Rural-urban disparities in India and China

World Development, Vol. 18, No. 8, pp. 1097-I 110, 1990. Printed in Great Britain.

Rural-Urban

0305-750x/90$3.00+0.00 0 1990 Pergamon Press plc

Disparities in India and China A. S. BHALLA* University of Manchester

Summary. -This paper compares rural-urban disparities in China and India in light of differences in the following indicators: income and consumption, deposit to credit ratios, and agricultural and industrial productivity. Access to such public services as health are also considered. Reasons for disparities are sought in government policies affecting agricultural terms of trade, credit, and rural to urban migration. The paper concludes that the Chinese economy during the Mao Zedong period was much more egalitarian than the Indian; but the case is less clearcut for the Deng Xiaoping period.

1. INTRODUCTION Mao Zedong’s China was known as a unique example in the Third World of equality of incomes and opportunities and “of eating from the same big pot.” In post-Mao China, egalitarian strategies have yielded to rapid modernization and efficiency; the leadership has clearly accepted the resulting widening income gaps between rural and urban areas. Since the revolution in China in 1949, its economy has been characterized by structural changes and upheavals like the Great Leap Forward and the Cultural Revolution. In the postMao period, a new wave of reforms - the rural responsibility system and decollectivization have brought about a virtual economic revolution, raising incomes and living standards, particularly of the rural population. These structural changes have influenced the relative positions of the rural and urban sectors and of agriculture and nonagriculture. Authors like Perkins and Yusuf’ have argued that Chinese planners and policymakers, like those in such developing countries as India, have favored the urban areas for the following reasons: they invest more in heavy industry than in agriculture; they utilize rural surpluses to finance the urban sector; and although investment in heavy urban industry in turn may generate increased sales of either agricultural inputs or industrial consumer goods, the process has limited benefits for the rural areas. In China, the post-Mao policies of economic liberalization and market socialism continue to be based on the state’s ownership of the means of production. On the other hand, in countries like India, a socialist pattern was built as a super-

structure on top of a market-oriented economy, with state and private sectors coexisting. Inequalities in income distribution and unequal access to resources, technology and inputs, and public goods and services are often considered inherent to capitalist modes of production. This paper examines the performance of urban and rural sectors in China and India; in particular it compares the economic strategies and government policies of the two countries. Section 2 considers rural-urban disparities with respect to income, output and consumption. Section 3 examines financial disparities between rural and urban areas as reflected in the variations in the deposit to credit ratios. As income and consumption inequalities are often accompanied by differential access of rural people to such nonmarket public goods and services as health and education, Section 4 is devoted to the performance of primary care and health services in rural areas of India and China. Section 5 discusses government policies viz. agricultural policies affecting terms of trade, rural-urban migration and rural credit, which may explain the disparities in the two countries. The concluding section argues that Mao’s China was very different from India with respect to socioeconomic disparities. But if the current reforms in Deng Xiaoping’s China toward market mechanisms and competition continue, the glaring inequalities prevailing in India are also likely to emerge in China.

*I am grateful to two anonymous referees for helpful comments on an earlier draft of the paper. All remaining errors or omissions are my sole responsibility.

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2. RURAL-URBAN DISPARITIES IN INCOME; CONSUMPTION AND OUTPUT (a) Income and consumption dzflerences Table 1 gives ratios of average rural to average urban consumption per capita in China and India. It shows that in India average rural-urban consumption disparities as well as those by each expenditure item have widened; in China these disparities have on average narrowed, although in the case of clothing expenditure they have widened (in 1983 rural consumption of clothing was only 37% of urban consumption, whereas in 1965 it was 41%); and the pattern of consumption remained largely unchanged in India, whereas it changed substantially in China between 1965 and 1983. In 1983, rural to urban consumption ratios in China increased for fuel, housing and articles of daily consumption but they declined for clothing and cultural activities. Changes in the pattern of rural consumption have been particularly noticeable since the introduction of rural reforms in the post-Mao period. A smaller proportion of the total family budget is now spent on food and clothing and a greater proportion on housing and articles of daily use. A phenomenally high ratio of rural to urban spending on housing in 1983 in China begs comment. In the wake of the rural reforms, Chinese peasants have been spending the bulk of their increased incomes on building privately-owned houses in the rural areas. However, in the urban areas so far there is virtually no private ownership of houses or apartments. A new scheme of privatization of housing is not getting off the ground because urban housing is heavily subsidized by the state (there is no subsidy for rural housing) and

urban dwellers spend only a nominal amount on rent. This system partly explains the very low urban expenditure on housing. In practice. the gaps between rural and urban consumption per capita noted in Table 1 may be narrower because of lower rural prices than urban prices. Underreporting of domestically produced food and other goods and services in rural areas is another factor which may account for some overestimation of the rural-urban gaps. In fact, the rather low rural to urban consumption ratios for food in China seem to be due to this factor. In 1983, subsistence food production in China accounted for nearly 60% of the total. On the basis of a general equilibrium model based on a social accounting matrix (SAM) for India, de Janvry and Subbarao (1986) estimated income and expenditure per capita by rural and urban social classes (Table 2). The average income and consumption per capita are the lowest for the small farmers and landless agricultural workers in the rural areas, which suggests that absolute rural poverty is concentrated in these two classes.’ In the urban sector, the class of marginal self-employed workers is the poorest, with income and expenditure per capita being lower than that of the category of medium farmers. Similar data for China are hard to find, but it would seem that in the postMao period the income inequalities exist not so much between rural and urban areas as between social classes - the rich and the poor. It has been noted that most of those who belong to the cate-

Table 2. Income and expenditure per capita by social class in India (1978-79) Average Income per capita (Rs.)

Average Expenditure per capita (Rs.)

