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CONTENTS

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Poverty Reduction Methods - Prof. Jane Duckett, Director of The Scottish Centre for China Research at the University of Glasgow

China’s Widening Wealth Gap - Professor Francis T. Lui, Director of the Centre for Economic Development at Hong Kong University of Science & Technology

The Global Wealth Gap - Prof. Branko Milanovic, former World Bank lead economist and affi liated senior scholar at the Luxembourg Income Study Centre

Income Distribution in OECD Nations - Michael F. Forster, Senior Policy AnalystOrganisation for Economic Cooperation and Development

Special ReportChina’s New Professional Farmers

Rural Land Reform and Poverty Identifi cation - John Donaldson, Associate Professor and Associate Dean

at the School of Social Sciences, Singapore Management University

Poverty and Urbanization -Judy Baker, lead economist at the World Bank

China’s Gini Coeffi cient -Professor Zhao Xijun,

School of Finance at Renmin University

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Despite all the talk of China’s breakneck developmental speed and the new cohorts

of rich Chinese flaunting their cash and boosting the economies of the countries they visit, China itself is very much still part of the developing world with millions living close to or below the pover-ty line. That is not to say that the government has not helped pull people out of poverty with vary-ing degrees of success depending upon which interpretation of the poverty line one adheres to.

The poverty line as dictated by the Chinese government refers to those living on less that 6.3 yuan per day, or about 1 US dollar. The World Bank’s interpretation of the poverty line is 1.25 dollars per day. If one were to consider the success of the Chinese govern-ment in relation to their domes-tic reading of the poverty line, then around 660 million people in China have been lifted out of poverty after more than 35 years of Reform and Opening-up.

But the latest data from the State Council, China’s cabinet, shows that there are still more than 80 million people living in absolute poverty, earning less than 6.3 yuan a day. Around 128 thousand villag-es across the country were identi-fied as being in absolute poverty by the central authority in 2014. And while poverty is mostly a rural problem in China, it is by no means non-existent in urban areas.

By the first half of 2014, more than 170 million rural residents had mi-grated to urban areas with higher standards of living. The influx of migrant workers as part of China’s urbanisation drive ultimately leads to the risk of increasing relative poverty in Chinese cities.

Furthermore, China not only has the problem of poverty to address; that problem is being exacerbated by an uneven distribution of wealth. China’s Gini coefficient, an index reflecting the gap between rich and poor, stood at 0.469 in 2014, down from 0.473 in 2013.

This figure marked the sixth year of consecutive decline for China’s Gini coefficient, but it is still higher than the warning level of 0.4 set by the United Nations.

Meanwhile, China’s issues relating to poverty and wealth inequality exist within a general overall theme of a global wealth gap; a concept that is slowly being recognised, as evidenced by mention of how widening income inequality affects the world economy during the G20 Finance Ministers’ meeting in Turkey.

This issue of MESSENGER pres-ents a series of interviews with 7 experts and scholars on the topic of poverty and income inequality with regard to each aspect out-lined above in order to provide a comprehensive analysis of Chi-na’s progress and challenges, in both a domestic and international context.

Editor-in-chief - Stuart Wiggin

Editor’s Message :

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Photo: Stuart Wiggin

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Professor Jane Duckett, Director of Th e Scottish Centre for China Re-search at the University of Glasgow in Scotland talks about poverty reduc-tion standards, poverty reduction methods and inequality in China.

China’s poverty line is 6.3 yuan per day, or about 1 US dollar. Th e World Bank’s standard is 1.25 dollars per day. Why is it necessary for China to have a standard that is seemingly lower than the international standard?

Obviously, the result of having this lower line is to reduce the fi gures of the total number of people in pov-erty in China, and that might be one motivation. But of course, whichever line we choose when we’re trying to measure poverty globally, if we choose an absolute way of measuring it in terms of dollars or whatever, then the problem is that that doesn’t really take into account the relative cost of living in diff erent countries in the world.

Th ey are all very arbitrary whichever one you use. And the problem with using the dollar per day (standard) is the US dollar buys a diff erent amount of healthcare in diff erent places, or dif-ferent canned goods in diff erent places; and food and basic things may be less expensive in China. So that might be one of the reasons why China is using this lower level.

By China’s own standards, more than 82 million rural people were living under the poverty line by the end of 2013. When it comes to the international stan-dard, the number is around 200 million. What do the numbers tell us about wealth distribution and inequality in China?

Both fi gures tell us that there are still very many people in China that live in poverty. On all those measures, whether it’s the Chinese poverty line or the World Bank poverty line, those are

still very low standards. And probably all those diff erent standards understate the actual experience of poverty that exists in China. Probably, many more people are in poverty if we looked at other more conventional ways of measuring poverty.

Poverty can be measured in many ways; it’s a very complex subject. Many of the approaches to measur-ing poverty, rather than drawing an absolute line using something like a dollar-a-day as has been used in the past, which is useful for trying to give a broad sense of poverty interna-tionally comparatively, what we tend to do in societies, which can be much more meaningful, is to look at the relative poverty of the poorest com-pared with the average in the popu-lation, or some other kind of general measure of wealth in the population.

Using these absolute measures gives you a sense of the very poorest in China. People, who are experiencing diffi culties of some kind, living on the margins of poverty, are likely to be much, much greater in fact.

People forget I think, because they look at the average level of wealth in China and they look at the rate of growth, they don’t realise that there are still very many people in poverty; even though China has actually reduced the numbers of people living in ab-solute poverty very signifi cantly over the last 30 years.

It’s kind of, is the glass half full or is the glass half empty? On the one hand, China has lift ed many millions of people out of absolute poverty. On the other hand, many people still live in poverty; so the job isn’t fi nished yet.

If we judge China from the perspective of relative poverty, how is the country performing?

