The Impact of Institutional Inequality on Welfare

Chinese students © Anna Frodesiak / Public Domain / Wikimedia Commons

When addressing the impact of institutional inequality on individual welfare as a result of the Chinese Hukou system, it is important to consider the effect of change in Hukou status from rural to urban on social and economic outcomes, quantifying the impact of institutions at the individual level. The Hukou system itself, under its contemporary form implemented in 1958, is a system in which Chinese citizens were segregated into agricultural/rural and non-agricultural/urban sectors. It was then based on this that the localities of Chinese citizens determined various forms of state benefits.

Some academics such as Zhiqiang Liu in Institution and inequality: the Hukou system in China (2005) find that the Hukou system denies rural individuals the access to quality education, either locally or in the urban area, and later deprives them of more lucrative urban employment. The latter reinforces the former in reducing the incentive of rural residents to invest in education, resulting in a negative impact on internal migrant welfare. Further consideration shall also be given to state welfare programmes, with particular focus on the extent of inequality during the Great Chinese Famine and how the Hukou system exacerbated the severity of the famine. However, it is also worth considering reforms that have been implemented overtime, such as the National New-type Urbanization Plan, designed by the state to rectify the negative impacts of China’s fast urbanisation (Wang, et al., 2015).

Firstly, it seems as though the Hukou system actively hinders educational attainment due to the fact that it deprives rural students of a quality education, and thus subsequently impacts the individual welfare of internal migrants negatively later in life. When initially examining the welfare of those who get an urban Hukou after the age of 15 and those who get an urban Hukou before then at an aggregate level, Liu finds that 36% of migrants who obtained an urban Hukou after the age of 15 were unemployed for a part of 1995, in comparison with those that received an urban Hukou before they were fifteen who instead had an unemployment value of 23% (ibidem, p. 140). Prima facie, this may already be an indicator of the discriminatory impact of the Hukou system on rural migrants at an aggregate level, yet this statistic does not account for variations in education, income, and labour market outcomes at an institutional level impacting on the individual level. Thus, the data needs to be further disaggregated to account for the causality of this cross-group inequality holding other factors constant.

After the data is disaggregated it becomes apparent that, when controlling for age and gender, those who acquire an urban Hukou after the age of 15 tend to have fewer years of education than the other group of those who receive urban Hukou prior to the age of 15. This is due to the fact that rural residents receive less formal education than their urban counterparts who have additional years of education more than their rural counterparts anyway. However, it is important to factor in that those that get urban Hukou status will need to have a similar degree of education and thus educational attainment in order to acquire urban Hukou in the first place due to policies governing rural to urban migration. Liu finds that there is less than one year of difference in education between those who acquired urban Hukou before and those that acquired urban Hukou after the age of 15. Hence, those who become legal urban residents would have necessarily been through additional years of education than the average rural individual, meaning that the coefficients for the above variables will understate the true effect of urban Hukou on educational attainment and thus does not factor the true extent of how institutional inequality impacts individual welfare. To account for this understatement of the true effect of the urban Hukou on how it impacts individual welfare, family wealth, an important determinant in educational attainment (Liu, 2003), may also account for the bias toward urban Hukou holders with more years of education.

Ostensibly, if family wealth influences whether one can acquire an urban Hukou, those who obtain an urban Hukou will thus come from wealthier rural families and so afford additional years of education, inflating the educational attainment of the sample within the regression analysis of those who acquired urban Hukou status, regardless of when they obtained it.

