perkins - poverty reduction in china

7/31/2019 Perkins - Poverty Reduction in China

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The Macro-Economics of Poverty Reduction in China

By

Dwight H. Perkins

Harvard University

Presentation to the International Workshop onChallenges to Poverty Reduction in Chinas New

Development Stage

Beijing, February 25, 2011


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Outine of Presentation

This talk will attempt to make three points:

(1) That China has unusually low household consumption as a share of GDP and toavoid large scale unemployment of labor and other resources a large expendituregap needs to be filled by an unusually large rate of investment (or othergovernment expenditure) much of which must be done directly or indirectly bygovernment. This is both a problem but it is also an opportunity.

(2) I then will illustrate alternative anti poverty programs that could be used to help

fill this gap (my main point is simply that even very large anti-poverty programswill still leave a large gap that can be filled with infrastructure investments of thekind now being pursued.

(1) The first example will be a large income subsidy to the bottom 20 percent ofthe rural together with urban poor at the same poverty level.

(2) The second example will be a program to provide urban housing to theentire floating population of migrants.

(3) The purpose of these exercises is to make one simple pointChina canafford to spend a very large amount of money on anti-poverty programsorto put it differently, Chinas government has to spend huge amounts ofmoney on something in order to keep the growth rate up and it makes senseto spend more of this huge sum on programs that address poverty issues.


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Figure 2: China GDP Breakdown

(Expenditure Calculation) (in %)

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0

10

20

30

40

50

60

70

80

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

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1994

1995

1996

1997

1998

1999

2000

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2007

2008

Total Consumption

Household Consumption

Investment

Trade Surplus


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Figure 3: Consumption as Share of

GDP (in %)

0

10

20

30

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PPP GDP

per

capita

854 1414.55 1812 2970 4075 6482 8500 10000 11500 13000 14500

China

Japan

Korea

Taipei, China


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The Aggregate Demand Gap: Problem or Opportunity

The consequences of this unusual structure of GDP on the expenditureside is that Chinas government expenditure must fill the gap betweenwhat profit oriented businesses would invest on their own and theamount of investment or government consumption that will achieve thefull employment of resources.

In practice so far this has involved very large expenditure on infrastructure(roads, railroads, airports, water conservancy, etc.), but there are otherkinds of investment that could also fill this gap if the government chose touse the investment money that way (e.g. migrant housing).

The money could also go to increase health insurance, to cover more ofthe costs of urban education for the poor, and for direct subsidies for thepoorall of these expenditures would help maintain full employment.

As the data in the next table make clear the amount of money availablefor these uses is very large (I do not have access to the detailedinvestment data so the table is my estimate and subject to error).


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GDP Expenditure Breakdown

Y = CHH + CG + IM + IG + (X

M)


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Table 1

Breakdown of Chinese GDP in 2009

BillionRMB %

CHH Consumption (households) 12112.99 35.1

CG Consumption (government) 4439.69 12.9

IM Investment (market driven) 8125.2 23.5

IG Investment (public infrastructure) 8321.15 24.1

(X-M) Export Surplus 1503.33 4.4

GDP (total) 34502.36 100


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Table 2

Rising Capital Output Ratio

GDCF/GDP GDP growth rate K/O ratio

(%) (%)

1978-1979 37.15 9.65 3.85

1980s 35.17 9.69 3.63

1990s 37.76 9.96 3.79

2000-2007 39.83 10.5 4.25

2008-2009 45.8 9.37 4.89


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A Program to Raise All Rural Incomes to Over US$2.00/day

This simulation is deliberately designed to be extremely large and nodoubt larger than anything the government is likely to consider at thisstage of development. My point is that even such a large program wouldbe affordable in the sense that the government has to spend far morethan this anyway simply to keep the growth rate up.

I am ignoring the many problems connected with implementing such aprogram (e.g. it is very difficult to measure incomes of the poor and thusto target such an expenditure to those for whom it is intended (examplefrom Sri Lanka), there is an issue of how to pay this out so that it doesntencourage people work less, giving the money to local cadres to distributeto the needy will promote corruption by some of them, and there are

financing issues as to who should pay, etc.) These subsidies could take many different forms (e.g. pensions for the

elderly, aid to poor children, or simple equivalents to the US EarnedIncome Credit.


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The Estimate Cost of this Income Subsidy

Raising all rural incomes to RMB3000/year (roughly equivalent

to US$2.00 per day) = RMB 218.6 Billion/year (roughly 71.8%

of Chinas rural population is already at this level or higher).

Raising urban incomes to RMB4500/year to take into account

the higher cost of urban living = RMB341 billion/year (roughly

75% of urban households are at or above this level already).

Total annual expenditure on this program = RMB560

billion/year or about 1/16th of the government expenditure

program that is needed to maintain high growth and fullemployment of resources.


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Table 3

Rural and Urban Low Incomes (per capita)

Rural

rural income RMB 100-800 2.21% US$0.22/day

800-1700 7.40% US$0.68/day

1700/3000 18.57% US$1.29/day

3000/5000 28.02% US$2.19/day

over 5000 43.80% US$2.74/day

Urban

urban lowest 10% 1981.15502 US$1.09/day

next 10% 2031.88854 US$1.11/day

next 20% 4319.73684 US$2.37/day

population

Subsidy rural population to RMB3000/yr 712.9 x.282x1088= 218.55 billion

Subsidy urban population to RMB4500/yr 621.9 x.25x2015= 341.4 billion

Total subsidy

RMB559.95

billion


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Providing Housing for Rural Migrants

The argument about why this would be desirable is compelling(children would be raised by their parents not their grandparents,education in urban schools will be better and more appropriate forthese childrens future than rural education, reduce sexuallytransmitted diseases, etc.).

Similar programs were also a source of stability in Singapore andHong Kong and were done at a time when the income per capita ofthese two cities was lower than what it is in China today.

I have done two calculations. One that funds all migrant familieswith housing equivalent to what is now called economically

affordable housing (80 square meters at RMB2134/sq. meter) The second assumes a more modest apartment of 40/sq meters

and only covers half of the floating population. I further assumethat both programs would be implemented over a ten year period.


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Table 4

Migrant Housing Expenditure Estimate

Funding all migrants

Funding half of floating

population

Sq meters/family 80 40

Price/square meter (in RMB) 2134 2134

Family apartments (millions) 100 50

Total cost z(billion RMB) 17072 4268

Cost per year over 10 years

(billion RMB) 1707.2 426.8


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Financing These Programs

The initial response of financial officials will be that they dont have themoney to do this, and this is true given the current sources of revenue andthe current expenditure priorities (e.g. the massive infrastructureconstruction programs).

But my main point throughout is that these large government investmentprograms were made necessary in part simply to maintain a high growth

rate. These anti poverty programs would also contribute to a high growthrate and would reduce poverty and inequality.

It will be desirable to finance these government programs (including theexisting ones) in more creative ways than in the past whatever the moneyis spent on. The shareholding enterprises controlled by the state shouldpay large dividends, long term bonds with appropriate interest rates

should provided for some of the housing costs and the migrantsthemselves can pay part of the cost by purchasing their apartments overtime at subsidized rates. Property taxes and other sources of localrevenue should be increased, but one cannot simply turn these tasks overto local governments, etc.

perkins - poverty reduction in china

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