The Invisible Wall against Social Protection Reform in China

Recently, the city of Chongqing has become the center of media attention caused by the political scandal surrounding prominent party leader Bo Xilai – the former top official in the Chinese province of Chongqing. Even before the scandal, Mr. Xilai received both praise and opprobrium for his policies and his role in the region’s rapid economic growth.

Despite the attention some of his policies have attracted, one of the lesser-known reforms introduced under the leadership of Mr. Xilai was the easing of the hukou restrictions for rural migrants living in the city of Chongqing. Reform of this system has many implications for social protection in China because its continuation poses a major impediment to the development of universal social protection programs. This is of particular importance for a country that has experienced remarkable change in the past three decades that brought many out of starvation, but that has seen recently a sharp rise in the rural-urban income gap.

The People’s Congress established the hukou system in 1958 with the objective of controlling labor mobility between rural and urban areas and guaranteeing basic living and minimum social welfare for urban residents. The system protected a minimum agricultural output and job security in the cities – both important elements of China’s rapid industrialization model during the Maoist regime.

The Chinese government categorizes personal hukou of every citizen into two related components: socio-economic status and residential location. The first classification of hukou registration is its type, commonly distinguished as either “agricultural” or “non-agricultural” hukou. In addition to the distinction by type of hukou, the system also categorizes citizens according to their place of residence – either official or permanent residence. The second distinction of the system allows individuals only to receive benefits in his or her place of registration.

Besides its impact on migration, reform of the hukou system would have important implications for social protection because it would affect how the government controls access to entitlements. A non-agricultural hukou grants the holder access to food subsidies, education, subsidized social security and public services. Hukou for the agricultural population entitles the permit holder to farmland. Beginning in the late 1990s, the central government has allowed some small and mid-sized cities to ease hukou regulations.

In 2010, the city of Chongqing began reforming the policies regulating rural-to-urban migration with the aim of helping 10 million people transfer to urban hukou by 2020. The program offers rural hukou holders the benefits bestowed upon urban hukou permits. Initially, residents converting from rural to urban hukou had to relinquish their rural land rights after three years, but recently the government has allowed rural migrants to retain them.

Reform of the hukou would have implications for the large number of migrant workers living in cities because of the limitations the system imposes on the delivery of social protection to every citizen. Rural migrants, who generally experience short-term employment and low incomes and thus are more susceptible to the vagaries of the economy, should receive the same benefits as their urban counterparts. This means that the Chinese government should reform the hukou system to eliminate the unequal treatment of different hukou holders by introducing a system that does not distinguish recipients based on their location of residence.

As China’s comparative advantage in low-wage sectors wanes, the country will likely shift to higher value-added industries and this could potentially increase the demand for social protection programs because of the impact the shift may have on the labor market. Without hukou reform, any reform of China’s social protection model will continue to differentiate Chinese citizens into two distinct groups.

In spite of China’s progress on social protection, the coverage of these programs remains low and the challenges continue to mount because of both demographic and geographic issues. As China’s economy continues to open, it will no longer be able to neglect rising inequality and the inadequacy of its social protection policies to meet the emerging demand for such from its citizens. Reform of China’s social protection model will be costly, which means the central government will have to find ways to reduce the costs of expanding the existing model.

Chinese leaders have approached hukou reform with caution in order to avoid the costs. Nonetheless, China needs social protection programs that reach migrants working in urban areas. Eliminating the use of cash for social insurance and social transfers has cut the administrative costs of these programs in countries like Brazil and South Africa. China could introduce similar schemes to lessen the costs of extending social protection to all of its citizens. While the impacts of hukou reform on the economy are clear, the complexity of hukou reform daunts Chinese leaders, especially the impact on its social protection model. However, the time has come for China to reform the hukou system if it wants to promote inclusive growth that allows the country to sustain its economic development – for which one of the essential requirements is social protection reform.