Cycle of poverty

From Wikipedia, the free encyclopedia

In economics, the cycle of poverty is the "set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention".

Families trapped in the cycle of poverty, have either limited or no resources. There are many disadvantages that collectively work in a circular process making it virtually impossible for individuals to break the cycle. This occurs when poor people do not have the resources necessary to get out of poverty, such as financial capital, education, or connections. In other words, impoverished individuals do not have access to economic and social resources as a result of their poverty. This lack may increase their poverty. This could mean that the poor remain poor throughout their lives.

The poverty cycle can be called the "development trap" or "poverty trap" when it is applied to countries.

Ruby K. Payne, author of A Framework for Understanding Poverty, distinguishes between situational poverty, which can generally be traced to a specific incident within the lifetimes of the person or family members in poverty, and generational poverty, which is a cycle that passes from generation to generation, and goes on to argue that generational poverty has its own distinct culture and belief patterns.

Measures of social mobility examine how frequently poor people become wealthier, and how often children are wealthier or achieve higher income than their parents.

Causes of the cycle

Chronic general poverty

Poverty can be created or sustained for large numbers of people through general economic conditions, which tend to be self-sustaining. Metrics for these conditions include:

• Low gross domestic product or overall low productivity, failing to produce enough wealth for the population as a whole to escape poverty
• High unemployment, creating poverty for the unemployed and putting downward pressure on wages
• High income inequality, creating poverty by allocating wealth unevenly
• Low social mobility, perpetuating poverty for a given person or family

There are also various poverty metrics that directly indicate its extent, generally involving income, wealth, or both. It can be measured on an absolute scale (which might put almost an entire country's population below the poverty line) or in a relative way, identifying people who are poor compared to others in the same country. 

Countries with chronically low levels of economic development fail to provide opportunities for many individuals to leave poverty. These may be caused by:

• Problems with the means of production:
  • Lack of or poor quality infrastructure
  • Widespread lack of skills needed for employment (including literacy) or high-wage employment
  • Lack of equipment and automation that would boost productivity
• Economic mismanagement, such as regulatory failure
• Widespread corruption
• Inability of the government to guarantee stable market conditions, including physical security and enforceable property rights
• High burden of disease
• Barriers to international trade, possibly including international sanctions

Non-circular causes of poverty

Generally poor economic conditions can also be due to temporary causes, which might not result in a "cycle of poverty" if the economy recovers thereafter. Temporary economic problems can be caused by:

• Recession (for which there are many causes) and the lower-activity portion of the business cycle
• Disasters
  • War, whether through direct destruction or general funding burden
  • Natural disasters, including storms, drought, and earthquakes
  • Epidemics
  • Famine
  • Anthropogenic disasters, including accidents

A one-time event, whether affecting the economy in general or personal in nature, can push a given person or family into poverty, after which the enter "cycle of poverty" which is difficult to escape. Examples of personal events that can have a negative economic impact include:

• The loss of a job or failure of a family-owned business
• A health issue, which can result in lost wages, a permanent disability, or medical debt in countries without free universal health care
• The death of a family member
• An unplanned pregnancy
• Short-term financial mismanagement of personal savings or debt
• A breakup or divorce, if alimony does not compensate for the loss of one partner's income
• A foreclosure or eviction
• An automobile collision or other loss of a vehicle needed to get to work
• Commission of a crime that results in a criminal record and difficulty obtaining work
• Incarceration that results in loss of economic assets and social networks

Factors maintaining personal poverty

Once poor, people can experience difficulty escaping poverty because many things that would allow them to do so require money they don't have, such as:

• Education and retraining with new skills
• Child care which would enable a single parent or second parent to work or take classes
• Transportation to a distant job
• Migration to an area with better economic opportunities
• Starting a new business, which might require market research, technical assistance, and startup funding
• Obtaining land for subsistence farming
• Cure a health condition that prevents work, including diseases of poverty which don't affect people outside of the "cycle of poverty"

Some activities can also cost poor people more than wealthier people:

• Rent - If unable to afford the first month's rent and security deposit for a typical apartment lease, people sometimes must live in a hotel or motel at a higher daily rate.
• Food
  • If unable to afford an apartment with a refrigerator, kitchen, and stove, people may need to spend more on prepared meals than if they could cook for themselves and store leftovers.
  • Buying in bulk (large quantities) is usually cheaper than buying small quantities in multiple transactions, but poor people are less likely to have cash on hand to finance a large purchase of food needed for the more distant future. Poor people are less able to afford delivery or automobile transport of quantities too large to carry on public transit or bicycle.
  • People who live in food deserts without access to fast transportation may buy more expensive food from nearby convenience stores, and have more difficulty transporting perishable goods.
• Banking - People who cannot maintain a minimum daily balance in a savings account are often charged fees by the bank, whereas people with larger amounts of wealth can earn interest on savings and substantial returns from investments. Unbanked people must use higher-cost alternative financial services services, such as check-cashing services for payroll and money orders for transferring to other people. People who have had previous credit problems, such as overdrafting an account, may not be eligible to open a checking or savings account. Major reasons for not opening a bank account include not trusting banks, being concerned about not making a payment due to a bank error or delay, not understanding how banks work, and not having enough money to qualify for a free account.
• Debt - People who have no net savings sometimes have to use high-interest credit cards or other loans to pay for emergency expenses or even daily needs. Interest must be paid on debt, and a lower credit score (which can result from a low income) typically results in a higher interest rate, such as for a subprime mortgage. Payday loans can have an extremely high interest rate, and other forms of debt not typically used by high-income consumers include refund anticipation loans, car title loans, and pawnshops.
• Overdue payments - People who cannot afford to pay all of their bills on time, or who accidentally make a late payment due to waiting until the last possible day can incur late fees not affecting people who can simple schedule automatic payments from savings.
• Furniture - If unable to afford a piece of furniture, a rent-to-own agreement can make it available without having savings, but at a higher long-term cost.
• Transportation - If unable to afford a car, taking public transportation can take longer, effectively an increased cost in the form of lost time. Many poor people must live further away from work in order to find housing they can afford.
• Health care - Though most industrialized countries have free universal health care, in the United States and many developing countries, people with little savings often postpone expensive medical treatment as long as possible. This can cause a relatively small medical condition to become a serious condition that costs more to treat, and possibly causing lots wages due to missed hourly work. (Though poor people may have lower overall personal medical expenses simply because illnesses and medical conditions go untreated, and on average life span is shorter.) Higher-income workers typically have medical insurance which prevents them from experiencing excessive costs and often provides free preventive care for example this reason. In addition to personal savings they can use, higher-income workers are also more likely to be salaried and get sick time that prevents them from losing wages while seeking treatment.
• Government benefits may require paperwork or attendance at mandatory classes that a job wouldn't, effectively an increased cost in the form of lost time per unit of money taken in.