Rural: Landless agricultural worker Small farmer Medium farmer Large farmer

622 502 829 2,024

546 457 737 1,368

Urban: Worker Marginal* Capitalistt

2,008 811 3,148

1,427 718 1,911

Total

1.133

875

Social class

Table I. Rural to urban consumption ratios by expenditure categories (China vs. India)

Item of expenditure

China (1965) (1983)

India (196768) (1983)

Food Clothing Fuel Housing Daily articles Cultural activities

0.50 0.41 0.84 0.47 0.52 1.07

0.49 0.37 1.53 3.60 0.59 0.26

0.86 0.90 0.73 -

0.76 0.77 0.69 -

-

-

Total consumption

0.43

0.49

0.74

Sources:

0.68

For China: State Statistical Bureau, Statistical Yearbook of China (1983), pp. 463 and 473. For India: Government of India (1983).

Source: de Janvry and Subbarao (1986). p. 49. *This category is defined as the lowest 82% of the urban self-employed. tThis category is defined as the highest 18% of the urban self-employed.

RURAL-URBAN

gory of rich (the so-called 10,000 yuan families) are engaged in activities based on private ownership or use of resources, e.g. self-employed workers, like taxi drivers-and writers, and wage employees, like the staff of joint ventures with foreign firms. It is estimated that about “10% of the nation’s 12 million self-employed industrial and commercial workers earn over 10,000 yuan a year, and 1% of these earn far more-up to hundreds of thousands of yuan.“’ For China, Table 3 gives time-series data on rural and urban net output per capita, consumption per capita and family income per capita. The rural and urban family incomes per capita (by both per worker and per resident) show a narrowing of rural-urban gaps over time. The ratio of urban to rural incomes narrowed from 3.5: 1 to 5.5: 1 in 1957 to only about 2: 1 in 1981 and 1985. This narrowing of gaps has been due primarily to the phenomenal growth of private rural incomes since the rural reforms introduced in 1979. The ratio of urban to rural consumption per capita has remained over 2 : 1. The data in Table 3

DISPARITIES

are for “farm” and “nonfarm” populations and are converted into real terms by deflating the urban figures by the worker cost of living index and the rural figures by the nationwide retail price index. As Perkins has noted, “the use of this latter deflator tends to overstate the growth of rural consumption mainly because rural consumers do not have easy access to goods sold at the official retail prices that dominate the national retail price index.4 Using the farm purchase-price index as a deflator for rural consumption raises real consumption for the period 1972-78 and, to a much lesser extent, for the period 1979-85, thus lowering the rates of growth of rural consumption. Data collected by sample surveys of rural and urban incomes and consumption (covering 12,050 families in 82 cities and 31,435 peasant families in 600 counties throughout the country) show that between 1978 and 1984 both rural incomes and consumption rose more rapidly than urban incomes and consumption. The average annual growth of rural incomes per resident (15.5%) during 197985 is unprecedented and is in sharp contrast to the 3.8%

Table 3. Disparities in output, consumption andfamily

Year

National income per capita (yuan at 1985 prices) Agriculture Nonagriculture

1099

income per capita in China (19.5245)

Family income (yuan at current prices) Rural Urban per per per per worker resident worker resident

Consumption per capita (yuan at 1985 prices) Rural Urban

1952 1957

187 207

380 533

97 113

249 315

152

73

1962 1965 1970 1975 1978 1979 1980 1981 1983 1985

149 195 196 208 208 223 223 231 277 338

421 587 882 1,097 1,283 1,276 1,353 1,587 1,752 2,030

129 100 164 169 191 205 225 263 324

332 282 453 514 535 575 584 603 754

204* 338 381 433 486 592 690

-98* 134 160 191 223 309 398

4.8 8.0

2.2 9.2

2.8 5.6

Annual growth rate (%): 1952-78 0.4 1979-85 7.2

195765 1981-85

3.8 9.2

3.8 15.5

833

254

8177 -

2437 500 573 821

888 977 1,426 -0.25 12.6

-0.51 13.2

Sources: For national income per capita: State Statistical Bureau, Statistical Yearbook of China (1985 and 1986). Rural and urban populations are used for 1952-80 (Sratirfical Yearbook ofchina, 1986, p. 71). and agricultural and nonagricultural populations are used for 1981 and 1985 (State Statistical Bureau, Agricultural Sfatisricaf Yearbook ofchina, 1981, 1983 and 1986). For consumption per capita: State Statistical Bureau, Zhongguo rongji nianjian (1986), pp. 624 and 646. For family income: State Statistical Bureau, Statistical Yearbook of China (1981), p. 441; (1983), p. 499; (1986), pp. 576 and 583 (sample survey data). *Estimated by assuming that the expenditure-income ratio per resident and the worker-resident ratio per family are the same as in 1957. tFor 1964.

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annual growth for the period between 1952 and 1978 (Table 3). However, reduction in income inequalities between rural and urban areas may conceal some intra-rural and intra-urban inequalities. There are some indications that the rural economic reforms have somewhat accentuated intra-rural inequalities. In 1984, the gini coefficient for Chinese peasants was 0.264 compared to 0.237 for 1978.5 On the other hand, urban income inequality is known to have been reduced. For worker families, the gini coefficient in 1984 was 0.168 compared to 0.185 in 1977. This decline in intra-urban inequality seems to be due to reduced differences between wage grades in the state fixed-wage system. But the above estimates are based on limited sample surveys, the results of which are not very reliable. At any rate, the change observed is also quite small.

