According to “trickle down theorists” the early stages of industrialization must be accompanied with inequality; as urban industries have a higher productivity, it should produce. Yet even as the general population of China experiences an increase in income, there are reasons that the trickle down effect will fail and inequality will not be resolved.
Firstly, if we see China as in the “take off” stage of Rostow’s model of economic growth, more of the society’s resources will be given to capital goods instead of consumer goods due to opportunity cost. If less essential goods are produced for China domestically, or that most of these goods are exported or reserved for urban use, then this will seriously affect the quality of life in rural areas. Secondly, both capital and labor tend to flee to urban areas due to pull factors. The rate of return for both investing and employment in the city areas are (sometimes falsely) seen to be higher than that of rural areas. In a free market, less investment will be available to the rural areas. Together with push factors, e.g. lack of entertainment in the countryside, rural workers with higher expertise will
migrate to cities to earn money. Urban skilled labor will not work in a lower income rural setting either. This would lower the productivity of the rural areas with capital and skilled labor flight. If the government also sees improving infrastructure in urban areas to have a higher rate of return, then government infrastructure improvements will also be attracted away from the rural areas.
With the failure of the trickle down effect, the government should intervene in the market by increasing rural infrastructure. Since living standards are measured in terms of economic development instead of merely economic growth, intangible factors such as availability of drinkable water, sanitation and education are considered. Without these life in the rural areas would be horrible, thus limiting the productivity of rural labor, which forms most of the population of labor in the country.
Since income is a crucial part of one’s living standard, in order to improve the income of farmers there is also a need to increase agricultural productivity and promote rural industrialization. For example, the government may invest or subsidize technological improvements in seed technology to increase crop yield of farmers, or promote mechanization and better irrigation in farming. Secondly, to diversify rural “small cottage industries” the government may promote cultural industries such as hand crafting or eco-tourism in rural areas. This will provide an alternative to agriculture, which is prone to low income elasticity and thus low income for farmers. By increasing the income of rural populations the income equality in China will increase. As income equality is a significant factor in economic development, improving rural income is necessary.
In conclusion, with more emphasis on economic development, China’s economy will benefit from an increased productivity and living standards. The reduction of discontentment of rural citizens will also prevent the riots and social instability as in last year and thus regaining investment confidence in the country, whether rural or urban. This is beneficial to the economy as a whole.
China to shift infrastructure focus from cities to countryside
December 31, 2005 Xinhua News Agency (accessed January 30, 2006)
Global NewsBank with Periodicals By NewsbankOnline. Infoweb by Newsbank, Inc.
BEIJING- China pledges to take countryside as priority in infrastructure investment next year, in order to initiate the premier strategy of building a "socialist new countryside" for the coming five years.
According to the just-closed annual central work conference on rural development, rural construction will claim a higher share in national debts and financial budgets in 2006, with more money to be spent on the improvement of living conditions in the countryside.
"This is the first time for the central authorities to promise to invest so heavily in rural development, with the focus on infrastructure” said Han Jun, an expert of rural research with the Development Research Center under the State Council.
Government spending has been the major source of infrastructure construction in urban areas. Statistics by the People's Bank of China showed that investment in China’s top ten metropolis accounted for 30 percent of China’s total investment, much higher than the proper ratio of 15 percent suggested by the World Bank.
On the other hand, farmers have to dig down their own pockets for infrastructure in rural areas. In 2005, the central government spending in rural areas is expected to total 29.3 billion Yuan (3.03 billion U.S. dollars), less than 1 percent of the fiscal income.
Currently, half of China’s villages do not have running water.
Besides, former investment in rural areas mainly focused on macro-projects like riverbank construction, and failed to directly benefit the farmers for most of the time.
To narrow down the increasing gab [sic] between urban and rural areas, the Chinese government decided to” let the sunlight of public finance shine in the countryside ", to promote construction of road, water, electricity and other infrastructure in rural areas.
Experts with the State Development and Reform Commission predicted that to build basic infrastructure in rural areas across the nation will cost at least 4 trillion Yuan (495.66 billion U.S. dollars). Therefore, other fund sources are needed to explore besides government spending.
Tang Min, chief economist of Asian Development Bank in China, said that reform of rural financial system is as pressing as investment in rural economic development and the improvement of the farmers' life.
Farmers are hard to get loans due to out-of-date financial mechanisms. Government statistics show that at least 200 billion Yuan (24.78 billion U.S. dollars) worth of funds are drawn from the rural areas by the financial entities every year.
Copyright (c) 2005 Xinhua News Agency