In order to better assess the impact of institutional inequality on individual migrant welfare on the grounds of education attainment, holding family wealth constant, Liu in his aforementioned 2005 paper focuses specifically on assessing the impact of migrant welfare based on human capital theory. What is exposed is that the existence of the Hukou system fundamentally disadvantages those that acquire urban Hukou status later in life due to initial human capital endowment discrepancies as a result of the system. When looking at the returns to education and work experience, ‘the return to an extra year of schooling in the urban area is about 5% compared to about 2.5% in the rural area’ (p. 149), with the effect on work experience being even more substantial. When ‘evaluated at 10 years of work experience, an extra year of experience raises urban residents' income by over 3% and more than three times as much as the effect for rural residents’, with the discrepancy in gender being even more striking. When holding human capital constant, ‘males in the urban and rural areas earn 17.2 and 46.1% more than their female counterparts respectively’ (p. 149). From this, to then evaluate the relative importance of the amount and returns to human capital in the rural–urban income disparity, Liu decomposes the income differential into the same components of education, work experience, and gender. What is discovered is that over 60% of the income discrepancy between the urban and rural samples that negatively impacts migrant welfare is attributed to the differences in returns to the above characteristics (p. 151), with the difference in educational attainment being the third largest contributing factor to the favourable income discrepancy for urban Hukou residents.

The reason as to why this seems to be the case is due to the fact that schools within rural areas are often understaffed and severely underfunded due to the Hukou system’s lack of prioritisation of resource allocation to rural schools (Zhou & Cheung, 2017). Urban schools, however, do not face the same constraints, yet are still inaccessible to rural students due to the need for rural migrants to pay large upfront fees with higher tuition fees which prices rural students, regardless of ability, out of being able to achieve a quality education because of the Hukou system’s policy regulations (Sun & Chen, 2015). The return to education in rural employment is thus comparatively lower than urban jobs that pay a large premium for education that isn’t accessible to the rural population due to the Hukou system. Given this, the incentive to invest in education in rural areas is far weaker than the urban areas. It could be argued that, in spite of this, one possible route to obtaining urban Hukou is by going through college education, essentially ensuring an urban Hukou and remedying the issue of low education attainment. However, a good quality middle and high school education is a prerequisite to getting college admission, which is itself a highly competitive process. Given the aforementioned arguments regarding the low returns in investing in rural education below the college level in China, these investments become uneconomic in themselves, rendering those who live in a rural area disadvantaged in competing for college admissions. Essentially, we can surmise that the Hukou system denies rural individuals the access to quality and affordability and then goes further to diminish their chances of obtaining financially viable employment later in life. What henceforth becomes manifest is a negative cyclical relation in which poor returns on education reinforces the lack of access to quality education, reducing the incentive of rural residents to invest in education, resulting in a negative impact on migrant welfare.

In summation, without the Hukou system’s schooling and employment restrictions, people in rural areas would possess greater incentive to invest in education and eventually acquire an income comparable to that of urban residents. Therefore, it seems that the Hukou system may be a significant contributing factor to the income differential between people from the urban and rural areas, subsequently negatively impacting migrant welfare in China. It is not only in education and employment that such restrictions apply, as the state also imposes restrictions in other aspects of life that may prove equally if not more severe to migrant welfare.

This latter segment will assess how the Hukou system prioritises the welfare of urban residents over rural residents to such a degree that the livelihood of rural residents and migrants are heavily penalised through the state’s provision of education, arranged employment, retirement benefits, and housing for urban residents only, and not for rural residents. The creation of this inequality disadvantages the rural population and thus rural migrants. There is no clearer example of the hardships faced by the rural Hukou holders than in the ‘Great Chinese Famine’ ( 三年大饥荒 / Sānnián dà jīhuāng, “3 years of great famine”) in 1959 – 1961, as urban and rural Hukou status could literally mean the difference between life and death. During this period, nearly 600 million rural Hukou holders were collectivised into communal village farms. These farms were predominantly subsistence in nature yet were taxed by the government in order to also feed the urban population (Becker, 1998). Amidst the Great Chinese Famine, local communist leaders institutionally exaggerated the output of these farms as well as local productivity, leading to exorbitant state taxes that collected the majority of the food in the rural communes and invariably causing the mass starvation of over 65 million rural Chinese Hukou holders, with deaths in the tens of millions (15 million to 55 million (Griner, 2016)). Becker in Hungry Ghosts: Mao’s Secret Famine notes that food rations, however, were provided to the approximately 100 million urban residents which managed to ensure the survival of the majority of their population, even though the rations declined to 1500 calories per day at times. Due to the Hukou system not allowing provisions to rural Hukou holders and instead taxing them, over 95% of the deaths due to the famine were rural Chinese citizens (Becker, 1998). The impact of such a severe and catastrophic event that disproportionately impacts rural Hukou holders undoubtedly leads to an intergenerational impact through a hindering of local rural development in human capital that disadvantages current rural Hukou holders (Han, 1999), as evidenced by the prior half of this article. Once again, we see the Hukou system directly and disproportionately disadvantage the individual, intergenerational welfare of migrants through the aforementioned state policy implications enforced via the Hukou system.

