Villagers use willow branches to make baskets in Guanyun County, Lianyungang City, Jiangsu Province on Aug. 22, 2022. The county has increased efforts to encourage professional farmers to engage in modern agriculture, creating more than 12,000 jobs for local residents. Photo: CNSphoto

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China’s new journey to build a modern socialist country in all respects is already underway. Based on the new development stage, the new development philosophy, and the new development pattern, narrowing the income gap is one of the most important tasks. The 18th CPC National Congress marked the start of a new phase in China’s economic development, a phase featuring the national economy’s transition from rapid growth to the “new normal” of mid- to high-speed growth. 

In this process, important economic variables such as regional income gaps and population flow have undergone trends and changes. All these changes have an important impact on the shifting income gap between urban and rural residents, and these variables are a driving force which determines the future direction of such gaps. A discussion about narrowing the urban-rural income gap needs to take place amid a fundamental shift in the current economic development stage.

Downwards trend

As China’s economy begins to move from high-speed growth to the new normal of mid- to high-speed growth, important economic variables have also changed. First, regional income gaps have gone from widening to narrowing, and they are currently showing a convergence. Second, the ratio of China’s urban permanent residents in high- and low-income areas, the flow rate of this population from low to high income areas slowed down greatly and has even reversed. Third, the speed of population transfers from rural to urban areas in high-income zones has also decreased, and urbanization levels for low-income areas have evidently become lower than urbanization in high-income areas, so they still maintain a relatively fast growth rate. It is worth noting that both types of population transfers have weakened at this point. Since the 1990s, income gaps between Chinese urban and rural residents have changed, from a stage where gaps were rising to a basically stable stage and on to a slow decline, which roughly stabilized at approximately 2.6 in recent years.

According to theoretical and empirical analysis, the main factors affecting the urban-rural income gap are the ratio of non-agricultural to agricultural labor productivity, the proportion of rural laborers engaged in agriculture, and the income ratio of urban workers to migrant workers. An increase of these three ratios will widen the income gap between urban and rural areas.

The rapid rise in urban and rural residents’ income levels between 1995 and 2007 can be attributed to the increase of industrial labor productivity in the early period of industrialization and the period of catching up. At the same time, with the labor force’s rapid transfer from agricultural to non-agricultural sectors in the process of industrialization, the proportion of rural residents engaged in agriculture decreased, which to a certain extent played a moderating role in the expansion of the urban-rural income gap. 

In the early stage of reform and opening up, the income gap between high- and low-income areas was widening, which led to a rapid population flow from low to high income areas, and narrowed the income gap between urban and rural residents. 

As China’s economic development transforms from high speed to mid- to high speed, industrial and GDP growth rates start to slow down significantly. In the absence of a significant decline in agricultural labor productivity’s growth rate, the ratio of non-agricultural and agricultural labor productivity basically maintained a steady pace or even slowly declined from 2010 to 2018, after a sharp rise in the previous period. This is the primary cause for the decline in the income gap between urban and rural residents after 2010, while in recent years it has remained stable. The increasing proportion of rural labor engaged in non-agricultural industries has narrowed the income gap between urban and rural residents.

In theory, the urban-rural income gap trajectory basically conforms to Simon Kuznets’ “inverted U-shaped” hypothesis and Arthur Lewis’s model for economic development. Specifically, as the economy grows and develops, the income gap between urban and rural residents will initially rise rapidly, then stabilize, and decline. 

The main driving force can be explained by a mechanism which guides economic activity using Kuznets’ hypothesis and Lewis’ hypothesis. First, non-agricultural labor productivity rises sharply in urban areas, then the ratio of non-agricultural labor productivity to agricultural labor productivity rockets, and then laborers shift from agricultural to non-agricultural sectors, and populations flow from low-income to high-income areas, and from rural to urban areas. Over time, this flow causes convergence in capital gains and labor incomes between different regions and sectors, with the gap reaching the top of an “inverted U-shaped” curve and beginning to decline.

Long way to go

Going forward, we can keep track of major variables affecting the urban-rural income gap, such as the non-agricultural to agricultural labor productivity ratio, the proportion of rural laborers engaged in agriculture, and the urban to migrant wage ratio, to sketch a rough outline of potential obstacles.