Government policy, government funding, and access to financial services can play a large role in preventing one-time events from pushing people into poverty, and in overcoming barriers to escaping poverty. People who cannot work due to a disability often rely on government assistance, family members, or charities, but may also have personal savings. Many governments have programs to support the elderly, given that many have not saved enough money to last throughout their planned retirement, and that many will experience health problems that prevent them from working. Inability to work can present an insurmountable barrier to exiting poverty if external assistance is insufficient.

Choices and culture

Personal choices and cultural influences can also make it difficult to escape poverty, such as:

• Choosing not to pursue education and skills that could be used to obtain a high-paying job
• A culture that disvalues education
• Low expectations for academic and economic success can be self-fulfilling
• Belief that one is self-limited and destined to remain trapped in poverty
• Belief that one is a victim and powerless to break free from poverty

Discrimination and concentration

Discrimination can make it more difficult to access government programs, to find work, and to access resources and social networks that could help. For a variety of reasons, it is more difficult to escape poverty in areas of concentrated poverty, where poor people may be forced to live by economic circumstance. Racial segregation can represent a combination of both discrimination and concentration.

Generational poverty

Generational poverty is poverty that is inherited across generations. This can happen because:

• Poor parents who know what their children need to succeed academically or economically cannot afford to provide that, such as tuition, books, tutoring, after-school programs, health care, transportation to school, safe housing, clothing, or adequate nutrition.
• Parents who are outside social networks that would be useful for economic advancement cannot introduce those children into those networks.
• Poor parents may pressure older children to drop out of school and work, for immediate wages at the expense of education that could provide higher long-term wages.
• Parents who have themselves not attended charter schools or secondary education may not realize the advantages of attendance, and may not know when or how to apply.
• Poorly educated parents might not know how to nurture the cognitive development of their children, and might be less able to provide educational assistance like help with homework.
• Parents who have made poor personal decisions may be bad role models for success, for example normalizing financial mismanagement or substance abuse.
• Child abuse creates a number of physical and psychological problems that increase the probability of growing up poor, and the vast majority of abusive parents were themselves abused as children.

Family background

A 2002 research paper titled "The Changing Effect of Family Background on the Incomes of American Adults" analyzed changes in the determinants of family income between 1961 and 1999, focusing on the effect of parental education, occupational rank, income, marital status, family size, region of residence, race, and ethnicity. The paper (1) outlines a simple framework for thinking about how family background affects children's family and income, (2) summarizes previous research on trends in intergenerational inheritance in the United States, (3) describes the data used as a basis for the research which it describes, (4) discusses trends in inequality among parents, (5) describes how the effects of parental inequality changed between 1961 and 1999, (6) contrasts effects at the top and bottom of the distribution, and (7) discusses whether intergenerational correlations of zero would be desirable. The paper concludes by posing the question of whether reducing the intergenerational correlation is an efficient strategy for reducing poverty or inequality.

Because improving the skills of disadvantaged children seems relatively easy, it is an attractive strategy. However, judging by American experience since the 1960s, improving the skills of disadvantaged children has proved difficult. As a result, the paper suggests, there are probably cheaper and easier ways to reduce poverty and inequality, such as supplementing the wages of the poor or changing immigration policy so that it drives down the relative wages of skilled rather than unskilled workers. These alternative strategies would not reduce intergenerational correlations, but they would reduce the economic gap between children who started life with all the disadvantages instead of all the advantages.

Another paper, titled Do poor children become poor adults?, which was originally presented at a 2004 symposium on the future of children from disadvantaged families in France, and was later included in a 2006 collection of papers related to the theme of the dynamics of inequality and poverty, discusses generational income mobility in North America and Europe. The paper opens by observing that in the United States almost one half of children born to low income parents become low income adults, four in ten in the United Kingdom, and one-third in Canada. The paper goes on to observe that rich children also tend to become rich adults—four in ten in the U.S. and the U.K., and as many as one-third in Canada. The paper argues, however, that money is not the only or even the most important factor influencing intergenerational income mobility. The rewards to higher skilled and/or higher educated individuals in the labor market and the opportunities for children to obtain the required skills and credentials are two important factors. Reaching the conclusion that income transfers to lower income individuals may be important to children in the here and now, but they should not be counted on to strongly promote generational mobility. The paper recommends that governments focus on investments in children to ensure that they have the skills and opportunities to succeed in the labor market, and observes that though this has historically meant promoting access to higher and higher levels of education, it is becoming increasingly important that attention be paid to preschool and early childhood education.

Lack of jobs due to deindustrialization

Sociologist William Julius Wilson has said that the economic restructuring of changes from manufacturing to a service-based economy has led to a high percentage of joblessness in the inner-cities and with it a loss of skills and inability to find jobs. This "mismatch" of skills to jobs available is said to be the main driver of poverty.

Effects of modern education

Research shows that schools with students that perform lower than the norm are also those hiring least-qualified teachers as a result of new teachers generally working in the area that they grew up in. This leads to certain schools not producing many students that go on to college. Students from these schools that go on to be college graduates are not as skilled as they would be if they had gone to a school with higher-qualified instructors. This leads to education perpetuating a cycle of poverty. People that choose to work in the schools close to them do not adequately supply the school with enough teachers. The schools must then outsource their teachers from other areas. Susanna Loeb from the School of Education at Stanford did a study and found that teachers who are brought in from the suburbs are 10 times more likely to transfer out of the school after their initial year. The fact that the teachers from the suburbs leave appears to be an influential factor for schools hiring more teachers from that area. The lack of adequate education for children is part of what allows for the cycle of poverty to continue. The problem undergoing this is the lack of updating the knowledge of the staff. Schools have continued to conduct professional development the same way they have for decades.