This takes us into the issue of inequality. Actually, inequality has been growing (in China) in the last 30 to 40 years. There are no abso-lute figures; it depends how you choose to measure the relationship or

the differences between the poorest and the richest, or the poorest and the people on middle incomes.

But in China, what people have shown, is that while most people’s living standards have been rising and wealth and the benefits of economic growth have reached most people, still the richer have benefited more than the poorer and the gap between the richest and the poorest has in-creased. Now, although that has been a trend since the 1980s and especially since the 1990s in China, there seems to be some indication that inequality has either levelled off , or it has maybe even begun to fall slightly.

That may be for lots of reasons. It is not unusual for rapidly developing poorer countries, in the early stages of rapid growth, to see inequality increase. But that would be expected to level off eventually. It is thought that many of the reasons why it might level off are due to government policies - trying to reduce inequali-ties; trying to provide more services; provide support and safety nets for the poorest; provide incentives and progressive tax systems to prevent too great a polarisation of wealth.

Do you think poverty reduction meth-ods adapted over last 30 years are still applicable going forward?

I think that we can see the Chinese government’s approach to dealing with poverty has evolved over the last 30 years, from an approach which in the 1980s focused almost exclusively on targeting poverty regions, either counties or townships even, where the average level of wealth was low.

Th at was criticised subsequently be-cause it was found that there were still many people, individuals or families in poverty, in areas that are not seen as overall very poor. Th ere has been an ongoing process of dialogue, research, interaction with external organisa-tions, and research by people in China, trying to understand the processes of change in the distribution of wealth and how to deal with it.

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China has kept changing; it has moved from just focusing on these poverty counties and areas that are deemed poor and focusing on building their economic development, to trying to target families that live in poverty.

First they did that in the cities in the 1990s when they introduced a subsidy for the most poor, and those schemes have been extended since the turn of the Twenty-First Century into rural ar-eas as well. So now you get means-test-ed benefi ts or support; it is very low level, but it is aimed at providing some assistance to the people who are the very poorest in the rural areas as well.

So they are the kind of very obvious programs that are variously targeted to reduce poverty in a diff erent way from the 1980s programs, but of course many of the policies that the Chinese government has introduced since the late 1990s, early 2000s, although not directly policy targeted at anti-pover-ty, have nevertheless been indirectly aimed at helping reduce poverty.

One of the most obvious examples is the rural cooperative medical schemes which have been introduced again in the 2000s and extended. Th at was in-troduced in part because it was felt that poor health and the inability to aff ord healthcare, or the costs of healthcare, were pushing families into poverty.

So those schemes have been intro-duced in China to try and help people pay for the cost of healthcare; so that indirectly is a poverty reduction type policy, and a new one.

You can see there have been many dif-ferent changes and learning about what the causes of poverty are and diff erent ways of tackling it, and there is still much to do be done and the learning is still ongoing but I think as China’s poverty profi le and economic profi le changes, there is a constant process of evaluating the situation; so ideas have changed and policies have changed.

Access to aff ordable healthcare also remains a problem for people in urban areas and even the middle classes.

With regards to high medical costs, how can the government prevent people from slipping back into pover-ty if they become ill or are in need of costly medical assistance?

It’s really around having both the safety nets in place for people who do slip into poverty - people who are maybe just above the poverty line but vul-nerable to poverty should something happen, should someone become ill, their wages are suspended for a period and they don’t have income.

You do need policies to support those kinds of people to prevent them slip-ping into poverty. Similarly with health and the costs of healthcare, even rela-tively wealthy people in China might be very hard hit by high medical costs if they have a very serious illness and that could push them into poverty as well.

And so, again in urban areas, there is a problem with the high costs of health-care and the government has intro-duced new policies of health insurance. Th ere is relatively generous health insurance for people in employment, but since around the middle of the 2000s there has been the introduction of another scheme which is for people who are not in employment, to help them with healthcare costs.

Research seems to show that with that scheme, as with the rural coop-erative medical schemes, one prob-lem is that the provision and level of support is still not enough to really help people and prevent people from being hit by very high costs and be-ing impoverished by very high costs and so the level of support and the level of provision for those schemes needs to be increased.

Basically, there needs to be more money put into those schemes to help people more. The schemes are basically in place, so it is a question of getting the political support to in-crease that investment, and especially of course investment from local gov-ernments as well as central govern-ment. Much more needs to be done, but the framework is in place now.Photo: Stuart Wiggin

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John Donaldson, Associate Professor and Associate Dean at the School of Social Sciences, Singapore Management Uni-versity talks about rural land reform and accurate poverty identifi cation methods.

How has China’s poverty situation devel-oped since 1978?

I think China should be applauded for the rapid reduction in rural pover-ty that has been seen basically since Deng Xiaoping took over and started his reform in 1978. Especially in the early years, poverty went down really quite rapidly and that was because a lot of the rural poverty at the time was caused by many of the factors that were basically fi xed by Deng Xiaoping’s era.

As a result, hundreds of millions of rural farmers were pulled out of poverty. More recently, it has been a little bit more of a struggle because a lot of the places that have poverty are in relatively isolated areas and poverty is also a very complex issue where diff erent areas are facing diff erent kinds of things. So, China is basically moving into, and has been in for the past few years, a new era in terms of poverty reduction; much more complex and a much more diffi cult era.

What are some of the new challenges that China faces in tackling poverty reduction?

When you’re talking about able-bodied farmers who are relatively young with a lot of experience, but living in poverty because they don’t have access to inputs or other kinds of things like that, that was the situa-tion that China was facing in the late 1970s and the early 1980s. And so, by increasing the access to inputs, by allowing farmers to sell their produce at a higher price by giving them land usage rights that they could personally use, that was what lift ed a lot of farmers out of poverty.