(b) Differences

in output per worker

The above data, based on household income and consumption surveys, tend to underestimate ruralurban income gaps because they omit income from capital and income in kind (e.g., rice rations), which are more significant in towns. There are additional problems in comparing average incomes and expenditures in rural and urban areas, such as the price differentials between the two sectors noted above, valuation of farmers’ production for Table 4. Ratio of

their own use, and differences in sources of income and in average size of families. It may be more useful to examine gaps in output per worker between agriculture and nonagriculture. We consider gaps between agriculture and industry since the inclusion of other sectors like services, for which estimation methods and coverage are very different in China and India, would tend to distort comparisons. Table 4 gives the ratio of gross output per worker in industry to gross output per worker in agriculture. In China this ratio increased between 1952 and 1971 but declined after that until 19sS, thus suggesting a narrowing of rural-urban gaps in the latter period. On the other hand, in India the ratio kept rising constantly between 1951 and 1981 which suggests a widening of the gap. This trend is illustrated in Figure 1. The industrial GNP per worker in China is particularly high compared to that in India and compared to China’s agricultural GNP per worker, which actually declined in 1961, the year following the period of the Great Leap Forward. One needs to bear in mind, however, that the output data for India and China in Table 4 are not strictly comparable. In China prior to 1984, the output of village- industry was included under agriculture, whereas in India it is included under industry. Furthermore, for China the output data are in terms of GNP, while they are in terms of GDP for India. The wide gaps between China and India might

GDP per worker in industry to GDP per worker in agriculture (China

vs. India at 1980 international dollars)

China GNP/worker GNP/worker Year 195lf 1961 1971 1981 1985

in industry 4,923 5,980 12,081 13,536 14,172

in agriculture 1,048 844 1,247 2,064 2,991

GDP/worker Ratio 4.70 7.08 9.69 6.56 4.74

in industry 1,385 1,987 2,951 3,475

India GDP/worker in agriculture 925 1,017 1,166 1,159

Ratio 1.50 1.95 2.53 3.00 -

Sources: Data on GNP/GDP for China and India are taken from Summers and Heston (1988). These data are adjusted for purchasing power parity. The data for GDP in agriculture and industry were derived by using shares of GDP in these two sectors. Base data taken from the State Statistical Bureau, Statistical Yearbook ofChina (various years), and Government of India [National Accounts Statistics] (various years). The data for workers employed in agriculture and industry for India were taken from the population censuses, and for China they were taken from SYC. For India, data for 1961 and 1971 are taken from CSO (1978). As there were differences between the two censuses with respect to identification criteria of workers and nonworkers, the RegistrarGeneral conducted a resurvey of both the population censuses on a sample basis (during December 1971 and July 1972). The estimates for India of the number of workers for 1961 and 1971 are according to the 1971 concept. *Data are for 1952 for China.

RURAL-URBAN

1101

DISPARITIES Chino (industry) .-•

I

0’ 1951

I

1961

1971

I 1961

I 1965

Figure 1. GNP/worker in agriculture and industry in China and India.

be explained by much greater investment in Chinese industry and by relatively greater output shifts from agriculture to industry, without any corresponding shifts of labor out of agriculture. In spite of the free rural to urban migration in India, the proportion of labor in agriculture there has remained quite high. On the other hand, in China (as we shall examine in Section 5), rural to urban migration has been controlled. Therefore, the migration factor cannot be used to explain the reduction in disparity over time. The labor supply factor may also be relevant here. Rural wages can be suppressed if it is less

Table 5. Deposit to credit ratios in China and India India (1969)

China (1979)

India (1978)

China (1985)

India (1985)

Rural Semi-urban Urban Metropolitan

2.7 2.5 1.7 0.9

1.5 0.3 -

1.9 2.1 1.6 1.1

1.1 0.5 -

1.5 1.9 1.6 1.2

Total average

1.2

0.5

1.4

0.6

1.4

Population group

Sources: For China: State Statistical Bureau, Statisrical Yearbook of China (1986). p. 530. Rural advances cover

loans to state-owned agricultural units, rural communes, production brigades, and teams. Urban advances cover loans to industrial production enterprises, industrial supply and marketing enterprises, and materials supply departments, as well as individual industrial and commercial units in urban areas. For India: Reserve Bank of India (no date). Data plied to the author by the Reserve Bank of India.

sup-

burdensome to be unemployed in rural areas than in urban. Also if urban workers are more easily organized than rural workers, then rural wages will be lower, other things being equal. Furthermore, self-employed activities in urban areas are, in general, demand-constrained (output must be sold), while peasant production is supply-constrained (output can be consumed by the family). This implies that peasants apply more labor to their nonlabor assets, reducing the average productivity of labor. The conclusion of increasing disparity in India is further supported by data on rural poverty and income distribution. In the Sixth Five-Year Plan (198&85), Indian planners concluded that nearly 50% of the Indian population remained below an absolute poverty line. They also admitted that unemployment and underemployment had increased over the past decade. According to the Planning Commission norms, roughly one-third of Punjab’s rural population is still below the poverty line.6 (It is important to note that Punjab is one of the fastest growing states in India.) Extremely uneven distribution of land and increasing population pressures seem to be the major reasons for this persistent rural poverty. The situation in other Indian states, which are growing much less rapidly, is likely to be even worse. For example, in the case of Bihar, the already high incidence of rural poverty seems to be rising still further owing to an extremely small land base for the majority of rural households.’ The above regional inequalities in incomes may be partly explained by an alliance of urban elite groups. There is little incentive for these groups to direct resources to remote regions, if these regions are not organized to demand equality or are unable

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to direct the benefits from such resources toward delivery of goods or services to the urban areas.8

ratios suggest that credit policy may have drained the rural sector of credit.

