Jan 17 2008

Does economic growth = economic development? Not for China’s rural poor…

Grinding poverty defies China’s boom – International Herald Tribune

Here at SAS my year two IB Econ students have started off the new year with a new unit: Economic Development. So far in the semester we’ve learned about what makes economic development different than economic growth. While gross domestic product may offer an indication of a country’s level of economic activity and output, it says little about the reality of life for the common person of developing countries.

To offer a more rounded figure for determining the level of economic development, the United Nations Development Program has created an alternative to GDP, the Human Development Index. The HDI accounts for the GDP per capita, the average level of primary and secondary education attained, literacy rates, and the life expectancy of citizens, to offer a glimpse into the reality of not just material wealth, but health and education in developing countries.

An analysis of the data for China reveals that since the 1970’s the trend in human development has been a steady improvement. In 1975 China had an HDI rating of 0.53 (about where Sub-Saharan Africa is at today), and has since improved its rating to 0.78, just putting it in the range of countries such as Thailand, Turkey, and the Dominican Republic. While it is still considered a “developing” country, China is no longer in the ranks of the “poorest of the poor”, which today are those with an HDI ranking considered “low”, or below 0.5.

On the surface the trends in development appear overwhelmingly positive; however, the reality is that as many as 300,000,000 Chinese may still live in a dire state of poverty. The World Bank itself recently announced that China’s GDP in purchasing power parity dollars, had for years been overstated, and the recent correction made it apparent to the world that China’s miracle growth over the last two decades had perhaps not lifted as many people out of poverty as previously thought.

In an International Herald Tribune article this week, Howard W. French (father of 2007 SAS grad Henry French), reveals a side of China’s economic landscape that is not often exposed by the media, focused as it is on the emerging middle class concentrated on the East coast. French visits China’s most populous province, Henan, to report on the reality for the rural poor in this economically deprived region:

China has moved more people out of poverty than any other country in recent decades, but the persistence of destitution in places like southern Henan Province fits with the findings of a recent World Bank study that suggests that there are still 300 million poor in China – three times as many as the bank previously estimated.

“Henan has the largest population of any province, approaching 100 million people, and the land there just cannot support those kinds of numbers,” said Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a specialist in Chinese poverty.

“It is supposed to be a breadbasket, but there has always been major discrimination against grain-based areas in China. The profit you can get from a hectare of land from vegetables, or a fish farm or oils, is so much more.”

Other experts say that Henan and other heavily populated parts of the Chinese heartland are often excluded from the financial support that goes to the coastal areas, and what antipoverty measures there are have little effect. Typically, residents of these areas say, money intended for them is appropriated by corrupt local officials, who pocket it or divert it to business investments.

Paradoxically, they say, they are overlooked precisely because of their proximity to the major economic centers of the east, forced to fend for themselves on the theory that they can make do with income sent home by migrant laborers and other forms of trickle-down wealth.

“Previous poverty alleviation policy focused more on western China, places like Gansu, Qinghai or Guizhou, which were poorer,” said Wang Xiaolu, deputy director of the National Economic Research Institute, a Beijing nongovernmental organization. “Besides, the situation in the border regions is more complicated, because if things go wrong there, it becomes more than a poverty problem. That’s why policy leaned toward them.”

Here in Henan’s rural Gushi County, only 73,000 of 1.4 million farmers fall below the official poverty level of $94 a year, which is supposed to be enough to cover basic needs, including maintaining a daily diet of 2,000 calories.

Did you read what I just read? In Henan Province, the “official” poverty level is $94 a year! That’s $0.26 a day! Yeah, of course the poverty rate according to this measure is low!

Despite its low standards, Beijing and provincial authorities have taken some measures to bring relief and development to the poor areas of China’s countryside. But is it enough?

Peasants here are the first to tell a visitor that whatever the statistics say, they remain mired in deep poverty. Villagers throughout this county said that several recent, highly publicized measures by the central government to improve the lot of peasants had produced only a modest effect on their lives. These included an abolition of agricultural taxes for peasants, the cancellation of school tuition fees for their children and new pension and health care plans that appear on paper to be more generous for the rural poor…

“We’re deadly poor,” said Zhou Zhiwen, 55, whose brick house in Yangmiao marks her as better off than most people, who still live in earthen structures. “We grow just enough food for ourselves to eat, with no surplus grain. We don’t have to pay the grain tax anymore, but our lives aren’t much better.”

Asked how she managed, Zhou said she received help occasionally from relatives who had migrated elsewhere for work. “If people lived well at home, who would want to migrate?” she asked. “All of our young people are working elsewhere.”

For many villagers, the central government is out of touch with rural realities in places like this, and the local government is filled with venal officials who shower spending intended for the rural poor on provincial towns and cities or simply take the money for themselves.

