The Macro-Economics of Poverty Reduction in China

By Dwight H. Perkins Harvard University

Presentation to the International Workshop on Challenges to Poverty Reduction in Chinas New Development Stage Beijing, February 25, 2011

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 to avoid large scale unemployment of labor and other resources a large expenditure gap needs to be filled by an unusually large rate of investment (or other government expenditure) much of which must be done directly or indirectly by government. 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 programs will still leave a large gap that can be filled with infrastructure investments of the kind now being pursued. (1) The first example will be a large income subsidy to the bottom 20 percent of the rural together with urban poor at the same poverty level. (2) The second example will be a program to provide urban housing to the entire floating population of migrants. (3) The purpose of these exercises is to make one simple pointChina can afford to spend a very large amount of money on anti-poverty programsor to put it differently, Chinas government has to spend huge amounts of money on something in order to keep the growth rate up and it makes sense to spend more of this huge sum on programs that address poverty issues.

Figure 2: China GDP Breakdown (Expenditure Calculation) (in %)

80 70

60

50 Total Consumption Household Consumption Investment 30

40

Trade Surplus

20

10

2002

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2003

2004

2005

2006

2007

-10

2008

Figure 3: Consumption as Share of GDP (in %)

90 80 70 60 50 40 30 20 10 0

China Japan Korea Taipei, China

PPP GDP per capita

854

1414.55

1812

2970

4075

6482

8500

10000

11500

13000

14500

The Aggregate Demand Gap: Problem or Opportunity

The consequences of this unusual structure of GDP on the expenditure side is that Chinas government expenditure must fill the gap between what profit oriented businesses would invest on their own and the amount of investment or government consumption that will achieve the full employment of resources. In practice so far this has involved very large expenditure on infrastructure (roads, railroads, airports, water conservancy, etc.), but there are other kinds of investment that could also fill this gap if the government chose to use the investment money that way (e.g. migrant housing). The money could also go to increase health insurance, to cover more of the costs of urban education for the poor, and for direct subsidies for the poorall of these expenditures would help maintain full employment. As the data in the next table make clear the amount of money available for these uses is very large (I do not have access to the detailed investment data so the table is my estimate and subject to error).

GDP Expenditure Breakdown

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

Table 1
Breakdown of Chinese GDP in 2009 Billion RMB %

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

Table 2 Rising Capital Output Ratio GDCF/GDP (%) 1978-1979 1980s 1990s 2000-2007 2008-2009 37.15 35.17 37.76 39.83 45.8 GDP growth rate (%) 9.65 9.69 9.96 10.5 9.37 3.85 3.63 3.79 4.25 4.89 K/O ratio

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

This simulation is deliberately designed to be extremely large and no doubt larger than anything the government is likely to consider at this stage of development. My point is that even such a large program would be affordable in the sense that the government has to spend far more than this anyway simply to keep the growth rate up. I am ignoring the many problems connected with implementing such a program (e.g. it is very difficult to measure incomes of the poor and thus to target such an expenditure to those for whom it is intended (example from Sri Lanka), there is an issue of how to pay this out so that it doesnt encourage people work less, giving the money to local cadres to distribute to 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 Earned Income Credit.

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 full employment of resources.

Table 3 Rural and Urban Low Incomes (per capita) Rural

rural income RMB 100-800 800-1700 1700/3000 3000/5000 2.21% 7.40% 18.57% 28.02% US$0.22/day US$0.68/day US$1.29/day US$2.19/day

over 5000
Urban urban lowest 10% next 10% next 20% 1981.15502 2031.88854 4319.73684

43.80%

US$2.74/day

US$1.09/day US$1.11/day US$2.37/day population

Subsidy rural population to RMB3000/yr Subsidy urban population to RMB4500/yr

Total subsidy

712.9 x.282x1088= 621.9 x.25x2015=

218.55 billion 341.4 billion RMB559.95 billion

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 for these childrens future than rural education, reduce sexually transmitted diseases, etc.). Similar programs were also a source of stability in Singapore and Hong Kong and were done at a time when the income per capita of these two cities was lower than what it is in China today. I have done two calculations. One that funds all migrant families with 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 assume that both programs would be implemented over a ten year period.

Table 4 Migrant Housing Expenditure Estimate

Funding all migrants Sq meters/family 80

Funding half of floating population 40

Price/square meter (in RMB)

2134

2134

Family apartments (millions) Total cost z(billion RMB) Cost per year over 10 years (billion RMB)

100 17072

50 4268

1707.2

426.8

Financing These Programs

The initial response of financial officials will be that they dont have the money to do this, and this is true given the current sources of revenue and the current expenditure priorities (e.g. the massive infrastructure construction programs). But my main point throughout is that these large government investment programs were made necessary in part simply to maintain a high growth rate. These anti poverty programs would also contribute to a high growth rate and would reduce poverty and inequality. It will be desirable to finance these government programs (including the existing ones) in more creative ways than in the past whatever the money is spent on. The shareholding enterprises controlled by the state should pay large dividends, long term bonds with appropriate interest rates should provided for some of the housing costs and the migrants themselves can pay part of the cost by purchasing their apartments over time at subsidized rates. Property taxes and other sources of local revenue should be increased, but one cannot simply turn these tasks over to local governments, etc.