3. RURAL-URBAN FINANCIAL DISPARITIES

4. DIFFERENTIAL ACCESS TO HEALTH SERVICES

Financial disparities between rural and urban areas and between agriculture and nonagriculture may occur’due to urban bias in economic policies. Government measures have been introduced to mobilize rural surpluses for industrialization and urban development. However, in the case of China, the mobilization of rural surpluses does not seem to have been all that important - the industrial sector ploughed back its incremental output into financing industrialization.’ For example, in the 1950s agriculture is estimated to have contributed about 16% of the state funds for urban development, whereas by the 1970s it contributed only 6%.‘O State revenues from agricultural taxation have declined considerably both as a proportion of total revenue and as a proportion of gross agricultural output. A deliberate policy to limit urbanization may partly account for this phenomenon (see Section 5). In India, in the 1950s and 1960s the net resource flows both on private capital account and on government account moved from nonagriculture into agriculture.” In the 1970s this trend was reversed: there was an increased outflow from the rural sector in the form of financial savings. It is estimated that the savings ratios of agricultural and rural nonagricultural households were about 10% and 6% respectively, an average rural savings rate of around 8%.12 The expansion of financial institutions (e.g., cooperative credit societies and nationalized commercial banks) and the slowdown of investment in physical farm assets seem to account for these financial outflows. Furthermore, taxation of agricultural income and wealth is insignificant in India. As a proportion of central and state tax revenue, land revenue and agricultural income tax declined from 7% in 1951-52 to less than 1% in 1983-84. A study by the National Institute of Bank Management in India concluded that “the interstate distribution of institutional finance in India showed a pronounced regressive bias against the low-income states which are predominantly rural.“‘3 This bias is also noticeable in Table 5 on the distribution of deposits and advances by rural and urban population groups. It shows that the deposit to credit ratios in India are lower in urban and metropolitan areas than in rural areas. The deposits were 1.5 to 1.9 times the advances in the rural sector in India and 1.1 to. 1.5 times those in China (Table 5). These higher deposit to credit

The income and consumption inequalities examined in Sections 2 and 3 are often accompanied by differential access of rural and urban people to such nonmarket public services as health. It is generally accepted that the poor in China enjoy much better access to health services than their counterparts in India and other low-income countries. Despite financial constraints, China made a major commitment to provide medical care for the common man and woman in rural areas - this was reflected in the program of barefoot doctors at the brigade and team levels in the Chinese rural sector. It has been estimated that the barefoot doctors contributed to the national economy through labor savings (reduction of workdays lost and savings in traveling and waiting time). The monetary value of these savings is estimated at about 1,353 million yuan which, for 1974, amounted to about 0.5% of GDP and about 2% of total value of agricultural output.14 In China, the numbers of urban and rural doctors per 1,000 population in 1983 were 3.71 and 0.82 respectively. The ratio of hospital beds per 1,000 population was 4.84 for urban areas and 1.48 for rural areas in the same year.” These data show unequal distribution of health care facilities, with the urban areas being better provided. In the case of India, the rural-urban gap in the ratio of hospital beds is much wider, with the rural ratio being 0.13 compared to the urban ratio of 2.89.1h Regarding the rural-urban breakdown of the health ‘*output” variables like mortality rates, in China the urban infant mortality rate declined from 120 in 1949 to 13 in 1982, whereas the rural rate declined from 212 to 22.2 during the same period.” In India, the rural-urban differences in this rate widened during the 1970s - the urban rate in 1970 was 90 compared to the rural rate of 136, whereas in 1980 these rates were 65 and 124 respectively.” There are regional variations, however. Data for the state of Kerala, with the highest literacy rate in the country, show a narrowing of the rural-urban gaps in these ratios. The situation in Kerala seems to be exceptional and is unlikely to be valid for other states in India. For China, the crude death rate in the rural areas is about 7.1 per 1,000, against 4.8 per 1,000 for the urban areas. The crude death rate for India is much higher: 13.9 for the rural areas and 8.4 for the urban areas. The above indicators, which partly reflect differences in the availability of health care facili-

RURAL-URBAN

ties, show relatively better performance of the rural health services in China than in India. This success can be explained in large measure by the agrarian structure of communes, brigades and teams. Both labor and funds for rural health services can be mobilized easily within the framework of a commune structure. In China before 1977, a number of measures were used to redistribute health services between rural and urban areas. First, urban medical personnel were transferred to rural areas either permanently or in mobile teams. Although this measure may have had some negative effects on the quantity of urban health services, it improved access of the rural peasants to health services. Second, hospitals in big cities like Beijing and Shanghai charged lower room rates (by about 50%) for poor peasants coming from the rural areas. Third, health care facilities in the rural areas were improved by integrating Western and traditional Chinese approaches to medicine. Traditional Chinese medicine and paramedical staff (the barefoot doctors) complemented the scarce Western medical facilities. Fourth, the curriculum of medical colleges was reduced from six years to three years to overcome the shortage of medical personnel. (A possible tradeoff between quantity and quality of medical service was justified on social and political grounds.) Fifth, the central government allocated additional resources for relatively poor rural areas to enable them to provide cooperative medical services. Some Western scholars argue that the disbanding of communes and the rural economic reforms has led to a weakening of the social health insurance scheme in the rural areas and to an increase in death rates since 1981 .I9 While it is true that more rural people are now having to bear the full cost of medical expenses, the impact of rural reforms on rural health services at present remains inconclusive. The possible decline in social welfare funds for rural health care needs to be offset by the much higher farm family incomes and their greater capacity to pay for health care from available rural or urban health facilities. The decline in barefoot doctors may also have been offset by the increase in the number of private practitioners in the rural areas. Even if one accepts that Chinese official estimates of rural infant mortality data are biased downward, and that abolition of communes has reduced some support for rural health services, there is no denying the fact that China’s achievements in improving rural health care have been remarkable. In the case of India, it is claimed by one author (from the medical profession) that “the failure to deliver health care, especially to the rural poor who form the majority of the population, is the result

DISPARITIES

1103

of a lack of professional and political will to look after the underprivileged and share the benefits of development.“20 Some modest attempts have been made to introduce, on an experimental basis, alternative strategies for delivering health services to the rural areas on the basis of local self-help. One example of such an approach was the Mandwa project which covered 30 villages across the harbor of Bombay. The project was intended to explore “whether the villagers themselves could be taught simple medical skills and make use of the equally simple available tools to look after their own health problems to the extent possible.“2’ The project, which is reminiscent of the Chinese barefoot doctor system, faced a number of problems, the most significant being the difficulty of finding teachers to train local villagers in basic health care, and a failure to convince doctors that villagers could be trained. Furthermore, the local leadership and power structure dominated by the rural elite showed open hostility to the project, which has now been terminated.

