China s (Uneven) Progress Against Poverty. Martin Ravallion and Shaohua Chen Development Research Group, World Bank

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1 China s (Uneven) Progress Against Poverty Martin Ravallion and Shaohua Chen Development Research Group, World Bank 1

2 Around 1980 China had one of the highest poverty rates in the world We estimate that the proportion of China s 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 That had changed dramatically by 2004, with China s $1 a day poverty rate falling to 10% (below average for developing world of 18%). 2

3 Data Five findings Five lessons 3

4 Distributional data for China Newly constructed poverty lines Old lines seen as out of date: too low + no allowance for geographic COL differences New lines: 850 Yuan per year for rural areas and 1200 Yuan for urban areas, both in 2002 prices; also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) 4

5 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 15 th and 25 th 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). 5

6 Deflators over time Urban and rural CPI Urban inflation rate higher than rural, esp., in the 1990s (higher costs of previously subsidized goods) CPI (100 in 1990) Urban Rural

7 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 (Beta+general elliptical) checks for theoretical consistency and accuracy 7

8 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 8

9 Five findings 9

10 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.) Halfof the decline in poverty came in 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. 10

11 Headcount index, Headcount index (%) 50 Upper line Lower line

12 Headcount index, Headcount index (%) Upper line Lower line

13 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. 13

14 Relative inequality between urban and rural areas Ratio of urban to rural mean income W ithout adjustment for urban-rural COL differential W ith adjustment for COL

15 Absolute inequality between urban and rural areas Difference between urban and rural mean (divided by 1990 national mean) W ithout COL adjustment W ith COL adjustment

16 Relative inequality within rural and urban areas and nationally 40 Gini index (%) 35 National 30 Rural Urban

17 Absolute inequality within rural and urban areas and nationally Absolute Gini index (relative to 1990 mean) Urban National Rural

18 Finding 3: The pattern of growth matters Economic growth was clearly a key proximate cause of poverty reduction ln Pt = π 0 + π1 lny t + εt 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 18

19 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: P 01 P 81 = r r r u u [ n 01 ( P01 P81 ) + n 01 ( P01 P81 )] + [( P81 P81 )( n 01 n 81 u u r u u )] W ithin-sector effect Population shift effect 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.) 19

20 Decomposition of the change in poverty Migration to urban areas helped, but the bulk of the reduction in poverty came from within rural areas Within rural (72.5) Within urban (4.6) Population shift (22.9) Poverty measures (% point change ) H PG SPG (74.0) (2.3) (23.7) (75.0) (1.5) (23.6) Total change Note: % of total in parentheses. Note: Quite rapid urbanization despite restrictions on migration Urban share of 19% in 1980; rose to 39% in 2002 and 43% in

21 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: lnp t n + 0 πisit ln i=1 = π Y + ε it t 21

22 n lnpt = π + 0 πisit lnyit + εt i=1 Headcount index (log difference) Constant (1.059) (1.656) (1.761) Growth rate of GDP per capita (-2.162) Primary ( π ) (-3.969) (-4.092) Secondary ( π ) (-1.214) Tertiary ( π ) (-1.239) Secondary Tertiary (-2.199) R D-W π1 π π 2 π 3 (-3.231) (-3.14) (0.405) 22

23 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. 23

24 Inequality and the pattern of growth The composition of growth mattered to the evolution of aggregate inequality. Agricultural growth was inequality decreasing. 24

25 Inequality and GDP growth by origin Constant (0.429) (1.278) (3.598) Growth rate of GDP per capita (0.544) Primary ( π 1 ) (2.244) (2.819) Secondary ( π 2) (0.432) Tertiary ( π 3) (-0.272) R D-W π π 2 π 2 π 3 (2.263) (0.381) Note: The dependent variable is the first difference over time in the log of the Gini 25

26 Inequality and growth in mean urban and rural incomes National Rural Urban Constant (0.930) (0.880) (0.386) Growth rate in mean rural income (-7.811) (-3.206) (-5.808) Growth rate in mean rural income lagged (2.981) (4.322) (4.635) Growth rate in mean urban income (4.640) (0.830) (3.305) R D-W Rural economic growth reduced inequality within both urban and rural areas, as well as between them 26

27 Finding 4: No sign of an aggregate growth-equity trade off The strong positive correlation over time between China s 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, 27

28 The periods of falling inequality had highest growth in average income Inequality Annualized log difference (%/year) Gini index Mean household income Falling Rising Falling Rising

29 Provinces with higher growth did not have steeper rises in inequality log X it X i X i = α + β t + ν X it Trend in rural Gini index (% per year) r = Trend growth rate in m ean rural incom e (% per year) 29

30 Double handicap in more unequal provinces More unequal provinces faced two handicaps in rural poverty reduction: 1. High inequality provinces had a lower growth elasticity of poverty reduction: H Y R R G β β = + y G + β i / i ( R 2 =0.386; n= ( 4.487) (2.560) 2. High inequality provinces had lower growth: signs of inefficient inequality both within rural areas, and between urban and rural areas => 80i )(1 83i ) (2.392) i + ˆ ε t 30

31 Regressions for provincial trends in poverty and mean incomes Initial conditions (mean and distribution) + location β H i = COAST ( 5.292) R 2 =0.827 ( 6.239) i 0.141Y (8.090) 80i G GDONG ( ) (3.313) i R 83i + ˆ ε + t 6.797UR (3.201) i β Y i = COAST (0.913) R 2 =0.423 (3.759) Y ( 1.294) i 80i GDONG (1.875) G ( 2.526) i R 83i + ˆ ε t UR ( 2.682) i 31

32 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? 32

33 Five lessons 33

34 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 decollectivizing agriculture and shifting the responsibility for farming to households. This brought huge gains to the country s (and the world s) poorest. Possibly half of the total decline in poverty in China was due to this reform. But it was a one-time reform. 34

35 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. 35

36 Lesson 3: Don t tax poor farmers to subsidize urban consumers! Higher foodgrain procurement prices have helped reduce poverty. 2 ln Ht = ln PPt lncpit 1 + εˆ ( 3.058) ( 3.688) (2.492) t These are distributional effects: ln H t = ln PP (3.791) ( ) t (4.651) 2 ln CPI t lny ( 9.843) t 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 antipoverty lever in the short-term. 36

37 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: 2 ln Ht = ln PPt lncpit 1 + εˆ t ( 3.058) ( 3.688) (2.492) 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. 37

38 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. Elasticity of H to Gini (rural) 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. 38

39 Three times as many people living under $2/day as $1/day, and number of people living between $1 and $2 does not change much Population in millions Living over $2/day Living between $1 and $2 200 Living under $1/day

40 Growth incidence curve for China, A n n u al g ro w th in in co m e p er p erso n (% ) Mean 7.00 Median Median The poorest p% of population ranked by per capita income 40

41 Growth incidence curve for China, Annual growth in income per person (%) Grow th rate of mean per capita income The poorest p% of population ranked by per capita income 41

42 Growth incidence curve for China, and Annual growth in income per person (%) Grow th rate of mean per capita income Grow th rate of mean per capita income The poorest p% of population ranked by per capita income 42

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