Culture of poverty

Another theory for the perpetual cycle of poverty is that poor people have their own culture with a different set of values and beliefs that keep them trapped within that cycle generation to generation. This theory has been explored by Ruby K. Payne in her book A Framework for Understanding Poverty. In this book she explains how a social class system in the United States exists, where there is a wealthy upper class, a middle class, and the working poor class. These classes each have their own set of rules and values, which differ from each other. To understand the culture of poverty, Payne describes how these rules affect the poor and tend to keep them trapped in this continual cycle. Time is treated differently by the poor; they generally do not plan ahead but simply live in the moment, which keeps them from saving money that could help their children escape poverty. 

Payne emphasizes how important it is when working with the poor to understand their unique cultural differences so that one does not get frustrated but instead tries to work with them on their ideologies and help them to understand how they can help themselves and their children escape the cycle. One aspect of generational poverty is a learned helplessness that is passed from parents to children, a mentality that there is no way for one to get out of poverty and so in order to make the best of the situation one must enjoy what one can when one can. This leads to such habits as spending money immediately, often on unnecessary goods such as alcohol and cigarettes, thus teaching their children to do the same and trapping them in poverty. Another important point Payne makes is that leaving poverty is not as simple as acquiring money and moving into a higher class but also includes giving up certain relationships in exchange for achievement. A student’s peers can have an influence on the child’s level of achievement. Coming from a low-income household a child could be teased or expected to fall short academically. This can cause a student to feel discouraged and hold back when it comes to getting involved more with their education because they are scared to be teased if they fail. This helps to explain why the culture of poverty tends endure from generation to generation as most of the relationships the poor have are within that class.

The "culture of poverty" theory has been debated and critiqued by many people including Eleanor Burke Leacock (and others) in her book The Culture of Poverty: A Critique. Leacock claims that people who use the term, "culture of poverty" only "contribute to the distorted characterizations of the poor." In addition, Michael Hannan in an essay argues that the "culture of poverty" is "essentially untestable." This is due to many things including the highly subjective nature of poverty and issues concerning the universal act of classifying only some impoverished people as trapped in the culture.

Life shocks

2004 research in New Zealand produced a report that showed that "life shocks" can be endured only to a limited extent, after which people are much more likely to be tipped into hardship. The researchers found very little differences in living standards for people who have endured up to 7 negative events in their lifetime. People who had 8 or more life shocks were dramatically more likely to live in poverty than those who had 0 to 7 life shocks. A few of the life shocks studied were:

• Marriage (or similar) break-ups (divorce)
• Forced sale of house
• Unexpected and substantial drop in income
• Eviction
• Bankruptcy
• Substantial financial loss
• Redundancy (being laid off from a job)
• Becoming a sole parent
• 3 months or more unemployed
• Major damage to home
• House burgled
• Victim of violence
• Incarceration
• A non-custodial sentence (community service, or fines, but not imprisonment)
• Illness lasting three weeks or more
• Major injury or health problem
• Unplanned pregnancy and birth of a child

The study focused on just a few possible life shocks, but many others are likely as traumatic or more so. Chronic PTSD, complex PTSD, and depression sufferers could have innumerable causes for their mental illness, including those studied above. The study is subject to some criticism.

Tracking in education

History in the United States has shown that Americans saw education as the way to end the perpetual cycle of poverty. In the present, children from low to middle income households are at a disadvantage. They are twice as likely to be held back and more likely not to graduate from high school. Recent studies have shown that the cause for the disparity among academic achievement results from the school's structure where some students succeed from an added advantage and others fail as a result of lacking that advantage. Educational institutions with a learning disparity are causing education to be a sustaining factor for the cycle of poverty. One prominent example of this type of school structures is tracking, which is predominantly used to help organize a classroom so the variability of academic ability in classes is decreased. Students are tracked based on their ability level, generally based on a standardized test after which they are given different course requirements. Some people believe that tracking "enhances academic achievement and improves the self-concept of students by permitting them to progress at their own pace."

The negative side is that studies have shown that tracking decreases students' opportunity to learn. Tracking also has a disproportionate number of Latinos and African Americans that have low socioeconomic status in the lower learning tracks. Tracking separates social classes putting the poor and minority children in lower tracks where they receive second-rate education, and the students that are better off are placed in upper tracks where they have many opportunities for success. Studies have found that in addition to the higher tracks having more extensive curriculum, there is also a disparity among the teachers and instructional resources provided. There appears to be a race/class bias which results in intelligent children not receiving the skills or opportunities needed for success or social/economic mobility, thus continuing the cycle of poverty. There is an overall perception that American education is failing and research has done nothing to counter this statement, but instead has revealed the reality and severity of the issue of the existence of tracking and other structures that cause the cycle of poverty to continue.

Theories and strategies for breaking the cycle

While many governmental officials are still trying to find an answer to poverty, many states and localities are making an effort to break the cycle. Mayor Bloomberg of New York City has been advocating a plan where parents are paid up to $5,000 a year for meeting certain goals that will better their lives. This policy was modeled after a Mexican initiative that aims to help poor families make better decisions that will help them in the long-term and break cycle of poverty and dependence that have been known to last for generations. In addition, many states also have been making an attempt to help break the cycle. For example, a bill has been proposed in the California Assembly that "would establish an advisory Childhood Poverty Council to develop a plan to reduce child poverty in the state by half by 2017 and eliminate it by 2027". Even when the plan has poverty reduction as the goal, a rise in child poverty might be the reality for many states as it was in Connecticut. States are attempting to not only decrease the number of people in the cycle of poverty, but to also adjust the stringent work requirements that resulted from Congress’s welfare reform. The tougher work restrictions have upset many poverty advocates that believe the new regulations prevent individuals that are vulnerable or that lack skills from preparing for work. California Democratic Representative McDermott believes as a result of this and other effects of the new limitations, it has been harder for individuals to escape a life of poverty.

