50 years after US President LBJ, China also declares war on poverty

50 years ago in the USA, President Lyndon B. Johnson declared a war on poverty in his State of the Union address on January 8, 1964. This legislation was proposed by Johnson in response to a national poverty rate of around nineteen percent. The speech led the United States Congress to pass the Economic Opportunity Act, which established the Office of Economic Opportunity (OEO) to administer the local application of federal funds targeted against poverty. As a part of the Great Society, Johnson believed in expanding the government’s role in education and health care as poverty reduction strategies. These policies can also be seen as a continuation of Franklin D. Roosevelt’s New Deal, which ran from 1933 to 1935, and the Four Freedoms of 1941. The popularity of a war on poverty waned after the 1960s. Deregulation, growing criticism of the welfare state, and an ideological shift to reducing federal aid to impoverished people in the 1980s and 1990s culminated in the Personal Responsibility and Work Opportunity Act of 1996.

In China, Chinese Premier Li Keqiang has vowed to fight a “war against poverty,” highlighting the existing imbalances in China’s economic growth. As China’s overall GDP draws ever closer to surpassing the United States’ for the position of world’s largest, more and more commentators have taken to pointing out China’s relatively low per-capita GDP. According to the World Bank’s data, in 2012 China’s per capita GDP was $6,091, lagging behind not only the United States ($51,749) but countries such as Iraq ($6,455), Azerbaijan ($7,164), Botswana ($7,238), and Columbia ($7,748). It’s a testimony to the simple fact that, while China’s overall economy is massive, it must provide for 1.36 billion people.

A 2012 survey done by Peking University showed, for example, that average family income for urban residents was $2,600 a year versus only $1,600 a year for rural resident. In 2010, China Daily reported that China’s urban-to-rural income ratio was 3.33:1, the highest level since 1978.

As a result, China’s per capita GDP doesn’t adequately capture the extent of the poverty problem. World Bank notes that China has about 128 million people living below the national poverty line (which equates to about $1.8 a day) — making China second only to India in terms of the largest population of the poor.

China’s own official estimates are lower, but only slightly so, with Xinhua reporting 98.99 million rural poor alone in 2012. To put that in context, if we go by the World Bank estimate, China’s impoverished population is greater than the total population of all but nine countries in the world (Japan, ranked #10 in total population, has just over 127 million people)

Hukou reform, a social safety net and the new urbanization plan

Li’s “war on poverty” is another name for his urbanization plan. Li has been actively pushing to transfer China’s population from rural to urban areas, which he hopes will lead to higher standards of living for China’s rural poor and increased domestic consumer demand — a “win-win” solution for China as its tries to rebalance its economy. A close look at Li’s comments in Monday’s Xinhua article shows the connection between his war on poverty and the existing urbanization plan. People living in “inhospitable areas” will be relocated, while the central government will “nurture small towns” for the relocated, formerly rural population. In other words, Li seeks to solve the rural-urban divide (and take down poverty) by turning rural residents into urban ones.

Li has now doubled-down on this strategy, which is not without its risks. A New York Times article last year documented the issues with the relocation strategy, including shoddy construction and a lack of jobs in the artificially created urban areas.

China Daily reports that China has completed a national plan on urbanization, and is expected to publish it soon, the China Securities Journal reported on Tuesday.

The plan, which has gone through amendments and been submitted to top authorities for approval, will specify targets, focuses and measures for “human-centered” urbanization, according to the report.

The journal quoted an anonymous source close to the plan as saying that it will lower barriers for the country’s 230 million migrant workers and 70 million non-local urbanites to settle in their home cities.

An urbanization conference in mid-December promised to remove restrictions on hukou, or household registration, in towns and small cities, gradually ease restrictions in medium cities, and set reasonable conditions for settling in big cities.

China’s rigid hukou system has prevented migrants from gaining equal access to services in cities, posing a major barrier holding back the country’s urbanization process.

The conference held closed-door discussions on a draft of the urbanization plan, which was seen as a guideline for the country’s next urbanization moves.

To help cope with the financial burdens caused by a possible influx of migrant workers and non-local urbanites, the plan asked central and local governments, enterprises, and individuals to share the cost.

In addition, China will also gradually nurture several city clusters in the country’s middle and southwestern regions and middle reaches of the Yangtze River.

Various Unofficial Proposals for Hukou Reform

To accomplish real urbanisation, migrant workers need to become full urban residents (i.e. each will require an urban hukou). It’s no small task, to be sure, and can only be done gradually. In 2012, the size of the floating population was about 230 million. A rough projection shows that by 2030, the floating population, made up mostly of migrant workers from the countryside, will reach more than 300 million.

An online proposal [by Kam Wing Chan] is to give all migrants an urban hukou within the next 15 years. This means granting hukou to about 20 million migrants per year. How should this annual quota be allocated? It could work in several steps over a period of 15 years from 2015: young college graduates would have first priority, followed by skilled workers and stable self-employed workers. Last but most important would be low-skilled workers. This will be more in line with the country’s economic and fiscal reality.

How much will it all cost? An Analysis by Kam Wing Chan

Many have legitimate concerns that the costs of allowing migrants to use urban social services may be overwhelming. The main urban social services are public education, public housing, social security, and medical care. In recent years, several estimates have used quite detailed, comprehensive and publicly available statistical data to show that the cost of “urbanising” each person (i.e. the average cost of social services) is approximately 20,000 yuan in a small city, and 100,000 yuan in a large one. In 2010, the State Council Research Development Centre conducted a detailed survey and analysis in four medium-sized and large cities. The results showed that average lifetime cost of providing urban social services to a typical migrant worker, including family members, is about 80,000 yuan (in 2010 prices).

Using a slightly higher figure (25% more), 100,000 yuan, to calculate the overall cost of urbanising the entire floating population and its fiscal impact. To transfer the household registrations of all the 230 million floating migrants to urban household registrations in one year would cost an astronomical 23 trillion yuan, or 44% of China’s 2012 GDP. However, over a 15-year time frame, assuming that the migrant population will reach 300million by 2030, the figure would come down to an average of 20 million people per year at an annual cost of 2 trillion yuan, or 3.8 % of the 2012 GDP. This is still a figure too high to be absorbed easily. However, this 100,000 yuan would not be spent in a single year, but over the remaining lifetime of a migrant. The average migrant worker is between 27 and 30 years old; assuming he or she lives for a further 40 years, the annual cost would be 2,500 yuan a year per person. In other words, offering urban hukou to 20 million people per year would cost 50 billion yuan, or 0.1 % of China’s GDP instead, a figure well within the country’s affordability.

A more useful approach would be to calculate the cost of urbanising migrant workers as a proportion of total government revenue. I computed that 50 billion yuan is 0.4 % of the government revenue in 2012. Of course, this is just the cost of the first year, and the cost would increase each year. By the last year of the plan (the 15th year), the cost would rise to the equivalent of 6 % of 2012 the government revenue.

China establish an authoritative hukou leading group at the central level to take charge of hukou reform and coordinate various parties.

Instead of encouraging migrants to the smaller cities, I [Kam Wing Chan] would argue that at this stage of development in China, agglomeration economies still play large. Big cities have the wherewithal and talents to be the most efficient and most productive in many respects. China needs to harness this advantage by letting the market decide and achieve these economies. Government officials do not and cannot have the precise information to know which businesses will do best in which type of cities, and thus where there will be most jobs. Therefore, I would argue that hukou reform must be rolled out in all cities, large, medium and small and should not be limited to the last two. Hukou reform should include Beijing, Shanghai, Shenzhen, and other large cities, because that’s where jobs are found.

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