5. GOVERNMENT POLICIES EXPLAINING RURAL-URBAN DISPARITIES The differences in the performance of rural and urban sectors in China and India are due in a large measure to the different government economic and social policies adopted by the two countries. The two most important relevant policy measures relate to policy toward agriculture (price and credit policy) and policy toward rural to urban migration. These are briefly discussed below.

(a) Agricultural policy During the Mao period, Chinese agriculture remained somewhat subservient to heavy industry, acting mainly as a source of funds. In their early economic plans, both India and China emphasized the role of heavy industry in economic growth. But in post-Mao China, agriculture has received much greater attention. A series of new agricultural policies - shifting the terms of trade in favor of farm products, the rural responsibility system and the promotion of rural enterprises - are designed to modernize agriculture and improve rural living standards. The sectoral allocation of GDP is broadly similar in China and India although the share of heavy industry is much higher in the former (Table 6). The importance of heavy industry in China partly explains why Chinese agriculture is more mechanized than Indian agriculture. The rates of agri-

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Table 6. Sectoral shares of output, capital and employment GDP share (“/) China (1981)

India (1979-80)

Fixed capital stock share (“/) Chinat India (1981) (1978-79)

(China and India)

Fixed capital to net output ‘ratios China India (1981) (1978-79)

Agriculture Mining Heavy industry Light industry

36 11 16 8

35 2 10 8

11.4 5.23 24.1 6.4 >

21.5 2.0 16.7

0.46 0.69 2.12 1.14 1

1.30 4.94 2.57

Infrastructure Services Dwellings

12 17

12 33

19.7 12.2 21.0

23.5 17.4 18.9

2.42 2.79

4.73 3.20 )

100

100

1.45

2.51

Total

100

100

lCORs* India (198&81 198:84)

Employment share (%) India ;!:; (1981)

3.17 9.98 14.36

69.6

70.6

18.q

12.94

4.43

12.4

16.5

100

IO0

Sources: World Bank (1985), pp. 26,30 and 38, appendices B & E. Reserve Bank of India (1982). pp. 114-l 15. *These ICORs are taken from Chakravarty (1987), p. 105. Estimates are at 197&71 prices and were made using three-year moving average estimates ofsectoral GDP at factor cost. A one-year time lag is assumed between investment and output for all sectors. The sectoral and aggregate GDP estimates for 1983-84 are point estimates. Sectoral ICORs for China could not be estimated for lack of adequate data. tNet of depreciation and valued at original cost. Adjusted upward ICoal and petroleum extraction only. @Includes mining, electricity, construction and manufacturing.

cultural output growth for 1965-80 are also very similar, but the Chinese rate rose to 9.4% for the 1980-85 period on account of the rural economic reforms and economic incentives to farmers.** From 1979 to 1983, the average yields in grain production in China increased by over 22%. With the growth rates of output being much higher than the population growth, the per capita availability of calorie and protein intake for the rural population has increased. In contrast, in India, the production of pulses, which are a major source of protein for the poor, has largely stagnated.23 To some extent, higher agricultural output growth and yields in China, particularly in the 197Os, can be attributed to the organizational innovations and governmental measures for building up infrastructure through investments in water and soil conservation and in chemical fertilizers.24 The organization of communes further enabled mobilization of rural labor for capital construction in irrigation and drainage. Thus, extraction of rural surplus was ploughed back for raising rural productivity. This does not seem to have been the case in India. The government subsidies for agricultural innovations are known to have been concentrated on large farmers who provide extra demand for urban consumption rather than for investment in food productionZ5 It is true that the investment share of Indian agriculture has risen somewhat in the past two decades, and it is also nearly twice as high as that for China (Table 6). The Chinese share of invest-

for international

comparison.

ment in agriculture in 1981 (11.4%) was lower than the share in 1952 (13.3%). Notwithstanding this relatively low share, per hectare applications of chemical fertilizer in China in 1977 were about three times the average level in India. From 1977 to 1980, fertilizer applications in China grew more than 70% compared to less than 35% in India.26 Furthermore, growth in large and medium tractors and in the proportion of irrigated land area was also appreciable. Although India also expanded land area under irrigation and multiple cropping, its efforts seem to have been less successful, due partly to the organizational and institutional constraints. Bardhan has noted the absence of local community organizations to tackle water management problems at the farm level.” There is some indication that the relatively lower Chinese investment share in agriculture has been accompanied by a more intensive utilization of capital (lower capital-output ratio in agriculture). However, one cannot rely too much on the capital stock data in Table 6. The World Bank data reported in the table refer to fixed assets which are net of depreciation and are valued at original cost. Assuming that investment goods are underpriced in China, the World Bank made rough upward adjustments (viz. using factor 1.10 for fixed investments in crops and 1.40 for fixed investments in machinery) for purposes of international comparisons. For agriculture and rural housing, information on the capital stock is particularly fragmentary, and the World Bank estimates, based

RURAL-URBAN on several assumptions, may suffer from a wide margin of error. The Chinese policy of forcing the rural population and labor to stay in the rural areas (more of this below) would also tend to lead to undercapitalization of agriculture where the high laborcapital ratio might be productively used, thus leading to a large gap between capital efficiency in agricultural and nonagricultural sectors. The post-Mao rural economic reforms seem to have run their course. Agricultural investment and foodgrain production have begun to suffer, partly because rural nonfarm activities (particularly rural industry) are far more profitable and yield benefits more quickly. Irrigation infrastructure has also suffered in the wake of decollectivization. Individual peasant households have no incentive to invest in irrigation schemes. Two components of agricultural policy that have bearing on rural-urban disparities - agricultural terms of trade and rural credit policy - are briefly examined below. (i) Agricultural terms of trade The agricultural terms of trade can be manipulated by government action which can “twist” prices (of farm products and inputs, interest rates and credit) against the interests of the rural sector to finance industrialization. However, it is difficult