Relatively modest increases in benefit levels for programs that assist nonworking individuals and low-income workers might well be sufficient to bring the United States into line with...other affluent nations in its degree of poverty reduction. Lane Kenworthy

In his book Children in Jeopardy: Can We Break the Cycle, Irving B. Harris discusses ways in which children can be helped to begin breaking the cycle of poverty. He stresses the importance of starting early and teaching children the importance of education from a very young age as well as making sure these children get the same educational opportunities as students who are richer. Family values such as nurturing children and encouraging them to do well in school need to be promoted as well as a non-authoritarian approach to parenting. Harris also discusses the importance of discouraging teenage pregnancy and finding ways in which to decrease this phenomenon so that when children are born they are planned and wanted and thus have a better chance at breaking the cycle of poverty.

It has been suggested by researchers like Lane Kenworthy that increasing welfare benefits and extending them to non-working families can help reduce poverty as other nations that have done so have had better results.

The Harlem Children's Zone is working to end generational poverty within a 100-block section of Harlem using an approach that provides educational support and services for children and their families from birth through college. This approach has been recognized as a model by the Obama administration's anti-poverty program.

Effects on children

Children are most at the mercy of the cycle of poverty. Because a child is dependent on his or her guardian(s), if a child's guardian is in poverty, then they will be also. It is almost impossible for a child to pull him or herself out of the cycle due to age, lack of experience, lack of a job, etc. Because children are at such a young and impressionable age, the scars they gain from experiencing poverty early in life inevitably carry on into their adult life. "Childhood lays the foundations for adult abilities, interests, and motivation." Therefore, if they learn certain poverty-related behaviors in childhood, the behaviors are more likely to perpetuate. 

Studies have shown that household structure sometimes has a connection to childhood poverty. Most studies on the subject also show that the children that are in poverty tend to come from single-parent households (most often matriarchal). In 1997, nearly 8.5 million (57%) poor children in the US came from single-parent households. With the rate of divorce increasing and the number of children born out of wedlock increasing, the number of children that are born into or fall into single-parent households is also increasing. However, this does not mean that the child/children will be impoverished because of it. 

According to Ashworth, Hill, & Walker (2004), both urban and rural poor children are more likely to be isolated from the nonpoor in schools, neighborhoods, and their communities. Human nature is to have relationships with others but when a child is isolated due to their socioeconomic status, it's hard to overcome that when the status doesn't improve. Therefore, poor children also have more tense relationships which sometimes results in abnormal behavior, acting out, or other unexplained behaviors. 

There have been programs developed to specifically address the needs of poor children. Francis Marion University's Center of Excellence to Prepare Teachers of Children of Poverty has a number of initiatives devoted to equipping teachers to be more effective in raising the achievement of children of poverty. Located in South Carolina, the Center provides direct teacher training as well as facilitates research in the area of poverty and scholastic achievement. A resource that is out there to try and help communities undergoing poverty are places like Head Start. Head Start is a program for low income families that provides early childhood education as well as parent involvement. Results show that attending these programs increases children’s academic outcomes. The problem is that in high poverty areas this is supposed to be a helpful resource, but they start to hold lower quality due to lack of funds to keep places updated.

Oftentimes the communities in which impoverished children grow up in are crime ridden areas, examples of these areas are Harlem and the Bronx. These areas have effects on children as they are often exposed to crime and maltreatment at a young age, which is proven to reduce a child's ability to learn by up to 5%. Oftentimes these youth get caught up in the crime that goes on all around them, this involvement only worsens the effects of the cycle as they are often incarcerated or killed in many types of gang violence.

Poverty in China

From Wikipedia, the free encyclopedia

In China today, poverty refers mainly to the rural poor, as decades of economic growth have largely eradicated urban poverty. The dramatic progress in reducing poverty over the past three decades in China is well known. According to the World Bank, more than 500 million people were lifted out of extreme poverty as China's poverty rate fell from 88 percent in 1981 to 6.5 percent in 2012, as measured by the percentage of people living on the equivalent of US$1.90 or less per day in 2011 purchasing price parity terms.

 

Since the start of far-reaching economic reforms in the late 1970s, growth has fueled a remarkable increase in per-capita income, helping to lift more people out of poverty than anywhere else in the world: China's per capita income has increased fivefold between 1990 and 2000, from $200 to $1,000. Between 2000 and 2010, per capita income also rose by the same rate, from $1,000 to $5,000, moving China into the ranks of middle-income countries. Between 1990 and 2005, China's progress accounted for more than three-quarters of global poverty reduction and a big factor in why the world reached the UN millennium development of dividing extreme poverty by two. This incredible success was delivered by a combination of a rapidly expanding labour market, driven by a protracted period of economic growth, and a series of government transfers such as an urban subsidy, and the introduction of a rural pension. Independent studies by Gallup indicate the poverty rate in China fell from 26% in 2007 to 7% by 2012, although World Bank extrapolations suggest that the percentage of the population living below the international poverty line continued to fall to 4.1 percent in 2014. As of 2018 the number of people in poverty living below the national poverty line is around 30 million, about 2% of the population with hopes of totally eradicating poverty by 2020.

At the same time, however, income disparities have increased. The growing income inequality is illustrated most clearly by the differences in living standards between the urban, coastal areas and the rural, inland regions. There have also been increases in the inequality of health and education outcomes, and increased attention to unequal outcomes for ethnic minorities. To alleviate the situation, the Chinese government shifted its policy in recent years to encourage urban migration, fund education, health, and transportation infrastructure for poor areas and poor households. In addition the government is attempting to rebalance the economy away from investment and exports toward domestic consumption and public services, to help reduce social disparities. Relocation of the poor from poverty stricken regions to more developed urban areas is also being implemented as part of the holistic plan to tackle rural poverty.