With a growth rate of near 11%, a booming industrial and service sector sprouting up along the East Coast, and a middle class approaching in size that of the United States, it’s easy for the world to look at China’s emergence as an overwhelming story of success. As French observes here, the story for the poor in places like rural Henan is, on the contrary, one of overwhelming poverty.

Discussion questions:

  1. Why doesn’t the rapid growth of China’s economy result in improvements in the lives of all Chinese?
  2. What measures might Beijing or the provincial governments take to bring true development to the poor areas?
  3. Does the rich East Coast have an obligation to improve the lives of the poor interior? If so, why hasn’t it happened?
  4. What is the biggest challenge China faces in lifting its 300 million poor out of poverty?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

11 responses so far

11 Responses to “Does economic growth = economic development? Not for China’s rural poor…”

  1. Marcoon 17 Jan 2008 at 10:54 pm

    The rapid economic growth experienced by China has largely been a result of urbanization. Western investment efforts have been concentrated in a few places (Shanghai, Beijing), so these are the places that have come out of poverty. But development is so much more than just economic growth, even if it were evenly spread around the country. Large cities such as Shanghai, Beijing and Xi'an themselves bring about social dislocation. We see it here in Shanghai. There are multitudes of impoverished people living right outside the gates of our luxurious compounds. As long as corrupt officials pocket development initiatives, and the middle class feels no obligation to help their compatriots, chronic poverty will persist.

    Economic growth fuelled by greed will not set up the proper conditions for development. We can see the result of it in many ways; the degradation of the environment and the social dislocation being the biggest. Economic and human development calls for a sense of community – an appreciation and love of your country (geographically and symbolically) and your countrymen. Corruption is an excellent example of what needs to be eradicated.

    The two market failures of corruption and environmental degradation are, in my mind, the two biggest challenges that China will have to face.

    However, they must also combat urbanization. Our Sloman textbook says that urbanization is the result of jobs being available in the cities. Except that more people flock to the cities, than are jobs available. In order to create jobs in the country side, and preventing people from migrating to the cities, China must also develop infrastructure in the rural areas. Schools, hospitals, community centres, power lines, sewage, clean water.

    Maybe that will slow down their economic growth. They might not be able to achieve 11% growth a year. But if 300 million Chinese live in a "dire state of poverty," should they really be achieving such growth?

  2. kevinhuangon 19 Jan 2008 at 4:19 pm

    The rapid growth that China has been experiencing has mostly been affecting the urban areas filled with wealthy businessmen and many middle-income workers (by Chinese standards) and almost none of this growth has been affecting the rural areas out in the country side which is a reason for the unreasonably high amount of poverty. Another problem that I think may be affecting China's attempt to decrease poverty in its provinces is the fact that there are so many different types of cultural backgrounds in China. Many of those people who live on the outskirts of civilization probably do not even know goes on in the rest of the country because they are so isolated and different. And of course the fact that they make only 94 dollars a year.In order for China to fix the problems, I think China has to develop more cities and start more production in the rural areas of China. This would create many job opportunities and seperated minorities would become more and more aware of the rest of the country. However, there is one large problem with this which is the fact that if more cities are developed in the rural areas, there will be increased pollution to China's already terrible air and water conditions, so maybe this is not the best solution to reduce poverty.

  3. Chris Seahon 20 Jan 2008 at 3:33 pm

    I completely agree with the above comments. It is very true that China's wealthy and those who are benefiting the most from China's economic growth (we at SAS included) are largely concentrated in metropolises like Shanghai, Beijing, Hong Kong, and such. That said, much of China's population outside these large and advanced cities live in squalor and poor living conditions in general because most of China's wealth is consolidated in the hands of wealthy executives and investors. Their salaries are meager, they have little hope for a formal education, and the waves of immigrants already headed to the big cities in search of a better life present even fewer opportunities for China's rural poor. As in many places around the world, education is very important. China has an interesting problem in that its population is so massive even college graduates are stuck doing menial or odd jobs (hence the many foreign companies coming here). In the long run, however, a subsidization by the government (cutting business taxes) encouraging Chinese entrepreneurship should hopefully create new job opportunities for citizens; China's new wealthy have an obligation to do so, but this has not been done for the most part because of greed that is inherent in all humans.

  4. andyxuon 20 Jan 2008 at 11:05 pm

    I didn't read the article above but I have a pretty good idea what it's about.

    However, I would like to mention the use of a "trickle down" system used in China during the past decades. Sure, rural areas are not being developed as they should be, however, the government hopes that the development of strategic cities such as Shanghai and Beijing will serve as "exemplar cities" in which rural areas can refer to imitate.

    This is probably the fastest and most efficient way to increase GDP and foreign investments.

  5. calebon 21 Jan 2008 at 9:56 pm

    As mentioned before, the lives of Chinese aren't improved even though their is massive economic growth for the nation because the money that is generated from the nation's GDP is so greatly concentrated in the eastern cities that there is a congested circular flow of money.

