Björn Gustafsson (corresponding author)

Department of Social Work

University of Göteborg

P.O. Box 720

SE 405 30 Göteborg

Sweden

Fax (+46) 31 773 18 88

&

Institute for the Study of Labor (IZA), Bonn, Germany

E-mail: Bjorn.Gustafsson@socwork.gu.se

and

Li Shi

Institute of Economics

Chinese Academy of Social Sciences

2 Yuetan Beixiaojie

Beijing

P.R. China

Fax (+86) 10 68032473

&

Institute for the Study of Labor (IZA), Bonn, Germany

E-mail: lishi89@263.net

June 2003

Abstract

Household health and education expenditures have increased rapidly in rural China. Based on data from households in eighteen provinces in 1988 and in 1995 we investigate how such expenditures affect poverty assessments. After accounting for these expenditures we cannot state that poverty decreased during this period of rapid economic growth. Further, poverty in China in 1995 appears to be even more concentrated in the west and in officially designated poor areas when education and health expenditures are considered.

JEL code: I32, O53, P24

Key words: China, Education, Health Care, Poverty

1.      Introduction

The introduction of the household responsibility system in China at the end of the 70s, as well as rural industrialisation has generated  rapid growth in household income. As a consequence, rural poverty (as commonly assessed) decreased rapidly in the earliest phase of reform, although later phases showed little poverty reduction.[1] Still, there is another side to how the transition has affected poverty among rural inhabitants that has not attracted attention in earlier writings on poverty in rural China; this situation has never been assessed, nor can it be inferred from official statistics. Rural inhabitants today spend a larger proportion of their budget on education and health care than was necessary before.

Before economic reform was introduced, rural inhabitants typically had access to collectively financed health care. In addition, the central government channelled considerable resources for education to lower levels of government. The abolition of the collective organisation as well as decreased public funding from the central level have put the provision of health care and education under financial pressure.[2]Some rural inhabitants might have fallen into poverty after being required to pay for health care and education. This paper investigates how household expenditures for health and education affect the assessment of poverty in rural China. Our household data covers eighteen provinces in 1988 and 1995. We analyse changes in the extent of poverty as well as the profile of poverty. 

2.      Sample and definitions

Our data come from two surveys conducted by the Institute of Economics, Chinese Academy of Social Sciences, with the assistance of the State Statistical Bureau in Beijing. The first survey of household income in 1988 was implemented in the spring of 1989; the second surveys income in 1995 and was collected between January and March 1996. Both samples were derived from larger samples of the State Statistical Bureau. Members of the research team designed the questionnaires which contain fairly comprehensive questions about household income and its components. We can use these answers to derive the subsistence income of rural residents. The questionnaires asked for the present value of private houses, which enables us to impute rents by adopting a discount rate. Household expenditures were recorded and grouped into categories.[3]

From the two surveys we derive our working sample of households from the same provinces for both years, a process which yields households from eighteen provinces. These are then grouped into three regions: Liaoning, Jiangsu, Zhejiang, Shandong and Guangdong are grouped into the eastern region; the central region includes Hebei, Shanxi, Jilin, Anhui, Jiangxi, Henan, Hubei and Hunan; Sichuan, Guizhou, Yunnan, Shaanxi and Gansu are in the western region. There are 4,178 households and 20,502 individuals in the 1988 sample and 7,888 households and 34,318 individuals in the 1995 sample.

Our analysis on the importance of education and health expenditures when assessing poverty in rural China is based on four measures of disposable income defined at the household level. First there is the sum of money income (wages, salaries, net revenue from farming and business), subsistence income, income in-kind from owner-occupied housing as well as transfer income net of income taxes and fees. This measure (Disposable income I) closely resembles that which is used when producing official statistics for rural China.

Assume that education is compulsory for children of a certain age and households are requested to pay schooling fees. This means that such educational expenditures can be regarded as taxes. Further assume that health care utilisation is a response to an unforeseen and unsolicited "shock" and can be so costly as to represent a threat to the household's ability to purchase other goods and services. Under these conditions, it is important to include health and education expenditures with a negative sign into the definition of disposable income.[4]  By subtracting the two expenditure groups individually and jointly we arrive at three additional definitions of disposable income.[5]

In the analysis we classify households and their members as poor or not poor according to each of the four definitions of income. We apply the World Bank World Poverty line which is defined as 1 USD Purchasing Poverty Parity per person per day (1985 prices), see World Bank (2000). [6]  This poverty line has the advantage of allowing for international comparisons. This poverty line is higher than the poverty line used when producing official statistics for rural China, which we also employ as asensitivity test.. We measure the extent of poverty using the family of indices suggested by Foster et al (1984).