Many town and village enterprises emerged and that was very helpful. Today, the situation is much more complicated because we’re talking about elderly people; disabled people; regions of China that are quite isolated and very diffi cult to access; people who may not have a good deal of formal education. And so, education, healthcare, ageing; those kinds of issues are very diffi cult issues to solve but those are the things that China must address in order to reduce poverty at this new stage.

China’s poor regions oft en tend to be adja-cent to one another. Is this situation unique to China and if so what is the answer?

If you look at other countries where rural poverty is also an issue, there tends to be rather large pockets of poverty. Th at could be an issue of terrain, it could be an issue of infrastructure, and it could

be an issue of things such as por-table water or other things like that. It’s not really unique but it is really quite a challenge.

Part of the challenge is that there are so many diff erent prescriptions out there on how to deal with poverty that you could almost be pulled in diff erent directions. China has been very in-novative and has tried to fi gure out its own path in order to reduce poverty.

How does the issue of poverty relate to rural land reform?

Th e issue of land and agriculture has long been linked with rural poverty. Much of the decline in poverty in the late 1970s and the early 1980s has been because of the changes in the land own-ership structure and things like that.

More recently, we’ve been researching the issue of the commercialisation of agriculture. In other words, are farmers able to shift from subsistence farming to cash crops and what is the role of agribusiness in that? One of the challenges that China faces is that with the household responsibility system, it basically allocated land usage rights to farmers; small plots of land. But what agribusiness needs is large-scale production; it needs quality control and other things like that.

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So, as China scales up in terms of its cash crops, how do they interface with so many small-scale, formerly subsistence farmers? And how do they convince those farmers to take the risk of shift ing from grain which they can consume to things that they cannot survive on but could sell in the market. One thing that we discovered, there’s a lot of people who are calling for the scaling up of land, which would mean fundamentally changing the household responsibility system.

But our conclusions show that agri-business has been able to basically scale up from the small-scale, and that the household responsibility system is not really an impediment for agribusi-ness to help subsistence farmers to shift from grain to commercial crops.

And if that is true, that might be another way that farmers could be pulled out of poverty; if they can benefi t from interna-tional markets, from demand for cash crops that could increase their income very rapidly but at the same time protect their rights in terms of land use.

Th e Chinese government oft en talks about accurate poverty identifi cation, so how can the authorities prevent the misidentifi cation of poor areas?

Th at is actually a challenge that is not unique to China and it cuts both ways. Th ere are people who have access to pov-

erty reduction funds who shouldn’t, and then there are people who should have access to poverty reduction funds that don’t. Th at is not a problem that is unique to China, it is a very big challenge in terms of how do you cost-eff ectively identify who’s who. In the mid-1980s, China adopted a policy of designating counties as being poor or not poor.

Th e problem was that counties them-selves can be quite large and quite diverse, and so there may be poor people in non-poor counties as well as non-poor people in poor counties. I think as China zooms in on the town-ship level, and even the village level, that will help in terms of accuracy.

Th at is one strategy, to look at lower levels of government and try to target poverty reduction there. I think there is another layer as well. One of the innova-tive programs that China has been doing in some sense has been self-selecting.

For instance, they have a policy where Chinese farmers can work and help to develop infrastructure, irrigation, rural roadways, in exchange for compensation from the government; but that kind of policy only attracts people who are poor.

If you are not poor, you would not want to take advantage of that kind of thing. So the great thing about that is it’s self-selecting; you don’t have to spend a lot of time and eff ort, and energy, and fi nancial resources

to try to identify who is poor and who is not poor; the poor will identify themselves in that kind of a program.

And thirdly, as China focuses more on developing non-government organisations that can target people, they’ll have another partner in terms of trying to ensure that the poverty reduction funds are getting to the places that they are supposed to.

Th e Chinese State Council leads poverty reduction, but are their eff orts well-co-ordinated when it comes to working alongside other departments?

Every modern country has bureaucra-cies, and the bureaucracies are effi -cient because they can have a division of labour. But when you are talking about poverty, you are talking about a multi-faceted issue, a complex issue that involves education, healthcare, pensions and other things like that.

I think as long as the State Council keeps its eye on the macro side of things, they can do a good job on coordinating. But I think part of the challenge is how you coordinate as it gets closer and closer to the people. China is a vast country and has several layers of government.

Th e State Council can set the macro level vision and policy, but as you get lower down how do you ensure coordination across diff erent kinds of policies; and that is part of the challenge.

Photo: Wu Tong

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Professor Francis T. Lui, Director of the Centre for Economic Devel-opment at Hong Kong University of Science & Technology talks about the widening wealth gap within Chinese society.

China’s statistical authorities put the country’s Gini coeffi cient in 2014 at 0.469. What does the fi gure relate to?

The Gini coefficient is a simple and commonly used measurement for income or wealth inequality in differ-ent societies; if everybody had exact-ly the same level of income, then the Gini coefficient would be equal to zero. However, if one person got the income of everybody or all income was concentrated in the hands of one person, then the Gini coefficient would be equal to 1.

So, it has become a very convenient way to measure inequality. Th e Gini coeffi cient ranges between 0 and 1. Th e higher it is the more unequal is income and wealth distribution. So, it is a commonly accepted way for such measurements. We only need to know that the higher the Gini coeffi cient, the worse is income distribution.

Can you put China’s Gini coeffi cient fi gure for 2014 (0.469) into perspective?

0.469 is a relatively high Gini coeffi cient according to international standards. Th ere are of course countries that may even have higher Gini coeffi cients, but relatively speaking, 0.469 is quite high.

