Inequality and poverty in China : institutional change and public policy, 1978 to 1988

)4zzs THE WORLD BANK ECONOMIC REVIEW, VOL. 5, NO. 2: 231-257 m4y gqt Inequality and Poverty in China: Institutional Change and Public Policy, 1978 to 1988 Ehtisham Ahmad and Yan Wang There is considerable uncertainty and debate about changes in poverty and living standards that are likely to occur in an economy in transition from centrally planned allocations to a more market-oriented basis, but a dearth of evidence and rigorous analysis remains. There is a tradeoff between policies that provide a guaranteed living standard with low inequality, albeit at a low income level, and systems that provide much higher monetary incomes, but create greater income variability and vulnerability, particularly during periods of high inflation. The Chinese experience following the economic reforms of 1978 highlights this dilemma, and our analysis strongly suggests the need for appropriate social safety nets if rapid growth is to be achieved without the poor and vulnerable bearing the costs of such growth. Successive Chinese constitutions have guaranteed the fulfillment of basic needs to Chinese citizens. Despite changes in policy and leadership, an important continuing element in this guarantee has been the prevention of destitution and the protection of vulnerable groups-the "social security" that we will examine here. In urban areas the permanent residence registration (hukou) provided guaran- teed employment, access to rationed essential consumer items, and eligibility for an enterprise-based labor insurance system (danwei) that included health care, retirement, and disability provisions. Until recently, the system was maintained by strict controls on urban registration and migration. In rural areas land reform provided households with access to productive assets, and assets were distributed fairly equally within regions. Although the rural guarantee has been subject to local interpretation, severe deprivation was generally avoided (except during the famine of 1959-61) through a system of transfers to the poorest regions. Minimum nutritional intake, shelter, basic At the time of writing, Ehtisham Ahmad was with the Development Economics Research Program of the London School of Economics on leave of absence at the World Bank. Yan Wang was a McNamara Fellow at the World Bank. This article builds on a discussion of the historical pattern of poverty in China by Ahmad and Zou (1989). The authors are indebted to Athar Hussain, Stephen Ludlow, Alan Piazza, Christine Wallich, and Gang Zou for helpful discussions and support and to Shahid Yusuf, the staff of the World Bank China Department, and the three referees for helpful comments on an earlier draft.