Comparing labor productivity ratios in agriculture and other industries, current studies predict that GDP growth and non-agricultural value-added benefits will decrease in the future. While laborers continue to move from low efficiency agriculture to other sectors,  increasing productivity rates for agricultural labor, the industrial to agricultural productivity ratio will show a steady or slow decline in the future. 

As of today, the proportion of the rural labor force engaged in agriculture shows a general decline. Under the current national urban-rural integration development strategy, such a downward trend is expected to continue, but the rate of decline will somewhat depend on future investment in agriculture and rural areas, increases in agricultural productivity, and the level of urban-rural integration. 

Improving rural education levels and human capital can shape long-term trends in the income ratio between urban workers and migrant workers. As the national education level converges, the future income ratio is expected to slowly decline. Meanwhile, the faster pace of urbanization in low-income areas will also help narrow the income gap between urban and rural residents.

As we can see, the ratio of non-agricultural to agricultural labor productivity, the number of rural laborers engaged in agriculture, and shifting income ratios between urban and migrant workers all play a positive role in narrowing the income gap between urban and rural residents. Measures implemented by the government, such as increasing investment in agriculture and rural infrastructure, promoting urbanization in low-income areas, strengthening investment in education in rural areas, and improving human capital for the rural labor force are also beneficial. The income gap between urban and rural residents is likely to decline slowly in the future, and the inflection point has already arrived.

It is worth noting that with our economy’s transition to the new normal, the current gap between regions, between urban and rural areas, and between agricultural and non-agricultural productivity has all stabilized and entered a state of convergence and relative steadiness. For many years in the future, although the income gap between urban and rural residents is expected to decline, the rate of decline will not be fast, and the income gap between urban and rural residents is likely to remain at a high level. 

According to predictions based on research for this article, the income gap between urban and rural residents will slowly decline from the current 2.6 to 2.1 by 2030, which is still a relatively high level. As there is a huge gap between rural residents and urban dwellers in terms of social services, infrastructure, wealth, and other aspects, the gap will still be prominent for years to come.

Possible solutions

First, we must come to realize that narrowing the urban-rural gap and achieving urban and rural integration will be an arduous and long-term task. At present, China has entered a new stage of development, and some key variables have reached turning points. Though we foresee that the income gap between urban and rural areas will decline, the absolute gap will remain wide for a long period of time, and the growth rate will slow for rural residents’ incomes due to the declining GDP growth rate. Therefore, it is necessary to formulate feasible development goals that focus on continuously increasing farmers’ incomes in both the short and long term.

Second, we should continue to increase investment in rural areas and agriculture. Learning from international practices, we can tell that there is still room for improvement in absolute and relative levels of agricultural tradable asset labor and agricultural labor productivity. The central government proposed that the revitalization of rural areas is first about revitalization of industries and talents, and either way, it needs to be achieved by increasing investment in rural areas and agriculture. While increasing input, fiscal policy should also play a role in fostering private capital investment, encouraging agricultural enterprises and entrepreneurs to participate, and protecting the interests of farmers.

Next, we should take note of the positive impact on rural resident’s income levels that entrepreneurs who return home to open businesses have. At present, there is a population transfer from developed areas to their hometowns, and the main reason is not a decline in employment demand within developed areas, but the “gravity” of county level economic development and the “deterrent” of high urban migration costs. 

Against the backdrop of improved transportation infrastructure, inter-regional industrial transfer, and the implementation of poverty alleviation projects, some migrant workers who have accumulated capital, technology, and market channels while working in cities have begun to return to their hometowns to start businesses, which is of great significance for promoting integrated development of rural economies.

Finally, the government must create favorable conditions for rural revitalization on an institutional level. To begin with, institutional factors that serve as barriers to agricultural and rural areas must be reduced. Upon deepening reforms of the land and household registration systems, and with the support of fiscal and financial policies, obstacles to capital investment in rural agriculture must be removed to effectively protect the interests of farmers. In addition, income distribution benefits should be tilted towards rural residents. We should continue to implement the policy of price subsidies for agricultural products, reasonably raise social security standards for rural residents, and reform the income distribution system in a direction conducive to raising rural residents’ incomes.

 

Zhang Yanqun is a research fellow from the Institute of Quantitative and Technological Economics at the Chinese Academy of Social Sciences. 

Edited by YANG XUE