Overview

Since Deng Xiaoping began instituting market reforms in the late 1970s, China has been among the most rapidly growing economies in the world, regularly exceeding 10 percent GDP growth annually. This growth has led to a substantial increase in real living standards and a marked decline in poverty. Between 1981 and 2008, the proportion of China's population living on less than $1.25/day is estimated to have fallen from 85% to 13.1%, meaning that roughly 600 million people were taken out of poverty. At the same time, this rapid change has brought with it different kinds of stresses. China faces serious natural resource scarcity and environmental degradation. It has also seen growing disparities as people in different parts of the country and with different characteristics have benefited from the growth at different rates. 

Starting from the pre-reform situation, some increase in income inequality was inevitable, as favored coastal urban locations benefited first from the opening policy, and as the small stock of educated people found new opportunities. However, particular features of Chinese policy may have exacerbated rather than mitigated growing disparities. The household registration (hukou) system kept rural-urban migration below what it otherwise would have been, and contributed to the development of one of the largest rural-urban income divides in the world. Weak tenure over rural land also limited the ability of peasants to benefit from their primary asset. 

Aside from income inequality, there has also been an increase in inequality of educational outcomes and health status, partly the result of China's uniquely decentralized fiscal system, in which local government has been primarily responsible for funding basic health and education. Poor localities have not been able to fund these services, and poor households have not been able to afford the high private cost of basic education and healthcare.

The large trade surplus that has emerged in China has exacerbated the inequalities, and makes them harder to address. The trade surplus stimulates the urban manufacturing sector, which is already relatively well off. It limits the government's scope to increase funding for public services such as rural health and education. The government has been trying to rebalance China's production away from investment and exports towards domestic consumption and services, to improve the country's long-term macroeconomic health and the situation of the relatively poor in China.

Recent government measures to reduce disparities including relaxation of the hukou system, abolition of the agricultural tax, and increased central transfers to fund health and education in rural areas.

Poverty reduction

China has maintained a high growth rate for more than 30 years since the beginning of economic reform in 1978, and this sustained growth has generated a huge increase in average living standards. 25 years ago, China had many characteristics in common with the rest of developing Asia: large population, low per capita income, and resource scarcity on a per capita basis. But in the 15 years from 1990–2005, China averaged per capita growth of 8.7%.

The whole reform program is often referred to in brief as the "open door policy". This highlights that a key component of Chinese reform has been trade liberalization and opening up to foreign direct investment, but not opening the capital account more generally to portfolio flows. China improved its human capital, opened up to foreign trade and investment, and created a better investment climate for the private sector. 

After joining the WTO China's average tariffs have dropped below 100%, and to around 5% for manufactured imports. It initially welcomed foreign investment into "special economic zones". Some of these zones were very large, amounting to urban areas of 20 million people or more. The positive impact of foreign investment in these locations led to a more general opening up of the economy to foreign investment, with the result that China became the largest recipient of direct investment flows in the 1990s.

The opening up measures have been accompanied by improvements in the investment climate. Particularly in the coastal areas, cities have developed their investment climates. In these cities, the private sector accounts for 90% or more of manufacturing assets and production. Out 2005, average pretax rate of return for domestic private firms was the same as that for foreign-invested firms. Local governments in coastal cities have lowered loss of output due to unreliable power supply to 1.0% and customs clearance time for imports has been lowered in Chinese cities to 3.3 days.

China's sustained growth fueled historically unprecedented poverty reduction. The World Bank uses a poverty line based on household real consumption (including consumption of own-produced crops and other goods), set at $1 per day measured at Purchasing Power Parity. In most low-income countries this amount is sufficient to guarantee each person about 1000 calories of nutrition per day, plus other basic necessities. In 2007, this line corresponds to about 2,836 RMB per year. Based on household surveys, the poverty rate in China in 1981 was 63% of the population. This rate declined to 10% in 2004, indicating that about 500 million people have climbed out of poverty during this period.

This poverty reduction has occurred in waves. The shift to the household responsibility system propelled a large increase in agricultural output, and poverty was cut in half over the short period from 1981 to 1987. From 1987 to 1993 poverty reduction stagnated, then resumed again. From 1996 to 2001 there was once more relatively little poverty reduction. Since China joined the WTO in 2001, however, poverty reduction resumed at a very rapid rate, and poverty was cut by a third in just three years.

Taken from the Asian Development Bank, there was an estimated average annual growth rate of 0.5% in China between 2010-2015. This brought the Chinese population to 1.37 billion in 2015. It is important to note that 7.2% of the Chinese population live below the national poverty line.

Increased inequality

China's growth has been so rapid that virtually every household has benefited significantly, fueling the steep drop in poverty. However, different people have benefited to very different extents, so that inequality has risen during the reform period. This is true for inequality in household income or consumption, as well as for inequality in important social outcomes such as health status or educational attainment. The Gini measure of inequality - an approximate measure of the national wealth gap with a range of 0 to 1, with the former representing perfect equality - increased from 0.31 at the beginning of reform to 0.45 in 2004; it has since risen to .49 in 2009. To some extent this rise in inequality is the natural result of the market forces that have generated the strong growth; but to some extent it is "artificial" in the sense that various government policies exacerbate the tendencies toward higher inequality, rather than mitigate them. Changes to some policies could halt or even reverse the increasing inequality.

The Nobel Prize-winning economist Sir Arthur Lewis noted that "development must be inegalitarian because it does not start in every part of the economy at the same time" in 1954. China classically manifests two of the characteristics of development that Lewis had in mind: rising return to education and rural-urban migration. As an underdeveloped country, China began its reform with relatively few highly educated people, and with a small minority of the population (20%) living in cities, where labor productivity was about twice the level as in the countryside.

In pre-reform China there was very little return to education manifested in salaries. Cab drivers and college professors had similar incomes. Economic reform has created a labor market in which people can search for higher pay, and one result of this is that salaries for educated people have gone up dramatically. In the short period between 1988 and 2003, the wage returns to one additional year of schooling increased from 4% to 11%. This development initially leads to higher overall inequality, because the initial stock of educated people is small and they are concentrated at the high end of the income distribution. But if there is reasonably good access to education, then over time a greater and greater share of the population will become educated, and that will ultimately tend to reduce inequality. 