However, we have to recognise the following – it is not always true that when the Gini coefficient goes up that income inequality will worsen. Usually, that is the case. If you assume that in the begin-ning everybody is equally poor, so everybody gets a low level income. But then, some people become rich while the other people remain

poor; so the Gini coefficient will go up. But in the process of economic development, it is quite unlikely that the growth rate of incomes for everybody will be the same.

Some people will have incomes going up faster than others, and the late-comers will try to catch up. So, aft er more and more people become rich, the Gini coeffi cient will go up, but aft er a while, when the majority of people become rich enough, the Gini coeffi cient will fall down again. It seems to me that China is in exactly this kind of process. I expect that in the future the Gini coeffi cient in China will likely fall somewhat.

Deng Xiaoping said that the country should allow some people to become rich fi rst and then the rich people will enable the others to catch up. So, at this stage of China’s development, with so many rich people created thanks to the country’s progress, are high Gini coeffi cient fi gures acceptable?

What Deng Xiaoping said is exactly correct. It is not possible to have everybody’s income going up by the same proportion simultaneously. You need to have some people who become richer sooner than the other people. But eventually, if the system works well enough, more and more people will become rich.

But during that kind of process, at least temporarily, the Gini coeffi cient will go up possibly to some high level. But I am quite optimistic that in the case of China that kind of trend seems to have already begun to reverse itself. Th at means the Gini coeffi cient during the last few years has been falling. But we also have to know that the speed of the decline is very slow. Of course, we would like to speed up that kind of process.

Do you believe that a downwards Gini coefficient is part of a natural trend or will it be the result of gov-ernment policies?

I think that both factors are important. First of all, it is likely that it is a natural tendency. I’m not saying that the Gini

coeffi cient will naturally fall always. What I’m saying is that in the begin-ning phase of economic development, it is very likely for the Gini coeffi cient to go up. But aft er some time, when there are enough rich people and the late-comers are beginning to catch up, then the Gini coeffi cient will have a natural tendency to decline, although the speed of decline may be very slow.

There could also be some policies be-hind (a Gini coefficient decrease). I can easily identify two approaches or two strategies that may have helped to reduce the Gini coefficient. If you look at the speed of the increase in per capita income in the rural areas, last year there was a 9.2 percent growth rate after deducting inflation. If we do not deduct inflation, then it would be 11.2 percent.

However, if we look at the urban people, last year the growth rate for per capita disposable income was only 6.8 percent. That means that traditionally we know that people living in the countryside would be poorer, but we have seen for quite a number of years that people in the countryside have had their income go up faster than the people living in the cities; so that is a good sign.

But that was not the case a decade ago. It is only in more recent years that that has happened, that people living in the countryside have been catching up. Another policy ap-proach is investment in education. China’s state investment in education is still limited compared to the size of its GDP. However, in recent years, that has improved somewhat.

The numbers of graduates in higher education have gone up very quickly. In 1997 or so, less than 1 million people could enter into higher education each year, but now we are talking about a number close to 7 mil-lion; so this has increased more than 7 times and this will help to reduce the Gini coeff icient very signif icantly in the future.

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Judy Baker, lead economist at the World Bank in Washington, and team leader for the ‘Report on East Asia’s Changing Urban Landscape: Measuring a Decade of Spatial Growth’, talks about China’s poverty issues in the context of its un-precedented urbanisation drive.

� e ‘Report on East Asia’s Changing Urban Landscape: Measuring a Decade of Spatial Growth’, assessed 869 urban areas, 600 of which were located in China.

According to the ‘Report on East Asia’s Changing Urban Landscape: Measuring a Decade of Spatial Growth’, almost 200 million people have moved to urban ar-eas within the East Asian region between 2000 to 2010.

Up until the year 2010, about 36 percent of the population lived in urban areas which continue to expand. What do you think are the major factors for the fast urbanisation expansion in East Asia over the past decade and specifi cally China?

We know that urban areas concentrate economic activity and generate much growth; therefore they attract people from rural areas for the opportunities that they bring for better jobs, better income, and better services.

And in some cases, they present the opportunity of an escape from rural life for some people, which may be socially repressive; or for young people they simply lack future opportunities in rural areas and want to come to cities.

Of course, in the midst of the region of countries is China which is really unique in many ways; both, of course, in terms of the sheer size but also in terms of the country’s explicit poli-cies which have encouraged urbani-sation as part of its economic growth strategy. The growth in China’s urban population alone was 131 million people during the period

of our study from 2000 to 2010. So that was actually twice of the rest of the region combined.

How would you assess China’s policy for supporting urbanisation?

It’s unique in the sense that they have explicitly gone ahead and encouraged urbanisation as part of the economic growth strategy. We know that one of the good things that’s happened of course is the pro-active planning for people to come to cities; putting in infrastructure, aff ordable housing, links to aff ordable transit. Th ose are all things that are very important.

What are the challenges of rapid urbanisation?

We know from the literature across the world that no country has made it to middle income status without urban-ising. So, urbanisation is very good for economic growth. Urban areas can be hubs of innovation, of economic activity, culture and opportunity, but if the ur-banisation process is not well managed, it can be challenged by congestion, pollution, crime, falling slums and vast inequalities which we see all over the developing world today.

So, the rapid urbanisation really requires a major focus by governments to ensure that it takes place in an eco-nomically effi cient way, a sustainable way and inclusive way.

Two-thirds of cities from the report cited above are located in China. Out of the 8 mega cities/city classes with populations of over 10 million in-cluded in the report, 3 are located in China, namely the Pearl River Delta, Shanghai and Beijing. What similar-ities and differences does China share with other countries in the region in terms of urbanisation?

China’s patterns stand out in the report in just about every way. The scale of urbanisation in China in the early 21st Century is really unprecedented. China dominates the urbanisation trends, with more than two-thirds of the region’s total urban land as well as more than 80

percent of new urban land added is located in China.

