Chinas Uneven Progress Against Poverty

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Chinas (Uneven) Progress Against Poverty
Martin Ravallion and Shaohua Chen Development
Research Group, World Bank
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Around 1980 China had one of the highest poverty
rates in the world

• We estimate that the proportion of Chinas
  population living below 1 a day in 1981 was 64.
  Based on the 1 a day poverty rates for 1981
  from Povcalnet.
• Only four countries (Cambodia, Burkina Faso, Mali
  and Uganda) had a higher poverty rate than China
  in 1981.
• That had changed dramatically by 2001, with
  Chinas 1 a day poverty rate falling to 17
  (below average for developing world of 21).

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Data Five findings Five lessons
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Distributional data for China

• Newly constructed poverty lines
• Old lines seen as out of date too low no
  allowance for geographic COL differences
• New lines 850 Yuan per year for rural areas and
  1200 Yuan for urban areas, both in 2002 prices
  also province-specific lines
• Newly assembled distributional data
• much of which has not previously been analyzed
• Rural Household Surveys (from 1980) and Urban
  Household Surveys (1981) of National Bureau of
  Statistics
• Early surveys excluded 30 of provinces, but no
  sign of bias
• Time series of tabulated distributions (complete
  micro data not available)

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New poverty lines

• Region-specific food bundles for urban and rural
  areas, valued at median unit values by province.
  
• Food bundles based on the actual consumption of
  those between the 15th and 25th percentile
  nationally.
• These bundles are then scaled to reach 2100
  calories per person per day, with 75 of the
  calories from foodgrains.
• Allowance for non-food consumption are based on
  the nonfood spending of households in a
  neighborhood of the point at which total spending
  equaled the food poverty line in each province
  (and separately for urban and rural areas).

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Deflators over time

• Urban and rural CPI
• Urban inflation rate higher than rural, esp., in
  the 1990s (higher costs of previously subsidized
  goods)

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Corrections for 1990 change in valuation method
in RHS

• 1990 change in valuation methods for imputing
  income from consumption of own-farm output
• Distributions by both methods for 1990 are used
  to correct the data for the late 1980s

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Corrections for 1990 change in valuation method
in RHS

• 1990 change in valuation methods for imputing
  income from consumption of own-farm output
• Distributions by both methods for 1990 are used
  to correct the data for the late 1980s

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Poverty measures

• Headcount index (H) living in households with
  income per person below the poverty line.
• Poverty gap index (PG) mean distance below the
  poverty line as a proportion of the poverty line
• Squared poverty gap index (SPG) poverty gaps are
  weighted by the gaps themselves, so as to reflect
  inequality amongst the poor (Foster et al.,
  1984).
• Parameterized Lorenz Curves
• alternative functional forms (Betageneral
  elliptical)
• checks for theoretical consistency and accuracy

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Inequality measures

• Relative Gini index based on sum of income
  differences normalized by the mean for that
  distribution
• Absolute Gini index based on sum of income
  differences normalized by a fixed mean

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Five findings
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Finding 1 Huge overall progress against
poverty, but uneven progress

• In the 20 year period after 1981, the proportion
  living below our new poverty lines fell from 53
  to 8.
• ( 62 in 1980.)
• Half of the decline in poverty came in 1981-84.
• However, there were many setbacks for the poor.
• Poverty rose in the late 1980s and stalled in
  early 1990s,
• recovered pace in the mid-1990s,
• but stagnated again in the late 1990s.

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Headcount index, 1981-2001
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Finding 2 Rising inequality But not
continuously and more in some periods and some
provinces

• Relative inequality is higher in rural than urban
  areas
• in marked contrast to most developing countries.
• Though steeper increase in urban inequality.
• Inequality between urban and rural areas has not
  shown a rising trend once one allows for the
  higher rate of increase in the urban
  cost-of-living.

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Relative inequality between urban and rural areas
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Absolute inequality between urban and rural areas
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Relative inequality within rural and urban areas
and nationally
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Absolute inequality within rural and urban areas
and nationally
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Finding 3 The pattern of growth matters

• Economic growth was clearly a key proximate cause
  of poverty reduction
• Growth elasticity of poverty reduction
• 3.2 (t 8.7) (using survey means)
• 2.6 (t 2.2) (using GDP per capita)
• However, the growth story is more complicated

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The sectoral pattern of growth matters

• The gains to the poor from aggregate economic
  growth depended on its sectoral composition.
• Decomposition of change in poverty
• Within-sector effect is the change in poverty
  measures over time weighted by final year
  population shares
• Population shift effect measures the partial
  contribution of urbanization over time, weighted
  by the initial urban-rural difference in poverty
  measures. (Kuznets process of migration.)

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Decomposition of the change in poverty Migration
to urban areas helped, but the bulk of the
reduction in poverty came from within rural areas

• Note Quite rapid urbanization despite
  restrictions on migration
• Urban share of 19 in 1980 rose to 39 in 2002

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Decomposing GDP growth

• Standard classification of its origins, namely
• primary (mainly agriculture),
• secondary (manufacturing and construction) and
• tertiary (services and trade).
• The primary sector had lower overall growth, so
  its share fell from 30 in 1980 to 15 in 2001
  (though not montonically).
• Almost all of this decline was made up for by an
  increase in the tertiary-sector share.
• Test equation

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Primary sector was the main engine of poverty
reduction

• Growth in the primary sector (primarily
  agriculture) did more to reduce poverty than
  either the secondary or tertiary sectors.
• Starting in 1981, if the same aggregate growth
  rate had been balanced across sectors then it
  would have taken 10 years to bring the national
  poverty rate down to 8, rather than 20 years.

