Autumn 2016: China's Rural-Urban Migration and Inequality Analysis

This report examines the significant issue of rural-urban migration in China and its implications for income inequality. Over the past two decades, China's rapid economic growth has been accompanied by a widening gap between rural and urban areas. The report identifies key drivers of this migration, including the pursuit of better economic opportunities, increasing rural inequality, and the need for diversified income sources. It highlights the negative consequences of this trend, such as urban congestion, labor imbalances, and the social exclusion of migrants due to the Hukou system, which exacerbates income disparities. The analysis also explores the potential long-term risks to China's economic growth if inequality is not addressed, including reduced domestic demand, skill deficiencies in the workforce, and slower technological advancement. The report proposes policy recommendations, particularly in the realm of fiscal policy, such as adjusting tax rates and brackets, reforming the Hukou system, and implementing property and wealth taxes, to promote a more equitable distribution of income and opportunities. The report emphasizes the need for prompt action to ensure sustainable economic growth and social stability in China.

CHINA’S RURAL-URBAN MIGRATION AND INEQUALITY
China’s rural-urban migration and inequality
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Over the last two decades, China has exhibited appreciative economic growth with
poverty reduction from 80% in 1980s to 1.9% in 2013 (Ahmad 2017). However, the
distribution of this economic growth has been unequal between rural and urban population
(Ye 2016). Labor mobility from rural to urban areas has increased sharply to take advantage
of these inequalities amid strict registration rules. Nevertheless, the rich are getting richer and
poor are staying deprived owing to lack of constructive policy initiatives, one of which
should have been in the area of taxation.
The gap in rural-urban opportunities and benefits amidst rapid economic progress has
led to increased migration from rural to urban areas over the decade (Ahmad 2017). Another
incentive for migration has been the increase in rural inequality with higher relative
deprivation making people less risk-averse towards mobility to new places. A third motive
has been the increasing need for diversifying income sources among the households for better
stability. Lack of opportunities and resulting surplus labor in rural areas are also fueling
mobility.
Inequalities have increased due to lack of health, education and infrastructure
developments in rural areas and lower allocation of necessary public expenditure for less
privileged classes (Kleinwechter 2012). Another deterrent has been the faulty tax and transfer
system. High-income households have been supported by generous income tax allowance and
exemptions while social security contribution rules have not been very progressive.
A high rate of rural urban migration in China has resulted in rising differences in rural
and urban income as well as differences in opportunities over the decades (Hung 2017).
There has been increasing congestion and excess labor supply in urban areas at the cost of

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negative effect on rural productivity. Besides, with the Hukou registration system in place,
many rural-urban migrants are leading invisible social existence with deprivation of further
education, credit and health benefits which has further aggravated the income inequality in
urban places (Afridi, et al. 2015). Unsanitary and overcrowded housing in urban areas have
been on the rise amidst high economic growth (Shao, et al. 2016). This kind of social life has
also impacted mental health of many migrants.
High inequality between rural and urban areas aggravated by rural urban mobility
could prove harmful for future growth in China (Zhang, Li and Xue 2015). For one, the
economic growth in China is driven by huge domestic demand and labor support for exports.
Both the driving factors could lose pace with rising inequalities. Unequal distribution of
tertiary education opportunities would deprive China of fully capitalizing on its vast
workforce owing to skill deficiencies. The country would also lag behind advanced nations in
terms of penetration of technological advancements and infrastructure developments which
could ultimately impact marginal labor productivity.
The country requires swift action in the form of constructive fiscal policy to reduce
the rising inequality (Jain-Chandra, et al. 2018). Firstly, tax composition as a percentage of
total revenue could be altered by increasing direct tax rates and decreasing rates on indirect
taxes. Redesigning personal income tax brackets to involve higher contribution by middle
and high income households in budget and social contributions would partially solve the
inequality issue. Minimum mandatory contributions for pension, unemployment and health
insurance should be done away with. Adoption of a recurrent market-value based property tax
and higher rates for wealth tax would serve as a promising source of tax revenue apart from

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combating inequality. The Hukou residency system needs to be relaxed to support inclusive
growth.
The biggest criticism will come from the urban population and business class if this
policy is adopted. There could be political instability due to fiscal policies aimed at higher
contributions from the richer class of population. However, without prompt action the
Chinese economy may not be able to maintain high growth especially with regard to a
thriving export sector driven by the giant workforce. Without an equitable distribution of
income and opportunities, this workforce would not deliver optimally. For example,
deprivation of higher education opportunities to a deserving but lower class of populace
could ultimately cost the country in the form of lower marginal productivity.
The economic growth achieved by China over the last few decades has been at the
cost of rising inequalities between rural and urban areas along with increasing rural-urban
migration. TO sustain the current growth levels, addressing this inequality by the
Government through appropriate fiscal measures is the need of the hour. For an equitable
income distribution, altering the personal income tax rates and brackets could be an important
measure in this respect.

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Bibliography
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