Th e population is also much larger than East Asian countries. While this is actually a 3.3 percent annual average growth rate, while it’s not particularly large by East Asian standards, the ab-solute number is huge. I’ve (noted) that the fi ndings on density for the region stood out, but actually in China it was a slightly diff erent pattern.

More than 60 percent of urban areas dropped in overall population between 2000 and 2010; so that really stood out diff erently than the rest of East Asia, where mostly it was increasing. Th e drop was mostly in small urban areas of fewer than 500,000 people.

Th e Pearl River Delta (Guangzhou, Shenzhen, Foshan and Dongguan) has surpassed Tokyo to become the world’s largest urban area both in terms of size and population. How would you comment on China’s urbanisation drive that creates large city clusters instead of mega cities and do you think medium or small-scale urbanisation would be a more sustainable path?

We didn’t get specifi cally into city cluster patterns. We were really trying to docu-ment what was happening in the study. But what I can say is that a portfolio of cities is needed in any country. Th ere is a role for primary cities in a given country, which provide the gateway to the global economy and they tend to be the centres of innovation and where a lot of the creativity is happening.

In China, the obvious ones are the Pearl River Delta and then you have your large mega cities. Th en there is a role for sec-ondary and tertiary cities in any country where you would tend to see more industry and manufacturing, where land and labour prices are cheaper and so those things are more aff ordable and sustainable. For that to happen, it doesn’t always happen naturally.

There’s a role for government to play in ensuring that the investments in some of the smaller towns are made in infrastructure and in attracting

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people, and you then end up with this somewhat economically efficient portfolio of cities. I think the cluster-ing represents that.

With regards to the link between ur-banisation and income growth, can you explain the explicit connection between urbanisation ending extreme poverty and boosting prosperity?

The economic growth in cities has obvious economic benefits for those in the cities that are benefitting from the jobs and increased incomes, but there are also benefits for those in rural areas, through remittances, there’s benefits from more national level GDP to go around which can be invested in infrastructure, in educa-tion, in health; and there’s also more demand for agricultural output as cities increase and economies grow.

But these benefits do not happen automatically and often will require appropriate government policies. And within urban areas, some of the policies that can directly help to boost prosperity and reduce poverty and also avoid strong inequality, which we see in some places, relate to spatial policies that would ensure a match between where people can afford to live and ac-cess to whatever their job may be; also having access to public transport and to health and education services.

Governments can also be proactive in acquiring land for affordable hous-ing, again emphasising that this land should be linked to affordable public transport so that low income people coming to cities will have options other than squatting on illegal lands, which they tend to do only because they have no other option.

Typically, those lands are those that are at the highest risk to the impacts of natural hazards, such as flooding, which as you know is a major prob-lem in East Asia, and of course is being exacerbated by climate change. And of course, it is typically the urban poor - those that are with the fewest resources that are hit hardest.

On the issue of ensuring inclusion in the context of urbanisation, what proactive policies are needed from the government at both central and local levels to ensure an economically efficient, sustainable and inclusive urbanisation process to benefit more people, especially for poor people and new city migrants?

With regards to economic efficiency, I earlier mentioned this notion of a portfolio of cities. The idea is not that you would only have large mega cities or that you would only have small and medium cities, but that you would have a range of city sizes that can maximise efficiency for different kinds of economic activities that happen in the urban space.

On sustainability, there’s good news in East Asia in that the cities are generally already quite dense, so this gives them a comparative advantage relative to many other parts of the world.

This can be beneficial to reducing or mi-nimising carbon emissions and can allow for more walkable and liveable cities. But when we talk about density, we sort of unbundled this in the study, to recognise that there are different kinds of density; we could call it good and bad density.

Good density means making sure that there’s not only the high popu-lation density but you also have the access to public transport, public spaces, schools and clinics all with-in reasonable walking distance.

When we talk about bad density, this can be large apartment blocks that are somewhat isolated from access to these other kinds of things; so while the density might be there, it’s not a very liveable and accessible environment.

What are the possible environmental impacts of rapid urbanisation?

It really goes back to planning and mak-ing sure that urbanisation is happening in a well-planned and managed way. It’s critical to keep development out of high risk zones, particularly flood plains, seismic risk areas; and for sustainability reasons, developing in a compact way.

That includes investing in affordable public transport so that people don’t become reliant on automobiles for transport and so that low income populations have a way to access jobs. Those are really the key things to ad-dress environmental risk.

A migrant worker searches job advertisement boards in Qingdao, Shandong Province.

(Photo: China Foto Press)

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Professor Branko Milanovic, former lead economist at the World Bank and an affiliated senior scholar at the Luxembourg Income Study Cen-tre, talks about the issue of a global wealth gap and China’s future role in decreasing that gap.

Countries track domestic income inequality closely. But is it equally important to track global income inequality?

I definitely agree that of course the countries themselves have to track their own inequality and the most developed countries, and China and India and others, still track it annual-ly. So, you do have large house-hold surveys that are done annually and they are tracking inequality be-cause it is an important issue, socially and economically.

Global inequality of course is not as important for individual countries as their own national inequality. Global inequality is entirely the re-sult of changes in individual coun-try’s growth rates and distributions within individual countries.

So in that sense, global inequality is an important topic but it may not be as important for China, for India, or for the United States, as inequality within their own countries simply because in the world today we have countries with their own governments; we don’t have a global government.

Obviously China has a very big role in global inequality because it is a big country in terms of population and GDP. Individual countries are not directly aff ected by global inequality; however, indirectly they are.

If you look at the migrations which are the results of large income differenc-es between the countries, and this is something which explains or feeds

into global inequality, clearly these migrations are the result of income gaps between the countries. So in that sense, income gaps between the countries leads to migration and that of course affects people in any indi-vidual country.