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Geographic composition of growth

• The geographic composition of growth also
  mattered.
• Provinces with higher rural income growth tended
  to have higher rates of poverty reduction.
• Growth elasticity across provinces of 2.4 (t
  4.3) (dropping Beijing, Shanghai, Tianjin)
• However, a wide variance in the impacts of a
  given rate of growth on the rate of poverty
  reduction.
• 95 CI for the impact of a 3 growth rate on H is
  (0, 9)
• Dropping Beijing, Shanghai and Tianjin the 95 CI
  for 3 growth rate is (4, 10)

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Trend rate of change in rural poverty against
trend growth rate in mean rural income
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Inequality and the pattern of growth

• The composition of growth mattered to the
  evolution of aggregate inequality.
• Agricultural growth was inequality decreasing.

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Inequality and GDP growth by origin
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Inequality and growth in mean urban and rural
incomes
Rural economic growth reduced inequality within
both urban and rural areas, as well as between
them
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Finding 4 No sign of an aggregate growth-equity
trade off

• The strong positive correlation over time between
  Chinas GDP per capita and inequality is driven
  by common time trends.
• Near zero correlation between changes in (log)
  Gini and growth rate.
• The periods of more rapid growth did not bring
  more rapid increases in inequality. Indeed,

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The periods of falling inequality had highest
growth in average income
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Provinces with higher growth did not have
steeper rises in inequality
r -0.18
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Double handicap in more unequal provinces

• More unequal provinces faced two handicaps in
  rural poverty reduction
• High inequality provinces had a lower growth
  elasticity of poverty reduction
• High inequality provinces had lower growth
• signs of inefficient inequality both within
  rural areas, and between urban and rural areas gt

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Regressions for provincial trends in poverty and
mean incomes

Initial conditions (mean and distribution)
location
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Finding 5 Poverty would have fallen much faster
without rising inequality

• Lack of aggregate growth-equity trade-off implies
  that
• Growth has more impact on poverty
• Rising inequality puts a brake on poverty
  reduction
• If not for the rise in inequality within rural
  areas, the national poverty rate in 2001 would
  have been 1.5 rather than 8.
• In most provinces, rapidly rising rural
  inequality meant far lower poverty reduction than
  one would have expected given the growth.
• An exception was Guangdong, which achieved rapid
  rural poverty reduction by combining growth with
  stationary inequality. Why?

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Steeper increases in inequality did not mean
faster poverty reduction
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Actual poverty incidence in 2001 and simulated
level without the rise in inequality
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Five lessons
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Lesson 1 Low-lying fruit of agrarian reform

• Great Leap Forward and the Cultural Revolution
  left a legacy of pervasive and severe rural
  poverty by the late 1970s.
• Yet much of the rural population that had been
  forced into collective farming (with weak
  incentives for work) could still remember how to
  farm individually.
• Undoing these failed policies called for
  de-collectivizing agriculture and shifting the
  responsibility for farming to households.
• This brought huge gains to the countrys (and the
  worlds) poorest. Possibly half of the total
  decline in poverty in China 1981-2001 was due to
  this reform.
• But it was a one-time reform.

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Lesson 2 Agricultural growth is good for poor
people

• But here too are unusual historical
  circumstances the relatively equitable land
  allocation that could be achieved at the time of
  breaking up the collectives.
• With fairly equal access to land (at least for
  the present) and relatively few distortions to
  incentives, achieving higher agricultural growth
  in China will require
• sound investments in research and development,
• and in rural infrastructure.
• Evidence that targeted poor-area development
  programs can help in this setting.

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Lesson 3 Dont tax poor farmers to subsidize
urban consumers!

• Higher foodgrain procurement prices have helped
  reduce poverty.
• These are distributional effects
• This too is an unusual country circumstance
• a procurement system that taxed farmers by
  setting quotas and fixing procurement prices
  below market levels.
• This gave the Chinese government a powerful
  anti-poverty lever in the short-term.

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Lesson 4 Less clear on economy-wide policies
(macro stability and free trade)

• Support for the view that macroeconomic stability
  (esp., avoiding inflationary shocks) has been
  good for poverty reduction
• But the score card for trade reform is blank!
• Neither the trade reforms not the trade
  expansions coincided with the times of falling
  poverty.
• Zero correlation between changes in trade volume
  (TV) and changes in poverty. Nor with lagged TV
  up to two years.
• Also holds with controls.
• Endogeneity of trade? Yes, but bias probably goes
  against the view that trade reform was poverty
  reducing in short-term.

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Lesson 5 Inequality is now an issue for China

• High inequality in many provinces will inhibit
  future prospects for both growth and poverty
  reduction.
• Aggregate growth is increasingly coming from
  sources that bring limited gains to the poorest.
  
• Inequality is continuing to rise
• and poverty is becoming much
• more responsive to rising inequality.
• Perceptions of what poverty means are also
  changing, which can hardly be surprising in an
  economy that can quadruple its mean income in 20
  years.

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Three times as many people living under 2/day
as 1/day, and the number of people living
between 1 and 2 is not falling