Effects of Public Transfers on Income Inequality and Poverty in Rural China

• Published date: 01 September 2022
• Author: Hisatoshi Hoken,Hiroshi Sato
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/cwe.12436

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 29–48, Vol. 30, No. 5, 2022 29

Effects of Public Transfers on Income Inequality

and Poverty in Rural China

Hisatoshi Hoken, Hiroshi Sato*

Abstract

This study examines the impacts of public transfers on income inequality and poverty

reduction in rural China. It uses nationally representative rural household surveys from

the China Household Income Project and classifi es public transfers into three types –

universal, pro-poor, and reimbursable transfers – to compare the impacts of each type

of public transfer in 2013 and 2018. Estimated results show that the contributions of

each type of public transfer to reducing income inequality were generally small in

both 2013 and 2018. However, the effects of reimbursable transfers were the largest

of the three types. We also found that the poverty-reducing eff ects were the largest for

reimbursable transfers, and their impacts have considerably improved in the western

region. The impacts of pro-poor transfers were intermediate but have developed notably

in the central region. These fi ndings suggest that reimbursable and pro-poor transfers

contributed mainly to reducing rural poverty but the impacts were heterogeneous among

regions.

Keywords: income inequality, poverty, public transfer, rural policy, social insurance

JEL codes: H24, I32, P35

I. Introduction

The implementation of a series of pro-rural (huinong) policies during the fi rst decade

of the 2000s marked a historical change in contemporary China’s public policy, away

from a pro-urban approach during the Mao and the post-Mao eras. This policy change

was due to the enhancement of state capacity brought about by economic development

and systemic transition to a more welfare-oriented country. More specifi cally, despite

the restoration of the township government as the lowest stratum of public fi nance in

the early 1980s, rural public goods provision had been financed substantially by the

*Hisatoshi Hoken, Professor, School of International Studies, Kwansei Gakuin University, Japan. Email:

h.hoken@kwansei.ac.jp; Hiroshi Sato, Professor Emeritus, Graduate School of Economics, Hitotsubashi

University, Japan. Email: sato.zuoteng@r.hit-u.ac.jp. This research was supported fi nancially by the Japan

Society for the Promotion of Science (JSPS) KAKENHI (Nos. 15H03340, 16K03691, and 19K01642).

Hisatoshi Hoken, Hiroshi Sato / 29–48, Vol. 30, No. 5, 2022

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

30

unauthorized collection of quasi-taxes and fees at the township and administrative

village levels until the beginning of the 2000s. Lack of fi scal support for public services

(e.g., basic education, medical care, and living assistance) and strong path dependence

of the fi nancing system of the People’s Commune era had resulted in a heavy “peasant

burden” (nongmin fudan) and a huge regional disparity in the level of public service

provision (Bernstein and Lü, 2003; Sato et al., 2008; Lin, 2018).

Against this background, pro-rural public policies have been implemented since the

early 2000s. The policies adopted in this period have been captured well by the slogan

“giving more, taking less, and allowing peasants more opportunities” (duoyu shaoqu

fanghuo) (Central Committee of the Communist Party of China and State Council, 2005).

It is only from the early 2000s onwards that public service provision in rural areas could

be initiated through formal fi scal support. Moreover, the Communist Party of China and

the Chinese government have intensified policy support to alleviate rural poverty and

reduce income inequality between urban and rural areas since the 2010s. A series of pro-

rural policies have been strengthened quantitatively and qualitatively, and the integration

of the urban-rural social security system has been implemented since the 2010s (State

Council, 2014, 2016; Lin, 2018). Thus, it is essential to consider the reforms to public

policy in China to evaluate the changes in the well-being of rural households.

The distributive impacts of public transfers on income inequality have been an area of

focus in public policy literature, and a growing number of studies have investigated those

impacts on countries other than developed countries (Esping-Andersen and Myles, 2009;

Causa and Hermansen, 2017; d’Agostino et al., 2020), including emerging economies

(Lustig, 2015; OECD, 2015; Higgins and Lustig, 2016). With regard to rural China,

recent empirical studies have examined the distributive impacts of rural public policies

based on large-scale household survey data. One focus of such studies is on the eff ects

of the minimum living standard guarantee policy in rural areas (Golan et al., 2017).

Another focus lies on the redistributive eff ects of the rural social insurance programs

(Li et al., 2018). Meanwhile, some other empirical studies, including this article, focus

on the overall redistributive impacts of public transfers in rural areas (Lin and Wong,

2012; Hoken and Sato, 2020) and in both rural and urban areas (Gao et al., 2020).

This study is an extension of Hoken and Sato (2020), and the scope of the survey is

extended to 2018. The major purpose of our examination is to evaluate the changes in

the redistributive and poverty-reducing impacts of public transfer income by comparing

inequality and poverty measures both with and without specific public transfers. We

employ various measurements of the redistributive and poverty eff ects such as the Gini

coeffi cient, the Kakwani and Musgrave-Thin indices, and the Foster-Greer-Thorbecke

poverty indices (FGT indices). As will be discussed later, to identify the redistributive