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Wednesday, July 13, 2005

Economists Say the WTO Hurts the Chinese Poor?

Titled "Rural Poor Aren't Sharing In Spoils of China's Changes -- Costs of Goods Rise, Standard of Living Falls" Peter Goodman's article in today's Washington Post claims that conditions are dire in rural China.
A recent study conducted by the World Bank found that incomes among rural Chinese -- about three-fourths of the total population -- have declined slightly in the years since China entered the WTO, while urban residents have enjoyed modest gains.

Economists say this trend underscores the downside of globalization: While free trade has proved highly efficient in generating wealth, it has failed to share the spoils, intensifying gaps between rich and poor, urban and rural.
No doubt "economists" do say that globalization can increase inequality, in the sense that the rich may gain faster than the poor gain. But I would be pretty surprised to find any economist claiming that the poor have actually seen declining incomes in China. If it were true, this would be a huge turnaround from the 1990s, which saw tremendous reductions in poverty, according to numerous studies, including another World Bank report:
Between 1990 and 2000, the number of people living on a dollar per day fell by 170 million —during a period when total population rose by over 125 million. Over the past two decades, China accounted for 75 percent of poverty reduction in the developing world.
According to Goodman, this new World Bank study of the WTO also contradicts China's goverment statistical agency, which reports continuing declines in poverty since China entered the WHO.

Of course, Goodman is wrong. He's entirely misunderstanding the World Bank's recent report on the impact of the WTO on China.

He seems to be talking about chapter 15 of the report, "Welfare Impacts of China's Accession to the WTO." The key word here is impacts. The World Bank is predicting the effect of the WTO on the distribution of income in China, based on an elaborate model. They're not describing trends; they're predicting that, in the short run, the dramatic gains experienced by China's rural poor will slow down a little. In the first few years, rural poverty will continue to decline, but not by quite as fast as it would have without the WTO.

Specifically, the World Bank predicts that China's poorest city-dwellers will enjoy an increase of 1.5% in income due to the WTO, but the poorest of the rural poor will lose 6%. Until recently, China's had high tarriffs on agricultural imports. As part of joining the WTO, China is reducing these tarriffs. In the short run, this will result in cheaper food for urbanites, but lower farm incomes. The World Bank authors are careful to note that they do not consider the long run. That is, they do not consider that in the long run, cutting farm incomes will spur migration to the cities, where incomes are much higher.

Now a 6% reduction in income is pretty serious for someone living on a dollar a day, but it's important to put that in context. According to the official Chinese statistics I cited above, rural incomes grew 6.8% faster than inflation last year, while urban incomes grew 7.7%. Perhaps the slower growth in rural incomes is due to the WTO. But China's spectacular growth means that the temporary 6% reduction predicted by the World Bank was wiped out in a single year.

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