However, one would be remiss to not factor in the reforms that have come into place under direction by the state of the People’s Republic of China. Following the ‘Opening of China’, a series of economic reforms led by then Paramount Leader Deng Xiaoping since 1978, a multitude of reforms took place to ameliorate the severity of these disadvantages. In the late 1980s, the ‘blue Hukou’ was introduced, which allowed those who previously held rural Hukou to live in urban areas and also enjoy the privileges enjoyed by those who already held urban Hukou (Cui & Cohen, 2015). Additionally, according to two government documents in 1997, the Pilot Scheme for Reform of the Hukou System in Small Towns and the Instructions on Improving the Management of Rural Hukou System allowed rural migrant Hukou holders to register as permanent residents of urban areas and entitle them to equal welfare benefits from the state afforded to urban Hukou holders. This is undoubtedly a step in the right direction. As observed in previous paragraphs, the discrepancy to entitlements from the state between rural and urban Hukou holders leads to an inequality in initial endowment that not only impacts educational attainment and leads to a negative cycle but can also literally allow for the deaths of Chinese citizens as seen during the Great Chinese Famine.

Yet this too contains with it its own set of issues. These policies are seen by some scholars as not rectifying the problem, but rather act simply as means of ‘selling’ urban Hukou (Fan, 2008). Indeed, with regards to the ‘blue Hukou’, being admitted necessitated that a rural migrant possessed professional skills or ability to make substantial investments, equating to at least 100 million Renminbi Yuan (Cui & Cohen, 2015). Essentially, to be admitted to urban Hukou or be eligible to the above-mentioned reforms, one still needs to be in possession of some form of initial capital, such as human capital in the form of professional skills, or physical capital such as prior home ownership or residency. Thus, if wealth is the precondition to rectifying the concerns raised via these reforms, then it fails to truly be efficient in sincerely solving them as they all fail to address the lack of wealth via inferior human capital endowment for rural Hukou holders, regardless of whether it is through a lack of state support or poor education attainment.

To conclude, the Hukou system clearly has a negative impact on the individual welfare of migrants, as exposed by Liu through econometric analysis emphasising the severity of poor education attainment enforced by the Hukou system through inevitable income discrepancies and poor human capital endowment between rural and urban Hukou holders. This is then exacerbated by the disproportionate intergenerational impact of the Great Chinese Famine in 1959-1961 which inadvertently led to the deaths of millions of rural Hukou holders due to the state’s blatant prioritisation of urban Hukou holders over rural holders. Even though some reforms are underway that seek to amend these injustices against rural migrants, they seem myopic at best, and present themselves as means to sell urban Hukou privileges to those previously disadvantaged by the state they serve. Ergo, there is an observable, negative impact on migrant welfare for rural Hukou holders due to the Hukou system.

Calvin Oliver is a recent graduate in philosophy, politics, and economics at the University of Sussex as well as a member of the Royal Economic Society in the United Kingdom. Aside from his time at university and further studies, he enjoys video games and travelling across Europe. You can find him on LinkedIn.

The opinions expressed here are those of the writers and do not represent the views of European Guanxi.

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