Whilst working at the World Bank, you indicated in a report that global income inequality fell unprecedentedly during the period of 1988 and 2008. What is the situation today?

We now have unpublished results, and to some extent they may still be preliminary, but we have global inequality numbers for 2011; so we have (data) for three years after the beginning of the crisis.

What has happened is that the tendency for the decline of global in-equality has become even stronger. It may seem paradoxical at first but this is the result of the fact that emerging economies, I don’t mean only China and India but also Brazil, South Africa, so forth, have had a period of continued high growth; certainly much higher growth that western Eu-rope and the United States and Japan.

So that meant that the gaps between the countries, and thereby also the gaps between individuals have been reduced; so that tendency of decline has continued.

However, I have to add a small caveat to that by saying that we are really having trouble accounting fully for the incomes of the richest people, of the top 1 percent. So it could be that if we were to account better for that, that decline would not be as large as we currently believe it is.

Why is it so hard to pinpoint the levels of income for the world’s richest people?

Rich people in any country, firstly they are not that many in terms of numbers. When you have household surveys, these are surveys that actu-ally poll or survey the entire popula-tion. If you are a really tiny group of

one-tenth, or one-hundredth or one percent, you are not likely to be se-lected; so this is a problem. But there is a second problem.

Even when they are selected, we have seen, and this is not something new but maybe it has become a more serious problem that very rich people either refuse to participate in surveys or they severely or strongly underesti-mate their income.

As the Chinese economy slows down, as well as that of India, China is edging towards middle income status. With a lower rate of wealth growth expected for the coming future, will China’s impact on easing global in-equality decrease?

Th ere is absolutely no doubt, partic-ularly since the early 1980s when the Chinese growth rate went up signifi -cantly, that China has been a huge contributor to the reduction of global inequality, even if inequality within China as we know went up.

Th ese are two elements that happened at the same time, but the element of growth for the world as a whole was more signifi cant than the element of rising inequality within China.

Clearly, the eff ect of Chinese growth is not going to be as dramatic as it was in the past for two reasons. First of all, it was very dramatic in the past because China was a fairly poor country, so you had a large increase in incomes of regular poor people.

China is now of course a middle income country, so it is closer to the mean of the world, or it is to a large extent the mean of the world; so by that very fact it is not going to contribute as much to the reduction as in the past.

Secondly of course, we do expect that the Chinese growth rate will decline somewhat, and we already see that it is projected to decline next year and the year aft er. In that sense, it would also have less of a positive impact in reducing global inequality.

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But nevertheless, that impact would remain because I expect the gap between Chinese growth and for example US growth to remain, and as long as it does remain China would continue to contribute towards the reduction of global inequality.

With increasing income inequality a problem in developed countries, is the widening wealth gap the result of a free market as advocated by western nations, and so far as a solution is concerned, does the US government have a greater role to play in terms of easing inequality going forward?

I think income inequality is a sig-nificant problem in rich countries. Just on a purely factual level, if you look at the Gini coefficient that is calculated for China and the Gini coefficient that is calculated for the

United States, they are pretty simi-lar, they are both about 0.4, which is considered to represent a level of fairly high inequality.

US inequality is indeed quite high and in comparison to other rich countries it is unusually high be-cause west European countries have lower inequality.

When it comes to the role of the government, we do know that the role of the government through re-distribution, which means through social transfers and taxation, is very significant.

Th at is most clearly seen if you com-pare for example Germany and the United States where if you look at inequality before government trans-fers and direct taxes, they are about the same. But because government

transfers and taxes in Germany are much higher than in the US, then the reduction of inequality is larger.

That leads us to a fundamental issue that is being debated a lot these days, whether the reduction of inequality is good for growth or bad for growth. In the past, many people believed that that type of redistribu-tion is bad for growth because it reduced incentives for investment and hard work and so on.

But it is also true that if you have a very high level of inequality, that high level of inequality by itself might be very bad for growth because it actually discourages poor people and makes it impossible for them to actually do jobs that they would be able to do otherwise. So in that sense, maybe a high level of inequality is detrimental for growth.

Photo: Wu Tong

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In 2014, the Chinese government lifted 10 million people out of poverty.

For 2015, the Chinese authorities aim to pull another 10 million citizens out of poverty.

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Photo: Stuart Wiggin

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TProfessor Zhao Xijun, Deputy Dean of the school of finance at Renmin University of China looks at China’s Gini coefficient, the concept of capital rewarding and the reforms required to address income inequality.

How has China’s Gini coefficient fared over the years?

Before the Reform and Opening up policy, the Gini coefficient was at a low level. For example, the Gini coefficient was 0.3 in 1978 but the coefficient increased slowly, then it jumped to the warning number of 0.4 in 2000. It kept growing. Up until the year of 2008, the Gini coefficient reached a record high of 0.491.

Then it decreased year by year, that is to say 0.49 for 2009, 0.481 for 2010, 0.477 for the year 2011, 0.474 for the year 2012, (0.473 for 2013) and then 0.469 for 2014. So from 2009 to 2014, this coefficient has experienced a 6 years decrease, which means that income distribution inequality has been improved over the past 6 years.

0.4 is the international warning standard for dangerously high levels of income inequality. With this in mind, is China facing a serious problem?

Of course, from the number 0.491 to 0.469, it’s not a big decrease. But I would say we have followed the right direction. Still, for the year 2014, the number of the Gini coefficient is above the warning level; that means we have a serious situation in terms of fighting against the income in-equality problem. But as I have said, we have followed the right direction.

The Chinese people and the Chinese government have already consid-ered the importance of the income

inequality problem and the severe results caused by income inequality, that is, not economically but socially and politically. Measures have been taken to reduce these negative effects caused by the inequality problem. Of course, we are confident in solving this problem.

