Rural vs. Urban – China’s Regional Inequality And The Middle-Income Trap
China has been working towards its target to join the high-income country club for years. Yet, if higher wages lower the country’s competitiveness in exports of traditional unskilled labour-intensive manufacturing and if it does not move into higher value-added markets, China won’t be able to take the majority of its population beyond the “middle-income threshold” of about 12,700 USD Gross National Income (GNI) per capita as defined by the World Bank.
We talked to Prof. Rolf J. Langhammer about China’s situation, the inequality between rural and urban provinces and his view on how China can find a solution for its entire people. He is a Professor of Economics, former Vice President of the Kiel Institute for World Economy and expert on China’s economy. An opinion piece by the author on the same topic was first published on the Mercator Institute for China Studies’ blog “European Voices on China”.
GESblog: Prof. Langhammer, the “middle-income trap” has been a buzzword in debates about China lately. What does it mean?
Prof. Langhammer: The “middle-income trap” describes a situation that China is facing today. Starting out at a low level, China’s economy rose at high rates for many years. This success, however, was strongly related to a booming construction sector and export-oriented manufacturing sector, where millions of people work in factories to assemble products that were designed elsewhere. Yet, this growth has slowed down due to declining productivity of investment in the construction sector, lower global demand for manufactured goods and increasing competition with other Asian countries like Vietnam or Bangladesh. At the same time, wages have gone up and as a result: China got stuck in its traditional growth model. There are no or not enough new more sophisticated industries including services to push the economy to a higher level, which is why the country is currently trapped with a middle income for many people.
GESblog: Is that particular for China or are other countries stuck as well?
Prof. Langhammer: China is not special in this case. Historically, it is really hard for a country to permanently overcome this middle-income threshold. Almost eighty per cent of upper-middle income countries remain trapped in the middle-income category even if they temporarily jumped over this threshold but fell back later. Yet, China is special in a sense that it is such a huge country with different economies within its borders, so that we should not look at it as a whole in terms of the average income.
GESblog: You are referring to the contrast between rural and urban areas.
Prof. Langhammer: That is indeed particular to China. With an estimated GNI per capita of 7,400 USD in 2014, China as a whole has made it only half way to the target of joining the high-income country club. Yet, if you look at the big cities, things are different. According to a China Business News (CBN) report, the GNI in the three mega-cities Beijing, Tianjin, and Shanghai had already approached 20,000 USD by the end of 2015. The report also stated that in 2015 Shandong became the tenth provincial region to exceed 10,000 USD in Gross Domestic Product (GDP) per capita. The difference between GNI and GDP in China is negligible.
GESblog: But there are more than 30 provincial regions. So only about one third of these regions is over or close to the threshold.
Prof. Langhammer: That is the big problem and it is not going away soon. Forecasts, some years ago, saw all regions reach a high-income level by 2030. Given the fact of a slowed down economy, it is fairly safe to predict that it will take longer than previously anticipated to escape the middle-income trap. By that time, however, China will already be in the stage of becoming an aging economy. This means that defending the status of a high-income country against both external crises and internal productivity slowdown would be an even tougher task than reaching it in the first place.
GESblog: So is the rapid urbanization a reason for this inequality among the regions?
Prof. Langhammer: Absolutely, this urbanization deprives rural provinces of the human resources they need to reach the middle-income level. With on-going rural-urban migration of the most dynamic parts of the population, the gap could get cemented, creating different economies within China. The Economist once illustrated this phenomenon by comparing the GDP of poor Bolivia with that of Qinghai Province and that of rich Finland with that of Shanghai.
GESblog: So does anyone benefit from this uneven distribution of income?
Prof. Langhammer: These imbalances are neither good for Qinghai nor for Shanghai. Even the high average income in the three mega-cities cannot be taken for granted in a volatile global economic environment. The integration of these urban hubs into the global economy makes them vulnerable to external shocks. And the one-sided concentration of resources and capital in these regions, which has fueled this uneven growth pattern, exacerbates the problem.
GESblog: What does the Chinese government do to level this inequality?
Prof. Langhammer: It is a double task the government has to manage. First, they have to foster competitiveness and innovation in order to provide the momentum for growth rates which are appropriate for a country beyond the first stage of rapid catching up . Second, they need to create better systems for regional redistribution of the country’s uneven wealth and prevent a zero-sum game in which rich provinces gain at the expense of poor provinces suffering from the outmigration of skilled resources.
GESblog: How could that be achieved?
Prof. Langhammer: There is already a system in place of vertical fiscal redistribution through a tax- sharing scheme with the provincial levels. It was installed in1994. Yet, some sort of a horizontal fiscal redistribution mechanism between rich and poor provinces is also needed to create equitable living conditions throughout the entire country and to weaken incentives to outmigrate into the mega agglomeration areas . We know such systems from Austria, Australia or Germany.
GESblog: Where do you see the difficulties in such a system?
Prof. Langhammer: This is a delicate task because it can weaken incentives in the rich provinces while fueling rent-seeking behavior in the poor provinces. But the alternative would be much worse: China would remain trapped in the middle-income trap until its demographics crush any hope of securing a permanent place among the world’s high-income countries. Deng Xiaoping’s slogan “Let some get rich first” may have been the right motto during the beginning of the reform and opening period in the 1980s. Today’s China needs to adopt a notion of collective – and regional – solidarity if it wants to lift all boats.