3.      Results on how poverty has changed

/Table 1 about here/

First we provide a general overview of the distribution of education and health expenditures and Disposable income I in rural China . Table 1 provides information on mean values for various deciles defined by Disposable income I for 1988 and 1995. There was rapid expenditure growth between those years as average health expenditures increased by as much as 192 percent and average education expenditures by 165 percent. Expenditure shares also increased rapidly to 2.2 percent for educational expenditures and 3.6 for health expenditures.

/Figure 1 about here/

Although mean expenditures on education and health increase with disposable income, expenditure shares decrease rapidly by decile . This is true for both years under study. For example, while thelowest decile spent 4.6 percent on education and 7.3 percent on health expenditures in 1995, the corresponding percentages for the highest decile was 1.0 and 2.2 percent respectively. Figure 1 illustrates the strong negative relation between income and expenditure shares. It also illustrates that for the same level of income, expenditure shares were considerably higher in 1995 than in 1988. [7]   

/Table 2 about here/

Table 2 provides our poverty estimates for rural China as a whole in 1988 and 1995. We highlight several observations.[8]  First, education expenditures have a stronger impact than health expenditures on the poverty indices . Together the two expenditures pushed 1.9 percent of the sample into poverty in 1988 while the corresponding proportion reached 4.3 percent in 1995.[9] Second,  alternative measures of disposable income show no change in poverty rates although we observe a moderate decrease in the poverty using Disposable income I.[10]

We also conclude that solely examining the proportion of inhabitants pushed into poverty provides only part of the picture of how health and education expenditures affect poverty. Such expenditures also push some people further into poverty. This effect is illustrated by an increase in poverty gaps using the alternative disposable income measures.

A fourth conclusion is that most of the results are also obtainable when setting the poverty line at the level used when producing official statistics (see Table 2b). However, in this case the head count ratio in the last column of the table indicates a small decrease from 1988 to 1995 while the poverty gap squared shows a rapid increase.

[BF1]

4.      Results on the poverty profile

/Table 3 about here/

Table 3 reports estimates of poverty indices for the three regions of China in 1995 using the four definitions of disposable income. The estimates show health and education expenditures force more people into poverty in the less developed western region compared to other regions. The proportion is 6.0 percent for the west compared with 4.6 percent in the middle region and not more than 2.7 percent in the eastern region. These findings are robust with regard to choice of poverty index, except when we account for education expendituresand measure the poverty gap squared, in which case the difference is largest in the eastern region.

/Table 4 about here/

Much of China's poverty reduction strategy targets resources to officially designated poor counties. Poor areas are designated at both the central and the provincial level. In 1995 one out of four rural inhabitants in China lived in an officially designated poor area. Table 4 shows that poverty was greater in the poor counties than in other areas.  More important however, is that the proportion of the population pushed into poverty by health and education expenditures was larger in the poor counties than in other locations. The other poverty indices indicate the same results,  except for the poverty gap squared index, where the consequences of expenditures on education were not larger in the poor areas than elsewhere.

5.      Conclusions

In this paper we have shown that education and health expenditures in rural China increased rapidly between 1988 and 1995 and constitute a much higher share of expenditures among people in low-income households than among high income households. Taking these expenditures into consideration means that it is no longer possible to state that poverty decreased during this period of rapid economic growth. Further, taking health and education expenditures into consideration shows rural poverty in China in 1995 was more concentrated in the western region and in officially designated poor areas. We feel that the results of this exercise have shown that poverty measures in rural China should account for  household expenditures on education and health care.  

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Table 1a. Education and health care expenditures in rural China: by decile,  1988

Table 1b Education and health care expenditures in rural China: by decile,  1995

Table 2a Poverty indices computed using various definitions of disposable income for rural China 1988 and 1995. Poverty line at 1 USD PPP per day and per capita

Table 2b Poverty indices computed using various definitions of disposable income for rural China 1988 and 1995. Poverty line is that which is used to produce official statistics. 

Table 3 Poverty indices computed using various definitions of disposable income for various regions of rural China 1995. Poverty line at 1 USD PPP per day and per capita

Table 4 Poverty indices computed using various definitions of disposable income for people living in poor counties and in non-poor counties of rural China 1995. Poverty line at 1 USD PPP per day and per capita