The large productivity and wage gap between cities and countryside also drives a high rate of rural-urban migration. Lewis pointed out that, starting from a situation of 80% rural, the initial shift of some from low-productivity agriculture to high productivity urban employment is disequalizing. If the flow continues until the population is more than 50% urban, however, further migration is equalizing. This pattern is very evident in the history of the U.S., with inequality rising during the rapid industrialization period from 1870–1920, and then declining thereafter. So, the same market forces that have produced the rapid growth in China predictably led to higher inequality. But it is important to note that in China there are a number of government policies that exacerbate this tendency toward higher inequality and restrict some of the potential mechanisms that would normally lead to an eventual decline in inequality.

Rural-urban divide

Much of the increase in inequality in China can be attributed to the widening rural-urban divide, particularly the differentials in rural-urban income. A household survey conducted in 1995 showed that the rural-urban income gap accounted for 35% of the overall inequality in China.

In 2009, according to the China's National Bureau of Statistics, the urban per capita annual income at US$2,525 was approximately three times that of the rural per capita annual income. This was the widest income gap recorded in China since 1978. Urban-biased economic policies adopted by the government contribute to the income disparities. This is also known as the ‘artificial’ result of the rural-urban divide. In terms of the share of investments allotted by the state, urban areas were given a larger proportion when compared with rural areas. In the period 1986-1992, investments to urban state-owned enterprises (SOE) accounted for more than 25% of the total government budget. On the other hand, less than 10% of the government budget was allocated to investments in the rural economy in the same period by the state despite the fact that about 73-76% of the total population lived in the rural areas. However, the burden of the inflation caused by the fiscal expansion, which at that time was at a level of approximately 8.5%, was shared by all including the rural population. Such biased allocation of government finances to the urban sector meant that the wages earned by urban workers also include these government fiscal transfers. This is in addition to the relatively higher proportions of credit loans the government also provided to the urban SOEs in the same period. Meanwhile, the wages earned by the rural workers came mainly from growth in output only. These urban-biased policies reflect the importance of the urban minority to the government relative to the rural majority.

In the period when reforms in urban areas were introduced, the real wages earned by urban workers rose inexorably. Restrictions to rural-urban migration protected the urban workers from competition from the rural workers, which therefore also contributed to rural-urban disparities. According to a report by the World Bank published in 2009, 99% of the poor in China come from rural areas if migrant workers in cities are included in the rural population figures. Excluding migrant workers from the rural population figures indicates that 90% of poverty in China is still rural.

Inequality in China does not only occur between rural and urban areas. There exist inequalities within rural areas, and within urban areas themselves. In some rural areas, incomes are comparable to that of urban incomes while in others, income remains low as development is limited. Rural-urban inequalities do not only refer to income differentials but also include inequalities in areas such as education and health care.

Urban poverty in China

The structural reforms of China's economy have brought about a widening of the income gap and rising unemployment in the urban cities. The increasing challenge for the Chinese government and social organizations is to address and solve poverty issues in urban areas where the people are increasingly being economically and socially marginalized. According to the official estimates, 12 million people were considered as urban poor in 1993, i.e. 3.6 per cent of the total urban population, but by 2006 the figure had jumped to more than 22 million, i.e. 4.1 per cent of the total urban population and these figures are estimated to grow if the government fails to institute any effective measures to circumvent this escalating problem.

China's “floating population” has since helped spur rapid development in the country because of the cheap and plentiful labor they can offer. On the flip side, many people who came from the rural areas are not able to find jobs in the cities. This surplus of rural laborers and mass internal migration will no doubt pose a major threat to the country's political stability and economic growth. Their inabilities to find jobs compounded by the rising costs of living in the cities have made many people fall below the poverty line. 

There are also large numbers of unemployed and laid-off workers from state-owned enterprises (SOEs). These enterprises have since failed to compete efficiently with the private and foreign-funded companies when China's open-door policy was introduced. In the years 1995 to 2000, the state sector lost 31 million jobs, which amounted to 28 per cent of the jobs in the sector. The non-state sector has been creating new jobs but not in sufficient numbers to offset job losses from the state sector. 

SOEs’ roles were more than employers, they are also responsible in the provision of welfare benefits, like retirement pensions, incentives for medical care, housing and direct subsidies and the like to its employees, as such these burdens greatly increased production costs. In 1992, SOE expenses on insurance and welfare took up 35% of the total wages. Therefore, many people not only lost their jobs but also, the social benefits and security that they were once so reliant on. The adverse consequences arising from the market reforms are evidently seen as a socially destabilizing factor. 

Lastly, the government provided little or no social benefit for the urban poor who needed the most attention. Ministry of Labor and Social Security (MLSS) was the last line of defense against urban poverty in the provision of social insurance and the living allowance for laid-off employees. However, its effectiveness was limited in scope in which less than a quarter of the eligible urban poor actually receiving assistance.

The Minimum Living Standard Scheme was first implemented in Shanghai in 1993 to help supplement the income of the urban poor. It is a last resort program that is meant to help those that don’t qualify for other forms of government aid. The Minimum Living Standard Scheme set regional poverty lines and gave recipients a sum of money. The amount of money received by each recipient was the difference in their income and the poverty line. The Scheme has grown rapidly and has since been adopted by over 580 cities and 1120 counties.

Rural Poverty

While poverty has been reduced immensely in China over the past decade, it still remains a large problem in rural China. Rural China has historically been disproportionately taxed and also have received fewer benefits from the recent economic development and success of China. Agriculture has been the main occupation for the inhabitants of rural China, and in villages the produce generated is used to feed the village and not for selling on the market. Even in the heartlands of China where agriculture is used for commercial purposes, the economic boom of China has actually led to a decrease in the price of produce which has resulted in a loss of income for these producers.

Children growing up in poverty are more likely to be undernourished, have less educational opportunity, and have lower literacy levels. The disproportionate amount of inequality in China's rural sector along with correlation between poverty and education shows that children born in rural China are much more likely to score lower on literacy tests and not have the opportunity to pursue higher education.