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1105

to quantify the impact of government measures in the same way as one can estimate the supply of and demand for agricultural products. To obtain some indication of rural versus urban welfare, one would need estimates of income terms of trade (instead of barter terms of trade) that would determine the absolute contribution that the sale of agricultural surpluses would make to rural welfare. The data for income terms of trade are not available for recent years for either India or China. In the.case of India, for the years 195051 to 1974-75, Thamarajakshi (1977) constructed income terms of trade showing that they were favorable to agriculture, particularly from the mid1960s onward. Taking 196&61 as 100, in 1973-74 the barter terms of trade increased to an index of 137, whereas income terms of trade rose to 206 (improving by more than 50%), thus indicating output gains for agriculture.” In the absence of income terms of trade for recent years, we present in Table 7 barter terms of trade for China and India. In the case of China, over the past 30 years or so, the procurement prices of farm products have been rising steadily (except during the decade 1965-75) - their increase has been particularly rapid since 1979 when the procurement prices for foodgrains were raised substantially. But the retail prices of industrial goods sold in rural areas have been remarkably constant

Table 7. Agricultural terms of trade over time (China and India) China Purchasing price of farm and sideline products (1) Year 1952 1956 1957 1958 1962 1965 1966

155.0 162.0

1977 1978 1979 1980 1981

168.8 173.5 211.8 226.9 240.3

100.0 116.6 122.4 125.1 161.9

Price Index of of industrial agricultural goods in rural terms of areas trade (l)+(2) x 100 (2) (Base 1952 = 100) 100.0 100.4 101.6 99.4 114.7 107.3 102.6 99.5 99.5 100.2 101.1 102.8

100.0

116.1 120.5 125.9 141.2 144.5 157.9 169.6 174.4 211.4 224.4 233.8

Sources: China: Lardy (1983), p. 108. India: Tyagi (1987).

Year

India Prices paid Purchasing Index of price of for industrial agricultural farm goods in rural terms of products areas trade (3) (4) (3)+(4) (Triennium ending 1971-72 = 100)

1952-53 1957-58 196566 197&71 1971-72

48.3 50.2 77.7 100.5 102.5

1972-73 1973-74 197&75 197576 197677 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84

116.9 145.0 166.8 142.4 157.0 164.8 157.1 185.4 213.6 224.2 237.2 260.4

53.0 55.9 75.5

100.5 105.1 112.9 132.3 166.9 168.3 173.2 181.6 183.9 209.3 244.8 270.5 279.9 302.6

91.1 89.8 102.9 100.0 97.5 103.5 109.6 99.9 84.6 90.7 90.8 85.4 88.6 87.3 82.9 84.7 86.1

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since 1952.29 Thus, the index of agricultural terms of trade has been rising steadily (particularly since 1979), resulting in higher agricultural output and incomes and increased purchasing power of the rural people. Notwithstanding the favorable terms of trade, many Chinese scholars feel that the relative farm prices are still far too low and that by keeping the food procurement prices much below the market prices, the state continues to exploit the agricultural sector. Compulsory foodgrain quotas, and below-market procurement prices can thus be considered as an implicit agricultural tax.M An alternative to using the index of terms of trade would be the use of relative production costs of agricultural and industrial products. In China, the unit cost of production increased much faster in agriculture (limited land availability and high person-land ratio) than in industry, due to a much faster increase in industrial productivity. The relatively higher costs of production in agriculture are also explained by the relatively high prices of agricultural inputs (such as farm machinery, chemical fertilizers, and pesticides) compared to their international market prices.” In the case of India, the agricultural terms of trade improved in the 196Os, but declined in the 1970s (see Table 7). But this finding remains controversial. The results can be quite sensitive to the choice of the base period. The prices for agricultural inputs were raised substantially during the mid-1970s (as a result of the oil crisis), which should have moved the terms of trade against agriculture (Table 7). The prices set by the Indian Agricultural Commission (the procurement prices) for foodgrains are generally based on the costs of production of wheat and rice. During the late 1970s and early 1980s the procurement prices for wheat and rice have been much below the free market retail price. This factor, added to the fact that with Green Revolution technology the growth of wheat output could be achieved only at higher unit costs, led the rich farmers to lobby for higher support prices. De Janvry and Subbarao (1986) argue that rich farmers are the main producers of marketed surpluses, and thus wield major influence on the government. They have empirically shown (through a general equilibrium model) that the Indian agricultural price support programs had a regressive bias on the distribution of real income within the rural sector. The purchasing power’of the rural poor (the landless laborers and small farmers), who are net buyers of food, fell considerably whereas benefits to medium and large farmers increased. ” The situation prevailing in China is quite different. There are virtually no landless workers. The rural poor are small farmers with

the right to lease at least some plot of publicly owned land. Unlike India, in China redistributive land reforms were fully implemented in the 1950s. The urban poor in China are fully protected by food subsidies. Thus, improvements in agricultural terms of’trade and lowering of farm input prices should benefit all groups of farmers in China. (ii) Rural credit policy There are indications that the recent Chinese credit policy is geared to favor the rural sector. The Agricultural Bank of China (which was restored in 1979) and, to a lesser extent, the People’s Bank and the Construction Bank, along with rural credit cooperatives, are responsible for providing loans to farmers. It is estimated that the loans to communal and state farms increased from 13 billion yuan in 1978 to 25 billion yuan in 1980, a near doubling in three years.33 Between 1978 and 1985, the combined lending by the Agricultural Bank and the rural credit cooperatives as percentage of gross value of agricultural output rose from 0.27 to 0.45.” Increased demand for loans may have resulted partly from low charges for production credit and working capital (4.3% per annum) and for agricultural equipment (2.16% per annum). These favorable measures for rural credit partly explain the lower deposit to credit ratios for the rural sector in China than in India (Table 5). In the case of India, the share of institutional credit has also increased substantially, from 3 1.7% in 1971 to 62.6% in 1981. Commercial banks were nationalized in 1969 to meet growing demand for rural credit with the advent of the Green Revolution. In the mid-1970s the regional rural banks were established. The result seems to have been a shift from cooperative credit to commercial bank credit, as well as improved access of small farmers to production and investment credit.35 But the relative position of small farmers vis-avis large farmers as beneficiaries of rural credit policy may not have improved all that much. Lipton (1982) argues that an increase in the flow of credit to Indian agriculture “has gone mainly to better-off farmers and the share that has reached small farmers merely have replaced, not supplemented, non-institutional credit.“16 Thus, the impact of rural credit policy may have been iniquitous, especially considering that inflation and higher cash input costs involved in the use of high yielding variety (HYV) technology would be a greater burden on the small than large farmer.

