How Did Openness Directly Affect Chinese Culture

[Mirtha Hinrichs]

Developingcountries worry that opening up to trade with the rest of the world may make the poor poorer and the rich richer, with China sometimes cited as an example of growing income inequality. A recent IMF study, however, finds that the reality is far more complex.

What trade openness does for the poor in developing countries is a controversial issue. It is sometimes argued that the poor have been made worse off by globalization or, at least, that the benefits have gone disproportionately to the rich.

Much of the research that has examined the impact of globalization has been based on cross-country comparisons. This approach is tainted with two key problems. The data on income and inequality in different countries cannot always be compared because of differences in the definition of variables and data-collection methods. It is also difficult to control for differences in culture and institutions, including the legal system, that may influence growth or inequality.

Professors T.N. Srinivasan and Jagdish Bhagwati argued in a paper written in 1999 that cross-country regressions are deficient and cannot be relied on to unravel the complex links between globalization, growth, poverty, and inequality. They insisted that the most compelling evidence must come from careful case studies. One may not fully agree with Srinivasan and Bhagwati, but their warning should give sufficient pause for us to complement the cross-country studies with careful studies of individual countries. The data are much more comparable, and the culture and institutions are also much more similar, for different regions within a country than they are across countries.

Reason #1. A large country, China represents a lot of observations and achance to make statistically powerful inferences. It is harder to do asimilar analysis for smaller economies, like Bangladesh and Costa Rica, thathave also recently experienced huge increases in their ratios of trade toGDP.

Reason #3. Poverty in China accounts for a major share of world poverty. In1978, based on the World Bank's definition of extreme poverty as livingon $1 a day or less after purchasing-power adjustment, there were 600million poor people in China, more than one-third of the world's total.Any change in poverty in China would have a significant impact on worldpoverty.

Reason #4. China represents a quasi-natural experiment. Even though changesin tariffs apply equally to all regions, different parts of the country haveexperienced vastly different effective changes in openness because ofvariations in natural barriers to trade, such as distance from majorseaports. The variations provide a good opportunity to study the impact ofopenness on inequality while holding constant the legal system,macroeconomic policies, culture, and other variables. During 1988-93, forexample, some cities saw the ratio of exports to local GDP increase by 50percentage points, whereas others experienced an absolute decline. Thisregional variation is very useful for researchers studying the relationshipbetween openness, local growth, and local inequality.

What is the impact of the change in a city's openness on the change in its inequality, taking into account a number of other variables that can potentially affect inequality? We find that a clear pattern emerges from the data: cities that have opened up more quickly have, on average, also experienced a faster decline (or a slower increase) in local urban-rural inequality (see top panel of chart).

This pattern continues to hold as we refine the study to include a city's initial level of inequality, the average growth rate of local GDP, and a measure of differential investment rates in urban and rural areas. We also account for cities that were allowed to carry out certain market reforms ahead of the rest of the country (officially designated "coastal open cities" and special economic zones).

We complement the study by making use of a data set on two household surveys across 40 rural counties and 39 urban areas in 1988 and 1995. These data enable us to compute Gini and Theil coefficients (the latter is also a common way to measure income inequality) within both urban and rural areas. The evidence suggests that, across the rural counties, there is a negative relationship between openness and inequality: those rural counties that have a bigger increase in openness tend to exhibit a reduction or a slower increase in income inequality than less open areas. Across the urban areas, however, there is either no significant relationship or a small positive relationship between changes in openness and changes in the Gini coefficient within cities.

In addition to income distribution, we also examine the living standard of the poor directly. This permits us to study the change in inequality within rural and urban areas. From 1988 to 1995, the fraction of poor people (below a common poverty line, in terms of purchasing power, for both years) declined in most of the rural counties. Moreover, the more open a rural area is, the faster the reduction in poverty. In comparison, across the 39 urban areas, there is no clear relationship between openness and inequality.

How does trade openness help the poor? In a country where arable land is scarce, the most reliable way to raise the poor's standard of living is to industrialize (and, to a lesser degree, to move to service sectors), and China's increasing openness has created more opportunities to do so. Because of the concern of Chinese leaders about overpopulation in the cities, a major part of industrialization takes place directly in the previously rural areas. Indeed, our evidence shows that rural industrial firms tend to grow faster in more open areas.

Could greater labor mobility be contributing to the changes in income inequality? Surely. Peasants migrate to urban areas seeking better-paying jobs (although migration is constrained by government policies, as noted above). The opportunity for migration tends to be better in regions with greater trade openness. Remittances from urban to rural areas by rural migrants help raise the living standard in the rural areas. The limitation of the first data set does not allow us to properly account for these remittances. That is, the true income of rural residents is underestimated, and the underestimation is likely to be more severe in more open areas. As a result, the true poverty-reduction effect of openness is probably greater than estimated.

We have so far focused on intraregional inequality. Our evidence also suggests that more open areas grow faster than less open areas. This result, by itself, suggests that inequality must have increased across regions as a result of the dramatic increase in openness. What is the overall effect of an increase in openness on the change in inequality if one takes into account both interregional and intraregional inequality? We have performed some calculations but, unfortunately, the estimates are not precise enough to be conclusive. Depending on the specification one uses, one obtains either a modest reduction in overall inequality or a modest increase.

However, all regions in China, including the less open ones, have been growing relatively fast over the past two decades. As our data from household surveys suggest, most regions, including less open areas, have exhibited a drastic reduction in poverty counts. Therefore, a widening interregional inequality comes mostly from a faster rise in the standard of living for people in more open areas, not necessarily at the expense of people in less open areas. This certainly does not mean that more cannot be done to help people in less open regions. Indeed, this is a major challenge for China.

Second, reducing inequality should not be an end in itself. Interregional inequality in China has risen partly as a result of an uneven distribution of effective openness across different regions. A policy that slows the growth of more open areas without accelerating the growth of less open areas is unlikely to be a good policy even if it improves equality. The challenge for policymakers is to find ways to increase openness in the areas that are currently less open and to distribute the overall gains from openness more evenly across the country.

Third, raising trade barriers is tantamount to a country's imposing an unfortunate geography on itself, and such measures are likely to hurt rather than help the poor in the country. Across different regions in China, as across different countries in the world, effective openness is closely linked to geography. While overcoming geography is not easy, improvements in transportation, infrastructure, and communication technology can help.

Part of this article is based on Globalization and Inequality: Evidence from Within China, NBER Working Paper 8611, by Shang-Jin Wei and Yi Wu (Cambridge, Massachusetts: National Bureau of Economic Research, 2001). A more recent and extended version can be downloaded from www.brookings.edu/scholars/swei.htm

6. The following pages do not claim to offer a complete teaching on fraternal love, but rather to consider its universal scope, its openness to every man and woman. I offer this social Encyclical as a modest contribution to continued reflection, in the hope that in the face of present-day attempts to eliminate or ignore others, we may prove capable of responding with a new vision of fraternity and social friendship that will not remain at the level of words. Although I have written it from the Christian convictions that inspire and sustain me, I have sought to make this reflection an invitation to dialogue among all people of good will.

7. As I was writing this letter, the Covid-19 pandemic unexpectedly erupted, exposing our false securities. Aside from the different ways that various countries responded to the crisis, their inability to work together became quite evident. For all our hyper-connectivity, we witnessed a fragmentation that made it more difficult to resolve problems that affect us all. Anyone who thinks that the only lesson to be learned was the need to improve what we were already doing, or to refine existing systems and regulations, is denying reality.

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