By most measures, the income gap between urban and rural households in China is one of the largest in the world, with urban residents’ incomes more than triple those of their rural counterparts. Not surprisingly, then, improving rural incomes has become the main target of social welfare policies in China today, though it is too early to tell whether such policies will be enough to reduce the rural-urban income gap. The new social policies have also been introduced in the context of two long-term demographic trends of great significance: China’s high-speed urbanization and the rapid aging of its population. China’s social welfare policies are in some respects responses to these trends—aimed at preventing both the formation of a vast urban underclass lacking access to basic means of social protection as well as the impoverishment of the elderly.
Regardless of their future effects on income inequality and urbanization patterns, China’s new social policies carry a political significance that is not well understood. The creation of very large social insurance programs, similar to those found in mature welfare states, is quickly eroding distinctions in access to social protections based on status and geography. Moreover, because social insurance involves people turning over some of their current incomes for future benefits, it has the potential to create in China, as it has elsewhere, powerful expectations for future state support and fierce resistance to government efforts to reduce promised benefits. The new social policies also carry the potential to promote a rebalancing of China’s economy toward greater domestic consumption, even if their impact is not likely to be determinant.
Reducing the rural-urban income gap became a central priority for the Chinese Communist Party (CCP) leadership a decade ago, when the problem of rural tax burdens rose to the top of the policy agenda. The agricultural tax was abolished in 2006, to go with earlier measures that had placed limits on what local officials could collect in taxes and fees. Up to a point, the CCP encouraged aggrieved rural residents to pursue justice through the courts, and even through petitions and protests to expose the abuses of local officialdom. The party also subtly encouraged media reports on peasant grievances and efforts to address them through various forms of collective resistance as a way to present the central party and government as on the side of those seeking remedies against local officials.
Reducing taxes, however, did little to address the real problem of how rural households were treated in policy terms. It is well-known that rural households lack access to urban living standards and social services because of the household registration system, known as hukou. What is less well-known is that the measures that evolved into the hukou system were introduced in the late-1950s, in response to rural migration into urban areas. The famine years of 1959-1961 brought tens of millions of rural families into cities, seeking relief from deprivation and starvation. These families were not only turned out of the cities, but also restricted by the new policies, which prevented all households, rural and urban, from leaving their registered residence without official approval that was nearly impossible to obtain.
China’s peculiar pattern of rural-urban inequality is thus a legacy of policies enacted more than 50 years ago and not, as some would have it, the result of globalization and other forms of liberalization associated with China’s economic reforms. The introduction of market forces, particularly the creation of a labor market, meant that urban residents, who had long enjoyed better access to health care and education, would be far better positioned for jobs and entrepreneurial opportunities than members of rural populations. The best that the latter could do was to send their youth to work in coastal factories and cities as migrant labor and rely on remittances back home as a crucial supplement to household income. The pro-urban bias of China’s economic reforms, in which vast sums were and continue to be invested in urban infrastructure and development projects, exacerbated the income gap between urban and rural areas.
This makes it something of a paradox that China’s social policies in the 1990s originated in and were targeted at urban rather than rural areas. The best explanation is in part that social policy was no different in China than elsewhere: The urban focus stemmed from the need to cultivate political support from various sectors of the urban population, and from the shaky assumption that rural populations can rely on the land, and their families, to cover the costs of caring for the elderly and health care. In fact, as far back as the early 1950s, China’s social policies gave protections to urban workers in state enterprises, and social policy for rural residents amounted to very basic health care cooperatives and rural primary schools.
The urban bias in China’s social policies also arose from the immediate need to compensate the tens of millions of workers who lost jobs in the restructuring of state-owned enterprises (SOEs) in the late-1990s. Up to that time, many SOEs had been “small societies” of work units providing guaranteed employment and cradle-to-grave benefits to their employees. With the turn to market forms of competition and profit retention, by the 1990s many of the largest state-owned enterprises could no longer cope with having to provide social services to workers from profits retained after the production and marketing of goods. The transformation of the state sector in the 1990s essentially externalized the costs of taking care of unemployed and retired workers by offloading the responsibility to local governments, most of which were ill-prepared to create a social safety net where none had previously existed outside the enterprises themselves.
There ensued waves of protests in cities by unpaid pensioners and laid-off workers, who exposed the fundamental inability of urban governments to provide support as called for in policies associated with state enterprise restructuring and bankruptcy. Eventually the Ministry of Finance reluctantly intervened in the early 2000s with subsidies for cities unable to provide pensions and unemployment payments to the ranks of jobless workers. Central government subsidies for pensions have reached roughly $83 billion over the past decade. The early 2000s also saw the introduction of a means-tested minimum income guarantee (dibao) to support those below the urban poverty line. The once common sight of laid-off workers petitioning or protesting in rustbelt cities of China is now rare, in part because of the deployment of a vast “social management” apparatus that includes “stability maintenance offices” (weiwenban) to deliver payments to petitioners and to use coercive means when necessary.