(b) Rural to urban mi.qration In theory, labor flows from rural to urban areas should reduce income inequalities by keeping the

RURAL-URBAN

urban wage down and raising the average rural per capita income. Indeed, the Lewis and Fei-Ranis models of development have assumed that development or removal of poverty occurs when rural peasants are transformed into urban workers through migration. But labor migration from rural to urban areas can also adversely affect the former by draining whatever skills are locally available. There is evidence to suggest that the better educated have a greater propensity to migrate. Furthermore, in the absence of any remittances from emigrants to their rural relatives, the rural areas are likely to suffer a net loss of income. Urban remittances to rural areas should, in principle, be income equalizing. But they do not seem to have such an effect in India and China. In the case of India, empirical studies show that despite the large gross figures for particular families and villages, generally the net urban to rural remittances (net of rural to urban remittances) are quite small as a proportion of rural village incomes. In a study of 17 villages in the 1960s in Gujarat, Rajasthan and Tamil Nadu, remittances as percentages of village income varied from nearly zero to 39%.37 In China, labor migration has been rather low because an administrative fiat prohibited rural to urban migration. There may well have been an economic motivation underlying this regulation, tliz. the need to conserve rural skills. This is suggested by the policy of “rustication” of urban youth to rural areas which was practiced in the 1960s and 1970s. (It is reported that 17 million urban-educated youths were rusticated from 1966 to 1976.)38 The rustication policy was introduced to raise, inter alia, the supply of skills in the rural areas and to avoid urban unemployment. The control of migration in China may partly explain a fairly high degree of stabilization of labor in agriculture in the 1970s and 1980s. Agriculture absorbed over 70% of Chinese labor during this period. The share in India is very similar, notwithstanding the unrestricted rural to urban migration. This likeness is rather puzzling. Somewhat low rates of industrial growth and a high degree of capital intensity in industry may partly explain this phenomenon. Furthermore, a demographic factor may also have something to do with the high share of labor in Indian agriculture. There are very unbalanced sex ratios in child-producing age groups, with massive male surplus in the towns and only a small male deficit (proportionately) in the rural areas.39 Since 1979, the rigid Chinese labor allocation system, under which the state decided on the allocation of labor to different industrial enterprises, and determined the migration of peasants from the communes to the cities and of urban youth to

DISPARITIES

1107

the communes, has been relaxed somewhat in the interest of greater allocative efficiency and better matching of supply and demand for labor. There is some controversy, however, about the extent to which control of rural to urban migration was relaxed through the back door by allowing rural contract workers to work and live in urban areas. Chan and Xu (1985) have argued that urban cmigration through rustication was largely offset by the cityward migration of temporary contract workers or those described as “both workers and peasants.“@ They argue that only the period between 1966 and 1969 was characterized by high net urban emigration. Between 1970 and 1976, there was net urban immigration (i.e., urban immigration was greater than urban emigration). If we accept this conclusion, at least during the period 196669, agriculture had to absorb large numbers of both urban educated youth and rural labor surplus. This process should have depressed agricultural productivity (output per worker) uis-ri-vis industrial productivity. Estimates made by Ishikawa (1983) show that this was indeed the case between 1960 and 1965.4’ Gross output per worker in state industrial enterprises was much higher than the foodgrain output per capita, but the differentials between the two widened instead of narrowing (Table 4). If the Chan-Xu contention is valid, productivity differentials between agriculture and nonagriculture should have narrowed during the 197@75 period, but in fact they increased (Table 3). During the 1980s a deliberate policy to siphon off rural labor surplus to small towns instead of large cities led to transfer of surplus labor out of agriculture and into nonfarm industrial activities in rural regions and small towns. This measure seems to have had a favorable effect on agricultural productivity, and reduced the sharp rural-urban cleavage which bedevils most developing countries.42 There is also a relatively new phenomenon in China - growth of the urban informal economy (privately-owned shops and restaurants). The Chinese experience shows that the growing informal activity in the urban economy does not reflect the marginalization of urban labor, but rather reflects significant income earning opportunities.

6. CONCLUSIONS The performance of India and China in the rural and urban sectors of their economies before the post-Mao economic reforms was marked by divergence in respect of income and consumption inequalities. Mao’s China was clearly more egalitarian, due partly to the successful land reforms introduced in the 1950s. Access to such nonmarket

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public goods and services as health was also more equal than in India. The story is different during the post-Mao period. Deng’s China is characterized by modernization, efficiency and growth, with equity taking a back seat. This policy, some Chinese (as well as Western) scholars argue, is leading to widening income gaps within rural and urban areas. During my visit to China (Beijing, Shanghai and Hangzhou in September 1988) the local press was full of news items and articles complaining about these widening gaps and people’s resentment of this development.43 The Chinese people’s indignation is understandable considering that since 1949 they had not experienced situations where some people were allowed to grow rich overnight - something

perceived to be incompatible with a socialist ideology. In India, on the other hand, the silent majority accepts serious inequalities (which have prevailed forever) as part of their destiny. If the’ present Chinese policy of promoting growth, modernization at the expense of equity, and market forces is allowed to expand into the year 2000 (which is not at all certain), the situations in India and China with respect to income disparities and differential access to nonmarket goods and services, will converge and become similar. One might then venture to conclude that disparities in income and consumption between rural and urban areas are inherent in capitalist systems and in socialist systems (like China’s) moving toward freer markets and competition.

