China's "New Socialist Countryside"

Standard Chartered Senior Economist Stephen Green explores how China should proceed to raise rural residents out of a cycle of poverty

The rest of the world hasn't really taken notice yet, but in recent months, there has been a marked shift in the domestic political priorities of official Beijing. During the last decade, Chinese Communist Party leaders such as President Jiang Zemin and Premier Zhu Rongji focused on achieving and maintaining high-speed economic growth rates. They spoke about the benefits of membership in the World Trade Organization, about closing inefficient state enterprises, about the importance of importing foreign technology, and about the crucial contributions of China's new rich elite.

Prosperity still matters in China, just like anywhere else on the planet. But for Beijing's new generation of leadership, closing the yawning income gap between China's well-off coastal region and its great interior has taken on equal urgency. In a candid Mar. 5 speech at the opening session of the 10th National People's Congress, Chinese Premier Wen Jiabao laid out the hardships of the mainland's 130 million migrant workers and the problem of poverty in rural China.

In fact, Chinese President Hu Jintao, Wen, and the state-controlled mainland press have all been talking about the creation of a "new socialist countryside" to improve living standards for those who don't happen to live in booming cities such as Shenzhen, Shanghai, and Beijing.


  The reality of what is at stake hit home for me during a recent visit to the Ningxia Hui Autonomous Region, a rural, relatively poor area in northwest China on the upper reaches of the Yellow River; 5.8 million citizens and about 30 different ethnic groups call this region home. It's primarily an agricultural economy, and it's also a microcosm of all the ills confronting other poor areas. Entrenched poverty, environmental degradation, and a frayed social safety net all conspire to make life a challenge for the less fortunate in Ningxia and places like it.

A lot is made of China's growing income inequality, and there's no doubt the gap has widened since the mainland began its modernization drive more than two decades ago. But inequality, per se, is not the problem -- developing countries rarely grow without it. And the vast majority of China's rural dwellers have seen significant increases in their incomes. More urgent is that a relatively small group of people can't quite manage to break free of poverty, while others around them in urban China and even in nearby rural communities are steadily getting wealthier.

Many of these are farmers living on unproductive land, in areas without much private or foreign investment, thousands of miles away from export markets. These workers don't have access to decent education or health care. Much of rural China's public health and education infrastructure collapsed during the reform years of the 1990s.


  In that period, the central government essentially froze spending on health care, but gave local state-run hospitals and medical-service providers more latitude in charging fees. Not surprisingly, health-care costs soared and households in poorer areas were hit hard. By 2001, some 61% of total health spending in China was coming directly out of people's own pockets, compared to 18% in 1980. Education costs also rose dramatically.

China's fabled environmental woes and poor land-management policies don't help. Agricultural productivity is stagnant -- due to lack of quality land and a serious water shortage -- and so the role of farming to employ excess labor and deliver decent working wages is limited. (Per-capita water resources are only one-quarter of the world average.) Consolidating land to enable more efficient farming is not a popular idea.

China is a also massive user of fertilizers -- on a per-hectare basis, it uses three times the international average -- and this has exhausted big chunks of land that, if better managed, could still be productive. Spend anytime in Ningxia, and you'll notice the virtual absence of trees in the province, evidence of overgrazing, fragile soils in the south, and over-irrigation in the north.


  However, the picture in Ningxia isn't all grim. Beijing has set in motion a number of interesting revival policies that could prove useful elsewhere on the mainland. You might call it Ningxia-nomics. For instance, Beijing is funneling public money into subsidies to farmers willing to grow high-demand items such as potatoes (the region's soil is ideal for this crop), to set up efficient irrigation networks, and to build small water reservoirs.

On top of that, Ningxia's government three years ago began offering small-scale subsidized loans in the eight counties with high poverty rates, for livestock and fodder cultivation. Last year, central government authorities rescinded a national agricultural tax imposed on all farmers nationwide. That translated into a 7% rise in incomes for farm households in southern Ningxia, and even more in other areas.

To encourage underemployed workers in Ningxia province, local governments have launched training programs to help them find work elsewhere. In Ningxia, some 580,000 people migrated for work in 2004 -- and they earned on average about $320 in annual salaries.


  Spending on education is expected to take up a record 4% of China's gross domestic product during the next five years -- and the government has already promised to revive free education in rural areas. Southern Ningxia will host one of the nationwide experiments to create cooperative health insurance. Rural residents each pay $1.20 a year into an individual account, to which the government contributes $4.90.

Individuals use this account to pay basic medical costs. That may not sound like much, but once in the program, citizens can apply for additional assistance with major illnesses, up to a maximum of about $1,000, a sizable sum for these people. When rolled out nationally, this will have an enormous impact.

There has also been some progress in preventing deforestation and desertification in some areas. In May, 2003, nomadic herding was banned above certain altitudes throughout the region and in other parts of China. Many farmers are also receiving subsidies to allow land with more than a 15-degree gradient to fallow, to prevent valuable topsoil being washed away during heavy rains and wind storms.

Ningxia-nomics has a lot going for it. I saw significant poverty reduction in the villages I visited, but there are three potential problems. To really address poverty in China will be expensive -- and a big undertaking for a still-developing economy. Beijing and local governments should be careful that the funding reaches the right families and that waste is kept low.


  And even with some promising programs under way, much more needs to be done to improve China's stagnant agricultural productivity. Consolidation of agricultural landholdings to achieve economies of scale is vital. A national law to allow land to be leased, sold, and consolidated was passed in 2003, but in southern Ningxia, as in much of the country, it seems to have been largely ignored.

The quickest solution to rural poverty would be to get people out of the countryside and into better-paying jobs in urban China. This is happening -- but not quickly enough. Some big cities, such as Beijing and Shanghai, have done a good job of giving migrant workers access to decent health care and education, but most haven't.

Add it all up, and it's clear that the challenges facing Ningxia won't disappear overnight. But at least Beijing's current leadership understands that raising living standards in rural China now must be at the very top of the agenda.