    Beijing might set aside funds that are dedicated to the interior of the nation. They might set up percentage quotas that ensure that a certain percentage of the GDP is invested in basic necessities for cities and provinces in the interior.

    The east coast has a responsibility to help the interior develop because much of the resources and cheap labor now come from the interior areas of China. The exhaustion of resources and the translated pollution from the east that affect the interior are all negative extranalities of doing international businesses, and the the east has a responsibility to help the ones that they are taking advantage of.

    The biggest obstacle that China faces in battling poverty is the challenge of cleaning up the political system that allows for corruption to take place.

  6. michcloseon 21 Jan 2008 at 10:30 pm

    I was delighted to see Caleb make the connection between economic growth, negative externalities and the economic well being of a nation. Spoken like a true economist. The proposal he makes sounds very much like "redistribution of income and wealth" that we will talk about in class later in the year. Do you think that Caleb's proposal seems to suggest "a direct government intervention" to reduce the negative externalities from pollution due to economic growth??

  7. Kai Lin Fuon 21 Jan 2008 at 10:41 pm

    What it all boils down to is the fact that corrupt officials in both urban and rural areas of China refuse to improve conditions due to greed. I too agree with the above, the only way for China to develop economically and socially is to demolish corruption.

  8. Jonathan Lauon 21 Jan 2008 at 11:50 pm

    I think the main reason why the rapid growth of China has not resulted in the improvements of the lives of all Chinese citizens is because China's economy is becoming more and more capitalistic, which means that the gap between the wealthy and the poor is increasing everyday. Unlike Communism, Capitalism preaches wealth, and that looks like the direction China is heading as it becomes one of the world's superpowers.

  9. Nicholas Milliganon 21 Jan 2012 at 4:31 pm

    1.Why doesn’t the rapid growth of China’s economy result in improvements in the lives of all Chinese?
    Despite rapid economic growth, China still has many barriers to economic development, meaning that the entire populace does not share in the success of the improving Chinese economy. First of all, the growth in China has been almost completely due to an increase in exports of manufactured goods. This suggests several things: manufacturing is generally centered around urban developments, so more rural areas such as Henan may not have profited from the increased industry. Furthermore, a large manufacturing sector implies a large unskilled workforce, a workforce that thus does not require advanced infrastructure such as higher education, increased wages, and more social mobility that development affords. Finally, because a great majority of Chinese GDP is net exports, this means a majority of goods produced in China are not enjoyed by the Chinese, thus lowering consumption and decreasing quality of life.

    2.What measures might Beijing or the provincial governments take to bring true development to the poor areas?
    The government should focus on education as a tool to move workers into secondary and tertiary sectors of output, instead of allowing them to remain in a largely agricultural economy. With proper capital investment, China could experience a decrease in agricultural workers yet an increase in agricultural output. Secondly, education is key to creating a skilled workforce. Because in rural areas it is more profitable for poor families in the short run to keep their children at home instead of allowing them to go to school, the government needs to offer some sort of incentive besides subsidizing school tuition fees. Another way to encourage development is to increase physical infrastructure such as roads and public utilites.

    3.Does the rich East Coast have an obligation to improve the lives of the poor interior? If so, why hasn’t it happened?
    Because Henan province contains the largest population of Chinese citizens, it is largely an untapped source of productivity that the East Coast has yet to use to achieve maximum economic growth. However, there are also human development issues that must be developed to unlock this potential. Therefore, political philosophy aside, the government is not as obliged to help its urban populace as it should be motivated to increase its output. The government has already taken steps towards increasing the living standards of the rural population through programs such as tax relief, education stipends, and new pension and health care plans. However, there are several barriers to development that have yet to be removed. There is a lack of formal markets as made evident by Li Enlan and her herb collection. This means that in rural areas there is still a largely barter economy, and the lack of monetary circulation decreases consumption and makes imports harder to purchase. There are also institutional barriers, such as the inherent corruption of local officials and the general bureaucracy of government relief programs. Finally, the low capital to labor ratio and the largely agrarian society are immensely hard to rectify.

    4.What is the biggest challenge China faces in lifting its 300 million poor out of poverty?
    The biggest challenge China faces in lifting its 300 million out of poverty is by finding equilibrium between its export-based economy and increasing consumption among the poor. An increase in consumption not only brings about a higher standard of living, but incentivizes the populace to seek higher paying jobs and education in order to secure more chattel and assets. Another challenge is mitigating the effect of local corruption to ensure aid is actually is getting through to the target demographic.

  10. domainon 11 Oct 2016 at 5:32 pm

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    Does economic growth = economic development? Not for China’s rural poor… | Economics in Plain English

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    Does economic growth = economic development? Not for China?s rural poor? | Economics in Plain English