More measures should be taken, and more acts should be intro-duced, for example further reform of the income distribution system to increase the weight of labour rewarding, rather than capital re-warding. Also, increasing the (level of ) government transfer to the poor people and establishing and im-proving our social security system.

Capital rewarding is a global phe-nomenon but what does labour re-warding mean and how can China achieve that?

As we know from economic the-ory, (several) factors were intro-duced into the value creation. These factors are labour, capital, land and management. For exam-ple, in Wall Street, the bankers get a very high reward or salary, but still this is labour rewarding rath-er than capital (rewarding).

For China’s example, let me share with you some historical numbers. During the early 1990s, labour re-warding as a part of GDP was 53.4 percent. In fact, later on, labour rewarding as part of total GDP de-creased to only 39.4 percent in the year of 2008. So, labour rewarding decreased quickly for the people. Labour rewarding is directly related to income distribution.

There has been a series of reforms on salary and pension distribu-tion for civil servants but what is your take on the latest controver-sy prompted by a raise in salaries or pensions for people working as civil servants?

I would say that recent reform of the social security system for the government officials and so-called

civil servants is part of a total social security system construction. Earlier this century, we started the reform of the social security system for the labourers who work for the manufacturing sector and for other primary and secondary industries.

But this reform did not cover gov-ernment officials or civil servants. Reform starting from this year will cover the government officials and the civil services. We merge the two systems together into one system so we can minimise the gap between the workers’ social security system and the officials’ social security system so we can have one system for the whole nation.

China faces a rapidly ageing society in the context of rapid urbanisa-tion. How can the government con-tinue to reduce the level of income inequality as the population ages?

That is the fundamental problem for China and most developed nations. The ageing population problem is an important issue for the whole world I believe. Of course, because China is such a huge country, the importance and the severity of the problem could be unprecedented.

First I would say we may in-crease the importance of the problem; everybody no matter the government or the people, must put more and more atten-tion onto the ageing problem. Secondly, we (must maintain) the growth of the economy.

As soon as the economy grows, then we can have more value, we can have more income distrib-uted to everybody. So, make a big share and we can have more resources. Thirdly, we may still put forward income distribution reform so that the people can have more chance to share eco-nomic growth results. Lastly, this is being discussed now by a lot of people, we can delay the retirement age.

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Photo: Wu Tong

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YMichael F. Forster, Senior Policy Analyst at the “Income Distribution and Poverty” branch of the Organisa-tion for Economic Cooperation and Development (OECD), based in Paris continues with the broader theme of global inequality in relation to OECD countries and the importance of in-vestment in human capital.

The OECD has been tracking income inequality for years. A recent report by the OECD said that the gap between the rich and poor is at its highest for three decades in most OECD members. Why is this issue becoming a growing concern for the international community today?

We have been working on this issue and ringing an alarm bell before the crisis started in the 2000s. Why has it become a growing concern? I see three issues for that. One is a political issue, because if you live in a society which has an increase in the gap between the rich and poor, you will gradually lose the trust of the voters. If the middle or lower middle classes cannot benefit or participate during growth periods, you will lose trust in political institutions.

Secondly, there is a social issue. There have been studies that show that there is a great correlation between social problems and an increase in the gap between the rich and the poor. So you have bigger health problems, bigger social problems in societies which have a higher gap between the rich and the poor.

And finally, and not least important-ly, there are economic reasons to be concerned about with increases in inequality. Namely, looking at the rela-tionship between increased inequality and potential growth, meaning that there is a possibility and even a proven correlation that increased inequality is actually damaging to economic growth.

It is easy to understand that income inequality may have negative im-pacts politically and socially, but with regards to income inequality and the economy, the OECD report states that worsening income inequality hurts the economy. Why and to what extent can it hurt the economy?

I think it is important to note that for many years, the international community’s economists tended to look at the inequality growth relationship as a tradeoff, saying that more and more growth actually goes hand-in-hand with more in-equality. But looking at more recent data, (including) a recent OECD study and a recent study by the International Monetary Fund, both studies found a negative correla-tion, meaning that a higher gap be-tween the rich and poor is actually damaging; hurting growth.

What are the possible reasons for this relationship? We looked partic-ularly at the human capital channel, because there are several possible reasons. It seems that this is one of the channels which is very import-ant for this negative relationship, meaning that an increasing number of lower and lower-middle income households are not sufficiently investing in the education of their children and this in turn is harmful for potential economic growth.

Does this mean income inequality hurts developing countries more badly than developed countries due to an insufficient investment into human capital by poorer families in developing countries?

The study looked at ‘within country variations’, referring to the difficulty within countries for lower income households. Secondly, our study looked at a sample of OECD coun-tries; higher income countries, more advanced economies.

Interestingly, you would not have ex-pected to find this negative relation-ship for this sample of countries but we did. It is true that this human cap-

ital channel plays an important role. We looked at the relation between the parental educational background and education outcomes in terms of schooling but also in terms of quality.

Of course, the first findings were not very astonishing, unfortunately, that people or kids from lower socioeco-nomic backgrounds fare worse. But the second finding, which is more inter-esting, is that this also depends on the level of inequality in a country.

So, actually if people are from higher socioeconomic backgrounds, inde-pendently of the status of inequality in a country, they will fare better. But for the poorer people, it plays a big role whether you were brought up in a country where inequality is high and rising or not. So, the potential for edu-cation is much higher in low inequality countries and this is the trend which feeds into economic growth.

Are we going to see an improving sit-uation going forward amongst OECD member countries?

Not necessarily. It’s important to look back before the economic crisis. The big chunk of increasing income inequality happened in the 1980s, the 1990s and the 2000s before the crisis.

