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In Asia and throughout the developing world, rural incomes lag behind those in urban areas. The urban to rural income ratio in most Asian countries has been estimated to be between 1.3 and 1.8, with outliers Indonesia at around 2, the Philippines at 2.2 and China at over 3 (these figures ignore regional price differences and are likely to be overestimates). According to the latest Millennium Development Goals progress report, inequality generally is on the rise in Asia, particularly East Asia, and rural-urban inequality is often a large component of overall inequality, contributing about half of the overall inequality in China, about one quarter in Indonesia (a higher proportion than the much-discussed inter-provincial inequality in that country) and a sizeable component of inequality in Viet Nam (Kanbur & Zhang, 1998; Sicular et al., 2007; Nguyen et al., 2007).
Some analysts have expected that welfare in rural and urban areas will converge over time, largely for two reasons. Firstly, in wealthier countries such a convergence has already taken place, implying that with development and the associated increasing labour and capital mobility, information and education will reduce rural disadvantage. That developing countries should follow this trend would be consistent with the Kuznets hypothesis, as well as evidence on the structural transformation that shows that as the importance of the agriculture sector in the overall economy declines, rural and urban incomes converge (Timmer, 2006). Secondly, the gap between rural and urban productivity has narrowed over the last couple of decades, a phenomenon that has also already occurred in rich countries, and theoretically incomes should reflect productivity.
However, to the contrary of these expectations there has been a slight divergence in rural-urban incomes over the last two decades in Asia. For example, in India, although there has been little change in expenditure inequality over the last four decades, there has been some divergence in the risk of falling into poverty. In Bangladesh, the gap increased up to the mid-nineties, mainly due to a rise in urban incomes, while in Sri Lanka inequality fell as urban incomes fell, while rural incomes were relatively unaffected, demonstrating the importance of urban growth as a driver of rural-urban inequality. In Thailand the gap increased, at least over the 1990s (Eastwood & Lipton, 2004). The case of China is instructive as overall inequality has been high when agriculture and rural areas were neglected by policy. There, rural-urban inequality increased dramatically with the promotion of heavy industry at the expense of agriculture during the fifties and sixties, fell in the late seventies with land reform, and increased again after 1984 as the focus of policy shifted back to the urban sector. Globalization and openness are also oft-cited factors contributing to the recent in inequality in China (Kanbur & Zhang, 2004).
What explains the persistence of rural-urban inequality in Asia? Some answers are provided by decomposing rural-urban inequality into two elements: inequality between the characteristics of rural and urban residents such as the level of education, age and household demographics, and inequality in the returns to these characteristics. In the case of Viet Nam, the gap is mostly caused by inequalities in the endowments of urban and rural residents, particularly the level of education (Nguyen et al., 2007). In contrast, in China household and individual characteristics contribute about half to the rural-urban gap, the other half explained by differing returns to those characteristics (again education is dominant, inequalities in education alone explaining about one quarter of the rural-urban income gap). The significance of returns to characteristics in China may be due to restrictions on labour mobility in China, meaning that workers are unable to migrate in search of higher wages, as well as low levels of rural investment (Shorrocks & Wan, 2005). This evidence supports conventional approaches to poverty reduction focusing on increasing the personal capabilities of the poor in both countries, and in China increasing the ability of the poor to use these capabilities through rural investment and labour migration.
However, knowing the causes of inequality is one thing, knowing exactly how to address those causes is another, as the process of development and structural transformation is complex and non-linear. For instance, in the long term, education levels are endogenously determined, and household investments in education are partly determined by other characteristics such as family size and composition, and the opportunity costs of education (Sicular et al., 2007). The immediate results from increasing education investment may be disappointing if the returns to education are lower for the poor due to other barriers obtaining well-paid employment.
Worryingly, evidence shows that over time the level of GDP at which rural and urban income convergence takes place has been increasing, meaning that the reduction in inequality associated with development will occur later for developing countries than it did for developed countries. This suggests an opening for pro-active policy. China's recent history shows that policy matters, particularly the balance of urban and rural investment.
Written by William Henderson, Research Associate, UNESCAP-CAPSA, Bogor, Indonesia.
(References available upon request) |