A decade ago, many officials would have argued that urban residents took priority for social welfare programs because farmers had access to land as a means of support for health care and old age expenses. That myth—land is technically owned by the village collective, not by individual farm families—is no longer brought up as an excuse for denying rural households coverage under long-standing social policies directed at urban residents. As urbanization has accelerated, many rural households have moreover lost their land, and with it their sole resource and means of support.
The Chinese government announced in March 2013 a bold new plan to resolve the rural income and consumption gap by essentially turning rural people into urban residents. The plan calls for 250 million people now in rural areas to move voluntarily to existing and new cities by 2030. This would put China’s urban population close to 900 million. The strategy is typically grandiose, and fraught with risks as well as opposition from many quarters. At a high-level policy meeting in August 2013, policy analysts concluded that urban governments could not sustain the spending needed to provide social services and meet the other costs of absorbing rural migrants.
Abolishing the hukou system of household registration to permit free migration is also controversial among local officials. Many of the policy experiments conducted in the cities of Chengdu and Chongqing in recent years were attempts to coordinate urbanization with household registration reform and social policy expansion for rural residents. Under one of these experiments, urban real estate developers seeking to convert scarce rural land had to first purchase land-use certificates at auction. The proceeds from the auction would then go to rural families, who gave up the plots on which their homes were located in exchange for moving into dwellings in denser urbanized areas. In other policy trials, an estimated 3.4 million rural residents living outside the urban districts of Chongqing received urban hukou. The city is now associated with dismissed party secretary Bo Xilai, but its social policies were in place well before his arrival and likely will continue to have the support of the central leadership—Chongqing is one of four Chinese cities directly administered by the central government.
In addition to the urbanization push, the Chinese government has in recent years promoted an expansion in health insurance coverage so that, on paper, China appears to have near-universal health coverage. The New Rural Cooperative Medical Scheme (CMS) for village residents now claims to have 812 million participants, meaning that rural health care coverage has risen from 10-15 percent of the target population in the late-1990s to more than 95 percent. With an estimated $114 billion in central government subsidies, local officials were mobilized in 2006 to register every village resident—as well as urban residents without full-time employment—into the CMS. By 2011, Ministry of Health officials claimed to have enrolled 1.28 billion rural and urban participants in the three main health care programs, a rate approaching the goal of universal coverage. The central government and local governments spent some $230 billion on health care between 2009 and 2011, half of which was to subsidize enrollment of insured populations in rural and urban areas.
Besides rural residents, migrant workers are also being brought into the social insurance net. The number of migrant workers receiving coverage for health insurance is now 46.4 million, up from essentially none—save those involved in a few local experiments—in the 1990s. Workplace injury, a chronic problem in export-processing zones, mines and other areas with high concentrations of migrant workers, is addressed through compensation under another social program for accident insurance. The government also claims that 41.4 million migrant workers are now covered under pensions. But these new programs for migrants still cover only about half of the migrant workforce: Migrant workers are especially wary of dealing with untrustworthy employers, who can rightly be doubted when they claim to be deducting wages for contribution to social insurance programs.
The government’s claims to having achieved near-universal health care coverage have to be qualified, given the serious problems with how health care operates in China. Those insured under government programs still encounter very high out-of-pocket expenses, estimated at 50-60 percent of inpatient medical costs. Health care costs in China have soared in the past decade, though they have moderated in recent years. One survey found that 12.9 percent of household respondents, both rural and urban, faced catastrophic health expenses, equating to 173 million people facing high financial burdens arising from medical causes. In towns and cities, any hospital visit for even routine medical procedures requires that patients pay all charges upfront, in full and usually in cash. Patients and their families have to follow up with efforts to seek health care reimbursements from local social insurance agencies. Reimbursements are usually limited to four times the local per capita annual income, and are lower for rural CMS participants.
Another important qualification to overly optimistic assessments of China’s social policy achievements relates to the design of social insurance, which has become the dominant model in China. Any social insurance program, including America’s Social Security and Medicare programs, is financed through past contributions paid by participants. If, as is usually the case, one gets back in unemployment benefits, pensions and medical care reimbursements roughly what one has paid in, the redistributive effects can be minimal. The introduction of social insurance in a country like China, with large income gaps between urban and rural residents, can reduce certain risks for households in both areas, but it does little if anything to narrow income inequalities. Average monthly pension figures in rural and urban areas illustrate this point well: Urban retirees on average received about $237 in 2011, compared with a flat benefit of about $9 for rural pensions. While the adjusted benefit in many rural counties is higher than this base level, the gap between urban and rural pensions remains very large. On top of this built-in inequality in social policy design, all of China’s social policy programs are administered at the city and county levels, meaning that poor cities and counties face great pressures to support their elderly and vulnerable populations, while rich cities and counties—and those with younger and healthier populations—do not have to transfer surplus funds to support their counterparts in poorer areas.
