Balancing Equity and Efficiency

One of the vital concerns for the Chinese authorities is to find solutions to the problems connected with the pervasive phenomenon of inequity as a result of China's economic development. It is estimated that the Gross domestic product of China may equal that of the United States in the coming five to ten years (Holz, 2008). At the same time, however, the growing inequity in China stemming from economic growth is causing concern. To some extent, inequity is the inevitable consequence of enhancing efficiency, but it may be exacerbated by government policies. This essay will present three solutions. Firstly, agrarian reform which may have a short term effect, secondly, rural-urban migration as a medium term option, and third, in the long term, government policy, such as fiscal, social, and labor market innovations. As each solution has its advantages and disadvantages, a combination of the three could be the best option. These solutions will be evaluated using the criteria of cost, feasibility and time horizon.

One of the most direct ways to balance the trade-off between equity and efficiency is to implement agrarian reform. Ravallion and Chen (2007) claim that agriculture played a far more crucial part in reducing inequality. One portion of agrarian reform is to provide more options for farmers and the agricultural population. This means that farmers could have more freedom on whether they wish to move to the city. Another aspect of agrarian reform is land ownership, which would allow farmers to sell or rent their lands. To some extent, this would improve agricultural efficiency as in time farms would become bigger if land was available to be sold. Furthermore, the capital raised from selling or renting land would enable many rural dwellers to fund a small business or help them to settle in the city. This solution can be put into practice in a quite short time while costs nothing and this solution has an effective short term impact.

Although implementing agriculture reform is practically feasible, other problems may arise. It is argued by Dollar (2007) that Chinese famers do not get compensated fairly when land is re-zoned for other use. Land annexation may occur in the light of bigger capital buying more lands to encroach on farmers. Dollar (2007) also states that corruption exists in the land conversion process and transparency should be increased. In addition, as younger people leave the land to find work in cities it becomes increasingly difficult for older people to maintain farms. (OECD, 2011).

Easier rural-urban migration is another possible solution to reduce inequality. At the present time, the hukou system is the biggest legal barrier to rural-urban migration. According to Regulations on Household Registration of the PRC, hukou designates a person's legal identity based as the locality of his/her mother's registration. (Chan and Zhang, 1999). Although rural workers have strong incentives to seek occupations with better pay in cities, they have to overcome legal barriers to work in cities. The government has been modifying the problem. In 1988, the central government initiated a policy reform which loosened the controls over rural-urban migration, farmers were permitted to work in cities as long as they could secure their own staples (Forbes and Linge, 1990). In addition, in 1998, the Ministry of Public Security issued another regulation relaxing the control of hukou registration, those who moved to join their families in cities could receive urban registration as well (Cai, 2003). As of today, hukou reform is incomplete. Central government must enforce existing laws and regulations to loosen restrictions on rural-urban migrations. The system of hukou is quite practical, with no cost and has a medium term impact.

Nevertheless, it is more than enough. It has been shown that the initial wave of migration can lead to a disequalizing effect. The total number of rural-to-urban migrants without a local hukou is approximately 74 million. In urban areas, unofficial migrants account for 80% and 68% of workers in construction and in manufacturing respectively. Unofficial migrants in urban areas make up 39% of the urban labor force and nearly 46% of non-agricultural employment (OECD, 2011). If migration to the cities was made easier urban authorities would be faced with enormous problems of providing services in a short period of time. However, according to Dollar (2007), citing industrialization in the US as an example, the situation becomes more equalizing once the population has increased to 50% urban inhabitants.

Government policy can be very effective in reducing social inequalities. These policies include monetary policies, social policies and labor market policies. Firstly, progressive taxation is an integral part of fiscal policies to redistribute income in the long term. (Gupta, Schiller et al, 1999). In addition, taxation on car ownership and people