China’s Economic Growth, Poverty and Inequality

Readers Question: Discuss the likely economic impact on absolute and relative poverty of China’s rapid economic growth?

It is an interesting question because even the Chinese government have been concerned that China’s rapid economic growth has not helped large sections of the population, especially in the north.

  • Absolute poverty is defined as the minimum level of income necessary to maintain the basic necessities of life. For example, this may be defined as $2 income a day.
  • Relative poverty is defined as income relatively lower than the average income in society. For example, one definition of relative poverty is, income 50% less than the average income. Therefore, if average incomes rise from $2,000 a year to $4,000 a year the level of relative poverty will change.

In theory economic growth should reduce absolute poverty. Higher GDP should ‘trickle down’ to all sectors. Higher GDP also means the Chinese government should be collecting higher taxes which could be used to help those unaffected by the economic growth.

Why Economic Growth in China is Causing an Increase in Relative Poverty

  • Economic growth is concentrated in the south and south West. Northern agricultural areas are not benefitting from the growth in manufacturing industries. Therefore, many rural farmers are falling behind the rest of the country.
  • Recession in Agriculture. A large % of the Chinese workforce is employed in agriculture; however, agriculture is largely stagnating. Farms tend to be small and inefficient and there is insufficient demand to see their incomes rise.
  • Real Wage growth in manufacturing is very low. Due to the number of people leaving agriculture to enter the manufacturing sector, the supply of labour in China is very elastic. This means that real wages in industry has stayed low. Therefore, there is a growing gap between the middle classes and new industrialists and the working class in the factories.
  • Trades Unions and Monopsonies In China, trades unions are not allowed. Therefore, monopsony employers are able to pay relatively low wages.
  • Another issue is that economic expansion is having a negative impact on standards of living. For example, pollution is increasing. Projects such as the controversial 3 Gorges Dam, has made life difficult for people in the surrounding areas.
  • Government intervention in China is Weak. Ironically to say China is a Communist country, therefore, welfare state is almost non-existent. The rich can often avoid paying taxes and corruption is endemic.
  • Unemployment is a problem in the privatised industries. Despite economic growth, unemployment in China is a problem. Privatised industries are shedding labour as they try to overcome inefficiencies.

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