China's Divisive Development

Growing Urban-Rural Inequality Bodes Trouble In an August 1999 incident reminiscent of the Cultural Revolution, Chinese farmers rampaged through government offices and pillaged the homes of the rich in Fiangxi province. Two thousand People's Armed Police called in to stomp out the rebellion confronted 20,000 peasants. Ironically, Fiangxi is the original home of Mao's Chinese Communist Party (CCP), which once based its strength and legitimacy on the support of poor peasants by promising relief from the excessive taxation and corruption of the Kuomingtang. Yet, many of these same Chinese have now turned against the CCP, claiming they have been left behind in the nation's recent economic development. China has enjoyed tremendous economic growth in the past 20 years, but simultaneously, levels of inequality have risen to unprecedented levels. This is the result of an urban-biased development scheme that favors industry and foreign investment over agricultural development. This scheme increases CCP legitimacy in critical sectors, but at the cost of increasing urban-rural inequality. The human response to such policies has been rural social unrest and mass migration to cities in search of jobs. Many other countries have faced similar dilemmas of human displacement in the course of their development, including the United States. But the peculiarities of China's demography and history make the nation's urban-rural divide a real source of acute social turmoil, whose potential will only increase with China's entry into the World Trade Organization (WTO). Growth in Phases China's economic history of the last 20 years is at the heart of the current situation in the nation's countryside. Development has occurred in two phases, and although overall growth has been impressive, it has been highly sectoral. The first phase began in 1979, when Deng Xiaoping launched a series of reforms, including decollectivization of agriculture and a return to household farming. This liberalization initially stimulated agrarian production. However, beginning in 1985, agricultural output has experienced a steady decline due to subsidy cuts and rising costs of inputs. Although agricultural output has been declining for the last 16 years, until 1993 the Chinese rural sector still experienced growth in overall rural output. This was due to the rise of town and village enterprises (TVEs): light manufacturing ventures in rural areas that soon out-competed the urban-centered state-owned enterprises (SOEs). The central government was giving local authorities more and more fiscal autonomy, and thus regions began diverting funds intended for agriculture into TVEs with higher returns. Despite increasing inequality within the countryside, TVEs were quite effective in temporarily reducing overall urban-rural disparity. TVEs were based on high levels of inputs and human capital, not technology--a strategy typically not sustainable in the long run. Yet in the 1980s, they expanded rapidly and swallowed up a certain amount of agricultural unemployment. By 1987, TVEs already superseded agriculture as the primary source of income in the rural sector. Overall, the 1980s were a time of agricultural decline and industrial growth for China, but TVEs kept the rural sector's economy strong. From 1993 until the present, in the second phase of China's growth, TVE growth virtually halted. Foreign-owned enterprises (FOEs) began entering China and replacing both SOEs and TVEs. FOEs were more efficient and technological, providing goods that Chinese consumers preferred over domestic goods of inferior quality. FOEs were naturally less input-oriented, however, and they tended to hire fewer people and use less equipment. Thus, during a period when SOEs were already being dismantled, FOEs, which were generally urban-centered, flattened rural output and employment. In 1997, TVE employment declined 4.8 percent; in 1998, it fell by 18. …