The implementation of Chinese policy has exacerbated the issue of rural poverty en lieu of increased urban poverty. Typically the urbanization of a country leads to mass migration from the rural areas to the urban. However, the Chinese government implemented policy that restricts the migration of people born in rural China from coming to urban China. This restriction is based on the citizen's registration under the hukou system which states if the individual was born in an agricultural (rural) or non-agricultural (urban) area. Additionally, Chinese officials have been cracking down on Chinese migrants from rural communities that have moved to Beijing. In 2017, thousands of migrant workers living in Beijing were evicted because they did not possess an urban hukou. This process of removing migrants from rural to urban China, relocates them back to rural China where they no longer have a job or source of income. This is a relocation of poverty from the urban sector to the rural sector. 

The political response of China's government to the issue of rural poverty has been both lauded and criticized. China has been criticized for its high rate of rural poverty and the policies that the government has put in place to ameliorate the poverty. In Transformation of Rural China, Jonathan Unger points out that the lack of taxation at the village level restricts the villages from dealing with the problems they face. This means problems such as food instability and lack of education are not able to be addressed by local officials. Supporters of government policy point out that over the time period of 1978 to 2014, China has reduced rural poverty from 250 million people to just over 70 million people. China's Rural Poverty Alleviation and Development Outline from 2001 to 2010 led to certain government policy directly dealing with the issue of poverty with the removal of agriculture tax in 2006 and a program which the government paid rural families to plant trees on degraded land.

Unequal educational opportunity

Education is a prerequisite for the development of human capital which in turn is an important factor in a country's overall development. Apart from the increasing income inequality, the education sector has long suffered from problems such as funding shortages and unequal allocation of education resources, adding to the disparity between China's urban and rural life; this was exacerbated by the two track system of government's approach to education. The first track is government -supported primary education in urban areas and the second is family -supported primary education in the rural areas.

Rural education has been marginalized by the focus on immediate economic development and the fact that urban education enjoys more attention and investment by the central government. This lack of public funding meant that children of rural families were forced to drop out of school, thus losing the opportunity to further their studies and following the paths of their parents to become low skilled workers with few chances of advancements. This leads to a vicious cycle of poverty. Because of limited educational resources, urban schools were supported by the government while village schools were provided for by the local communities where educational opportunities were possibly constrained depending on local conditions. Thus, there still exist a huge gap in teacher preparation and quality of facilities between rural and urban areas. 

The two track system was then abolished in 1986 & 1992, to be replaced by the Compulsory Education Law and the Rule for the Implementation of the Compulsory Education Law respectively. Despite the emphasis of China's education reform on providing quality and holistic education, the rural schools still lack the capacity to implement such reforms vis-à-vis their urban counterparts. The rural areas lack the educational resources of the urban areas and the rural areas are considered to be falling below the educational benchmark set in the cities. Teachers are more attracted to urban sectors with higher pay and a slew of benefits. In addition, rural villages have a difficult time finding quality teachers because of the relatively poorer standard of living in villages. As a result, some rural teachers are not qualified as they received college degrees from continuing-education programs, which is not the best type of further education one could receive.

As a result, rural students often find themselves neither competitive enough to gain admissions to colleges nor employable for most occupations. Rural residents are increasingly being marginalised in higher education, closing off their best opportunities for advancement. This is especially prominent in Tsinghua and Peking University where the percentage of rural population studying in the two universities have shrunk to 17.6 percent in 2000 and 16.3 percent in 1999, down from 50 to 60 percent in the 1950s. These numbers are the most recent reliable data that has been published and experts agree that the number might be as low as 1 percent in 2010.

Even the attainment of an education, however, many not lead to escaping poverty. For some of China's ethnic minorities, specifically the Uyghur and Tibetans, ethnic discrimination is a barrier even for the most educated. In minority areas, regardless of education, the best jobs go to Hans.

Restrictions on migration

Pre-reform China had a system that severely restricted people's mobility, and that system has only slowly been reformed over the past 25 years. Each person has a registration (hukou) in either a rural area or an urban area, and cannot change the hukou without the permission of the receiving jurisdiction. In practice cities usually give registration to skilled people who have offers of employment, but have generally been reluctant to provide registration to migrants from the countryside. Nevertheless, these migrants are needed for economic development, and large numbers have in fact migrated. Many of these fall into the category of "floating population". There are nearly 200 million rural residents who spend at least six months of the year working in urban areas. Many of these people have for all practical purposes moved to a city, but they do not have official registration. Beyond the floating population, there are tens of millions of people who have left rural areas and obtained urban hukous.

So, there is significant rural-urban migration in China, but it seems likely that the hukou system has resulted in less migration than otherwise would have occurred. There are several pieces of evidence to support this view. First, the gap in per capita income between rural and urban areas widened during the reform period, reaching a ratio of three to one. Three to one is a very high gap by international standards. Second, manufacturing wages have risen sharply in recent years, at double-digit rates, so that China now has considerably higher wages than much of the rest of developing Asia (India, Vietnam, Pakistan, Bangladesh). This rise is good for the incumbent workers, but they are relatively high up in China's income distribution, so that the wage increases raise inequality. It is hard to imagine that manufacturing wages would have risen so rapidly if there had not been such controls on labor migration. Third, recent studies focusing on migrants have shown that it is difficult for them to bring their families to the city, put their children in school, and obtain healthcare. So, the growth of the urban population must have been slowed down by these restrictions.

Though, it should be noted that China's urbanization so far has been a relatively orderly process. One does not see in China the kinds of slums and extreme poverty that exist in cities throughout South Asia, Eastern Europe, Latin America, and Africa. Nevertheless, urbanization goes on: the urban share of China's population has risen from 20% to 40% during the course of economic reform. But at the same time the hukou system has slowed and distorted urbanization, without preventing it. The system has likely contributed to inequality by limiting the opportunities of the relatively poor rural population to move to better-paying employment.