NOTES I.

Perkins and Yusuf (1984).

20.

Antia (1989 and 1985).

2.

de Janvry

21.

Antia (1989 and 1985).

3.

Dai (1988).

4.

Perkins

5.

Li (1985) and Yao (1987), p. 28.

6.

Mundle

(1983).

I.

Mundle

(1983).

8.

Sen (1983).

9.

Perkins

and Yusuf (1984), p. 17.

10.

Perkins

and Yusuf (1984)

11.

Mody (1981).

12.

Mody (1983).

13.

Chandavarkar

14.

Hu (1980).

15.

State

and Subbarao

(1986).

22. These data for China and India are according to Western definitions; that is, the shares of GDP for China are not the estimates of the net material product. Similarity of shares in the two countries could be due to definitional differences, for example. in years/harvests, relative prices, and treatment of transport costs.

(1988).

Statistical

23.

Bardhan

(1986), p.

24.

Raj (1983).

25.

Lipton

26.

Malenbaum

27.

Bardhan

(1977). (1982).

p. 19. (1986). p. 15.

28. Thamarajakshi (1986), p. 34. (1984).

Bureau,

1I.

Statistical

Yearbook of

China (1984). p. 519. 16. Government of India (1984). These ratios are obtained by dividing the absolute figures on hospital beds for 1984 by rural and urban population for 1981. They are, therefore, somewhat overstated, since the population has increased since 198 1. 17.

Jamison.

er al. (1984)

18.

Panikar

(1985)

19.

Hussain

and Stern (forthcoming).

p. 49.

(1977). and de Janvry

29.

Khan

30.

Stone (1988).

31.

Riskin (1987). p. 247.

32.

de Janvry

33.

World

34.

Tam (1988).

35.

Gadgii

(1986). and Desai (1987).

36.

Lipton

(1982).

37.

Connell,

and Subbarao

(1983), pp. 58-59.

and Subbarao

Bank (1983)

(1986), p. 93.

p. 45.

et al. (1976).

RURAL-URBAN

38.

Feng and Zhao (1982)

39.

This point is due to Michael

40.

Chan and Xu (1985), p. 612.

Lipton.

DISPARITIES

1109

41.

Ishikawa

(1983).

42.

Ming (1986), p. 155.

43.

See also Dai (1988).

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the changes in rural institutions,” in Azizur Rahman Khan and Eddy Lee @is.), Agrarian Policies and Institutions in China After Mao (Bangkok: ILO/ ARTEP, 1983). Lardy, Nicholas R., Agriculture in China’s Modern Economic Development (Cambridge: Cambridge University Press, 1983). “Economic reform brings better life,” Li Chengrui, Be@tg Review, July 22 1985. Lipton, Michael, “Why poor people stay poor,” in J. Harriss (Ed.), Rural Development: Theories of Peasant Economy and Agrarian Change (London: Hutchinson, 1982). Lipton, Michael, Why Poor People Stay Poor? Urban Bias in World Develooment (London: Temple Smith, 1977). Malenbaum, “Modem economic growth in India and China: The comparison revisited, 195&1980,” Economic Development and Cultural Change, Vol. 31, NO. 1 (October 1982). Ming Fang, “Recent research on small towns,” Social Sciences in China, Vol. 7, No. 1 (March 1986). Mody, Ashoka, “Rural resource generation and mobiEconomic and Political Weekly, Annual lization,” Number, Vol. 17, Nos. 19-21 (1983). Mody, Ashoka, “Resource flows between agriculture and non-agriculture,” Economic and Political Weekly, Annual Number (March 1981). Mundle, Sudipto, “Land, labor and the level of living in the rural Punjab,” in A. R. Khan and Eddy Lee (Eds.), Poverty in Rural Asia (Bangkok: ILO/ARTEP, 1983). Panikar, P. G. K., “Health care system in Kerala,” in Scott B. Halstead, Julia A. Walsh, and Kenneth S. Warren (Eds.), Good Health at Low Cost. Conference Report (NewYork: Rockefeller Foundation, 1985). Perkins, Dwight, “Reforming China’s economic system,” Journal of Economic Literature, Vol. 26, No. 2 (June 1988). Perkins, Dwight, and Shahid Yusuf, Rural Development in China, Baltimore, MD: Johns Hopkins University Press, 1984). Rai K. N., “Agricultural growth in China and India: Role of price and non-price factors,” Economic and Political Weekly, Vol. 3 (January 15 1983). Reserve Bank of India, Capital Formation and Savings in India, 19.5&51 and 1979-80 (Bombay: Reserve Bank of India, 1982). Reserve Bank of India, Banking Statistics, Basic Sfafistical Returns, Reserve Bank of India (Bombay: Reserve Bank of India, no date). Riskin, Carl, China’s Political Economy - The Quest for Development Since 1949 (New York: Oxford University Press, 1987). Sen, A. K., “Development: Which way now?,” Economic Journal, Vol. 93, No. 372 (December 1983).

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Thamarajakshi, R., “Role of price incentives in stimulating agricultural production,” in D. Ensminger (Ed.), Food Enough or Slarvarion for Millions (New Delhi: Tata-McGraw-Hill, 1977). Tyagi, D.S, “Dynamic terms of trade and their effect on supply and demand of agricultural sector,” Economic and Polifical Weekly, Review of Agriculture (28 March 1987). “Long-term development issues and World Bank, options,” Annex 5 in Economic Structure in International Perspecrive (Washington, DC: The World Bank, 1985). World Bank, .China - Socialist Economic Development. Vol. 2 (Washineton DC: World Bank. 1983). Yao Shuje, “Chinese agricultural policies and the grain unpublished MA thesis (Manchester, problem,” England: Department of Agricultural Economics, University of Manchester, August 1987).