Education and housing are less often considered in assessments of social policy, but in China’s case it is essential to do so. In terms of mobility and livelihoods, they represent the two forms of inequality that ordinary Chinese encounter most often. Since the 1950s, China has achieved impressive outcomes in terms of primary education, but rural schools, like rural health clinics, suffered greatly in the aftermath of the de-collectivization of agriculture beginning in the late-1970s. And in a similar fashion to the way the Chinese government launched a campaign-style mobilization to expand rural health care, its approach to addressing a host of complex education problems was to spend money in hopes that the issues would resolve themselves as funds cascaded to local areas. National education spending in 2011 reached the government’s goal to exceed 4 percent of GDP. But underfunding in rural areas remains a hot-button issue in policy debates and in Internet chat rooms. As is often the case with new public investment funds, much of the education spending appears from anecdotal accounts to have gone to new school buildings rather than to teachers’ salaries and other more nuanced channels for improving educational outcomes.
Housing and land-use policies are also closely linked to efforts to reduce the rural-urban income gap. At about the same time as SOEs were being restructured in the 1990s, urban governments sold much of the housing stock held by SOEs to worker households that occupied this housing. The properties were sold at very low prices relative to what they would otherwise have been worth in cities with rapidly rising real estate prices. Ownership and possession of apartment blocks arose as a source of bitter conflict when urban governments subsequently sought to sell the land occupied by these dwellings to real estate developers. The same officials who were expropriating and demolishing the dwellings of urban residents were also the primary agents in the large and illegal land requisitions taking place in areas outside cities.
As land sales became the primary source of revenue for urban governments, these governments found vast potential funding streams in the acquisition and sale of rural land surrounding the city, in counties within their jurisdiction. Rural officials collaborated with village heads to sell off rural land that was collectively owned, sparking waves of protests by dispossessed farmers who received small sums relative to the amount of land being sold by their village officials. The expansion of social insurance to rural areas can thus be explained in part as a consequence of rural households losing their land.
These recent changes in social policy in China are likely to generate deep and lasting shifts in politics. China may prove an exception, but it is clear from many other governments—democratic and otherwise—that have launched expansions in social protection that these new policies create important political effects. First, they lock governments into a commitment to maintain and often to increase benefit levels. The sum that the Chinese government has promised in terms of pensions alone already exceeds that of its spending on defense and domestic security. If, as many analysts expect, the Chinese government faces a public finance crisis in the near term, it will be politically very difficult to step back from recent levels of social policy expenditures. The beneficiaries of social policies in China cannot punish politicians at the polls, but the political costs of reducing commitments are as high in China as anywhere else.
A second political effect of the new social policies will be to amplify the debate over the two-tier distinction in citizenship between rural and urban households. China’s recently adopted social policies have expanded coverage to rural populations and migrant workers, but we should expect a pattern of conflict driven by rising expectations as rural residents continue to experience urbanization and to raise the logical question of why their benefits fall short of those enjoyed by their urban-registered neighbors. Many Chinese, rural and urban, complain loudly that a third tier of social policy beneficiaries exists among the 30 million or so civil servants for whom health care, pensions and housing are provided freely or at much-reduced cost. The special privileges that officials enjoy in terms of social policies feed into a larger, bitter criticism of official corruption and malfeasance.
New social policies of the sort that the Chinese government has advanced over the past decade might also be expected to have important effects on consumption and domestic demand. All else being equal, it is logical to expect Chinese households to retreat from their high levels of savings if they can expect that certain costs associated with old age and health care can be borne by the government. However, all else is not equal. Chinese households are happy to receive state support for these future costs, but households are not the main source of savings in China—businesses are—and the savings that they do accumulate go toward any number of other expenses related most often to education, housing and transportation. And many Chinese are well aware that the government’s pension and health care insurance programs will provide only a portion of what will be needed for retirement income and future medical costs. Domestic demand in China may well increase and shift the economy toward greater household consumption, but it is not likely to occur solely on the basis of the new social policies.
In short, China’s new social policies will matter a great deal in whether historical rural-urban inequalities in Chinese society can be reduced. The policies need to be closely watched for their short-term political consequences in terms of the fiscal commitments the government has made to so many new beneficiaries, and for the expectations they create for an end to China’s “separate but not equal” divisions between rural and urban categories of citizenship.
Mark W. Frazier is professor of politics and co-academic director of the India-China Institute at the New School. He is the author of “Socialist Insecurity: Pensions and the Politics of Uneven Development in China” (Cornell University Press, 2010).
Photo: Street in Shanghai, China, Sept. 29, 2008 (photo by Flickr user beltzner licensed under the Creative Commons Attribution-ShareAlike 2.0 Generic license).