Actually, in the first year of the financial economic crisis, inequal-ity did not grow, but why is that? Because in the very early period, the top incomes, basically incomes from capital fell, because they were very sensitive to the economic crisis, and at the same time, in the first 6 to 12 months of the crisis, the welfare state in most of the countries was able to cushion the effects of the crisis.

So, in 2009 you didn’t find a big increase in inequality. However, the cushioning effect ended in 2010/2011, and at the same time the top incomes picked up again very early, after one or two years of stopping; so you have the increas-ing trend only after one or two years break so to speak.

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What kind of policies can ease the situation?

It needs several policies; there is not only one single policy that will handle reversing the trend. I usually put forward three strands of policy forward that are necessary to buck the trend. The most immediate one is of course changes to the tax and benefit sys-tem; so taxes and benefits, and social transfers are the most direct way to impact on income distribu-tion. Depending on the country of course, there is room to make the system more redistributive.

The second and most important layer is more medi-um-term but it is absolutely important, this is inclu-sive labour market policies. These policies do not only

The Search for New Professional Farmers

Zhou Jingnan

Many Chinese people live in the most traditional of senses, toiling and labouring seven days a week in the fields for a basic living. But there is growing pressure on the hundreds of millions of farmers who live that way to find a place in the modern economy.

In his annual Government Work Report, Premier Li Keqiang talk-ed about the “new type of skilled farmer” that the country requires. During the annual two sessions of China’s top legislature, Premier Li outlined the government’s stance on its hope to achieve these new pro-fessional farmers, stating that, “On the premise of keeping household operations stable, we will support the development of large family farming businesses, family farms and pas-tures, farmers’ cooperatives, leading agricultural enterprises, and other emerging agribusinesses; cultivate a new type of skilled farmer.”

Yu Xuewen, a deputy of China’s National People’s Congress (NPC), is one of the farmers that Premier Li was referring to. In reference to his own farming exploits, Yu explains, “We have been developing organic

react to tax and benefits policies, they are also acting on the market, on the labour market mainly, and in-clusive labour market policies which put people back into career prospects and jobs.

And the third aspect, which is even more long-term but very important, is education and investment in human capital. In other various analyses, we found that the increase in the up-scaling series of the reports in OECD reports over the last 20 to 30 years actually was a guarantee that inequality did not rise further, so it is important to continue investing in education and human capital.

tea for over a decade. Currently, sales and exports, as well as the plantation area of our tea, rank first domestical-ly.” Yu came to Beijing from a small village in Wuyi County of east Chi-na’s Zhejiang province twenty years ago. Since his hometown was famous for its tea, Yu naturally started out as a tea merchant.

In 1998, after learning about organic tea at a training course provided by the Chinese Academy of Agricultural Sciences, Yu decided to upgrade his product and he set about studying the planting and cultivation methods of organic tea.

At the same time, Yu opened an organic tea plantation back in his hometown. After years of hard work, Yu succeeded in making his organic tea well known across China and it has even managed to gain fame in foreign markets. Most of Yu’s exports go to the US, accounting for around 20 percent of his total production.

Professor Zhu Qizhen from China Agricultural University points out that China’s new professional farmers need to meet certain requirements if they are to rely on farming as an essential source of income. Zhu ex-plains, “What makes the farmer new

The Chinese government is attempting to persuade farmers to move away from subsistence farming and

towards the new professional farmer status. (Photo: China Foto Press)

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instead of being traditional is that he must have some knowledge regarding certain skills; he must be literate; and know something about management as well.”

During the development of Yu Xuewen’s organic tea business, Yu created an industrial chain that links the farmer, the plantation, and the tea brand to the market. “Our company sets unified standards for managing and processing products,” Yu noted, “But the management of each plantation is attributed to its contractor. And each plantation has an ID so that the quality of the tea is guaranteed to be traceable.”

Yu Xuewen’s industrial chain for organic tea and other pollution-free teas covers about ten thousand farmers. Many contractors employ their own chil-dren who otherwise would have a hard time finding jobs, thus alleviating unemployment among the younger generation of farmers. But nurturing new professional farmers like Yu Xuewen is certainly not an easy task. It calls for more education for farmers so that they can learn new technologies and skills.

However, Professor Zhu Qizhen emphasizes that education is not a panacea, adding that “The farmers should also have land. Without land, one can nev-er be a new professional farmer. That’s why a land transfer plan is necessary. The government has been promising to transfer more land usage rights to those who are good at farming. And after ensuring that farmers have land to rent, it is also important for the government to provide subsidies, supporting policies and services for the farmers.”

Subsidies would serve as a stimulus for farmers to de-vote themselves to the land but there is a risk that such subsidies could be abused. As another NPC deputy, party chief of Huafeng village in Zhejiang province, Zhu Zhangjin points out, subsidies are given to farmers only according to the coverage of the land contracted by them. Efficiency of land use is not considered, so many peasant farmers choose not to farm all the land they control. Zhu claims that this leads to a significant amount of acreage being wasted.

In an effort to address this loophole, Zhu Zhangjin gave his suggestion to the NPC Congress. As Zhu explained, “My advice is that the subsidies should be linked to the crops that are being planted on a certain piece of land. The more one plants, the more subsidies that person gets. The less one plants, the fewer subsidies there are for him. If one doesn’t grow anything on his land, he shouldn’t get any subsidies at all.”

Zhu believes that with an effective land subsidy system in place, farmers will have more impetus to make good use of their land, a vital state of affairs for the nurtur-ing of new professional farmers.

As a representative of the group, Deputy Yu Xuewen provided his thoughts on what it takes to become one of China’s new professional farmers. “You must adjust yourself to the times. It’s crucial to keep studying extensively to improve yourself. Also, don’t be content to stand still, or be too pessimistic either. Never succumb to the view that farmers are destined to be poor and underprivileged.”

A farmer in Tibet works the land.(Photo: China Foto Press)

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