Universal House Arrest

Yesterday in our Chinese biz/econ class we learned that the gap between the urban rich and the rural poor has been steadily increasing since the beginning of the Chinese growth miracle about thirty years ago. In fact, rural farming communities have more or less completely missed out on this whole development process that has brought so much prosperity to the cities.

Now this would make sense if there were way too many farmers growing way too much food—whenever there is an abundance of a good the price plummets, and with it the income of those who sell it (think oxygen). However this is not the case in China—according to our professor there is barely enough food to go around. This should mean there is about exactly the correct amount of farmers, and their salaries should be about the same as that of city-dwellers (if they were different some farmers would just move to the city, or vica-versa). 

So why is this not the case? Why do farmers on average earn less than a third as much per year as their urban peers? From what I gathered there are basically two reasons:

1. The government currently fixes the price of agricultural goods—so if you are growing rice, you are not allowed to sell it at the market price.  Consequently, you earn much less for each bag of rice than you would in a free market. This is why rural incomes are so low. So why do they stick around? Why don’t they just move to the city?

2. China currently has a fairly unique ID card system by the name of hukou. The purpose of this system is to keep people from moving away from their home area, and it is generally quite successful. Citizens are still free to move wherever they wish-- the hukou system just makes it very expensive. It’s kind of like in the US, how if you want to go to an out-of-state university it is much more expensive, so most people don’t. The difference in China is that many more benefits, like health care and social security, are dependent upon you staying put; what this practically means for the lower classes is that they cannot afford to move out of their area.

It seems like the solution is kind of a no-brainer: just lift the price controls and let people move about as they wish! My professor brought up two problems with this: for one, if the price controls were lifted there is a very good chance farmers would be undercut by subsidized foreign competition, so they wouldn’t benefit anyway. Secondly, if prices were lifted right away, inflation would soar, which would then cause a whole slew of problems.

It seems like the approach the government is using now is to very gradually get rid of the price-controls by raising them a bit every year, so this sector of the economy can be smoothly transitioned into the free market. In other words, they are applying the same policy they seem to be using across the economic and political board: slow, deliberative liberalization.