Land policy and corruption

Just as Chinese citizens are either registered as urban or rural under the Hukou system, land in China is zoned as either rural or urban. Under Chinese property law, there is no privately held land. Urban land is owned by the state, which grants land rights for a set number of years. Reforms in the late 1980s and 1990s allowed for transactions in urban land, enabling citizens to sell their land and buildings, or mortgage them to borrow, while still retaining state ownership. Rural, or “collectively owned land”, is leased by the state for periods of 30 years, and is theoretically reserved for agricultural purposes, housing and services for farmers. Peasants have long-term tenure as long as they sow the land, but they cannot mortgage or sell the use rights. The biggest distortion, however, concerns moving land from rural to urban use. China is a densely populated, water-scarce country whose comparative advantage lies more in manufacturing and services than in agriculture. The fact that many peasants cannot earn a decent living as farmers is a signal that their labor is more useful in urban employment, hence the hundreds of millions of people who have migrated. But, at the same time, it is efficient to allocate some of the land out of agriculture for urban use. 

In China, that conversion is handled administratively, requiring central approval. Farmers are compensated based on the agricultural value of the land. But the reason to convert land – especially in the fringes around cities – is that the commercial value of the land for urban use is higher than its value for agriculture. So, even if China's laws on land are followed scrupulously, the conversion does not generate a high income for the peasants. There are cases in which the conversion is done transparently, the use rights over the land auctioned, and the revenue collected put into the public budget to finance public goods. But still the peasants get relatively poor recompense. One government study found that 62% of displaced peasants were worse off after land conversion.

Secure land tenure is recognized as a powerful tool to reduce poverty, and the central government has begun guaranteeing all farmers 30-year land rights, strictly limiting expropriations, documenting and publicizing farmers’ rights, and requiring sufficient compensation when farmers’ lands are expropriated. A 2010 survey of 17 provinces by Landesa found improved documentation of farmer's land rights, but much room for improvement: 63% of farming families have been issued land-rights certificates and 53% have land-rights contracts, but only 44% have been issued both documents (as is required by law) and 29% have no document at all; farmers who have been issued these documents are far more likely to make long-term investments in their land and are financially benefiting from those investments.

There have been reports of cases where peasants complain and demonstrate because the conversions have not been done in a transparent way, and there have been accusations of corruption of local officials. The government has published statistics on violent protests involving more than 100 people, and that number grew steadily up to 84,000 in 2005, before dropping a reported 20% in 2006. Up until 2006, the way in which agricultural land was being converted to urban land probably contributed unnecessarily to increasing inequality. It has been noted that compared to other developing countries, virtually all peasants in China have land. If that asset could be used either as collateral for borrowing, or could be sold to provide some capital before migrants moved to the city, then it would have been helping those who were in the poorer part of the income distribution. The administrative, rather than market-based, conversion of land essentially reduced the value of the main asset held by the poor.

Fiscal system and rural social services

Market reform has dramatically increased the return to education, as it indicates that there are good opportunities for skilled people and as it creates a powerful incentive for families to increase the education of their children. However, there needs to be strong public support for education and reasonably fair access to the education system. Otherwise, inequality can become self-perpetuating: if only high-income people can educate their children, then that group remains a privileged, high-income group permanently. China is at some risk of falling into this trap, because it has developed a highly decentralized fiscal system in which local governments rely primarily on local tax collection to provide basic services such as primary education and primary health care. China in fact has one of the most decentralized fiscal systems in the world.

China is much more decentralized than OECD countries and middle-income countries, particularly on the spending side. More than half of all expenditure takes place at the sub-provincial level. In part, the sheer size of the country explains this degree of decentralization, but the structure of government and some unusual expenditure assignments also give rise to this pattern of spending. Functions such as social security, justice, and even the production of national statistics are largely decentralized in China, whereas they are central functions in most other countries. 

Fiscal disparities among subnational governments are larger in China than in most OECD countries. These disparities have emerged alongside a growing disparity in economic strength among the provinces. From 1990 to 2003, the ratio of per capita GDP of the richest to poorest province grew from 7.3 to 13. In China, the richest province has more than 8 times the per capita public spending than the poorest province. In the US, the poorest state has about 65 percent of the revenues of the average state, and in Germany, any state falling below 95 percent of the average level gets subsidized through the "Finanzausgleich" (and any receiving more than 110 percent gets taxed). In Brazil, the richest state has 2.3 times the revenues per capita of the poorest state.

Inequalities in spending are even larger at the sub-provincial level. The richest county, the level that is most important for service delivery, has about 48 times the level of per capita spending of the poorest county. These disparities in aggregate spending levels also show up in functional categories such as health and education where variation among counties and among provinces is large.

These differences in public spending translate into differences in social outcomes. Up through 1990, there were only modest differences across provinces in infant survival rate, but by 2000 there had emerged a very sharp difference, closely related to the province's per capita GDP. So too with the high-school enrollment rate: there used to be small differences across provinces. By 2003, high-school enrollment was nearing 100% in the wealthier provinces while still less than 40% in poor provinces.

There is some redistribution within China's fiscal system, but not enough. Poor areas have very little tax collection and hence cannot fund decent basic education and health care. Some of their population will relocate over time. But for reasons of both national efficiency and equity, it would make sense for the state to ensure that everyone has good basic education and health care, so that when people move they come with a solid foundation of human capital.

China's highly decentralized fiscal system results in local government in many locations not having adequate resources to fund basic social services. As a consequence, households are left to fend for themselves to a remarkable extent. The average hospital visit in China is paid 60% out-of-pocket by the patient, compared to 25% in Mexico, 10% in Turkey, and lower amounts in most developed countries. Poor households either forego treatment or face devastating financial consequences. In the 2003 National Health Survey, 30% of poor households identified a large health care expenditure as the reason that they were in poverty.

The situation in education is similar. In a survey of 3037 villages in 2004, average primary school fees were 260 yuan and average middle-school fees, 442 yuan. A family living right at the dollar-a-day poverty line would have about 900 yuan total resources for a child for a year; sending a child to middle-school would take half of that. Not surprisingly, then, enrollment rates are relatively low in poor areas and for poor families.