did China Reduce Rural Poverty?
29th 2009, C.P. Chandrasekhar and Jayati Ghosh
Chinese case has often been cited as an example of how
rapid GDP growth is associated with poverty reduction.
Yet in fact it illustrates quite sharply the crucial
importance of growth in agricultural incomes for poverty
reduction, in a context of relatively equitable distribution
of land. It also illustrates the need for output growth
to be associated with structural change that allows
for a substantial shift of the work force out of agriculture.
What is striking about the post-reform Chinese experience
with growth and its effects on poverty reduction is
that while Chinese growth was consistently high across
time, poverty reduction was concentrated in particular
periods. The relation between poverty reduction and
growth has varied over time, being strong at the beginning
of the ''reform'' period and somewhat weaker afterwards.
Chart 1 indicates the changes over time in the incidence
of rural poverty, based on official Chinese estimates.
It is true that these probably underestimate poverty
for several reasons. Unlike for most other developing
countries, Chinese poverty estimates are based on income
data rather than expenditure data, which typically show
greater absolute poverty. For example, using an expenditure-based
line causes the proportion of rural poor to increase
to 25 per cent in 1999, compared to only around 5 per
cent according to the official income-based estimate.
Further, the poverty line is derived on the basis of
a basket of foods, and before 1998 food grains dominated
this bundle, amounting to 88 per cent of the total value
of the bundle, even though they were only 70 per cent
of the total food expenditure of poor households. This
gave disproportionate significance to grain prices,
which have been kept from increasing as rapidly as other
In any case, the official poverty line has not kept
pace with consumer price inflation, and it has been
estimated that in 2000 this caused the poverty line
to be at least 13 per cent lower than in the mid-1980s.
Subsequently, too, the increase in prices of many essential
goods has not been adequately captured in the official
poverty line. Non-food items have been given only 17
per cent weight after 1998, even though they account
for between 27 and 49 per cent of total expenditure
of poor households across the various provinces.
Even so, it can be seen that much of the reduction in
rural poverty was concentrated in two relatively brief
periods: the first five years of the reform period,
1979-1984; and the period 1995-97. This change had much
to do with the nature of the growth, which began by
being centred on agriculture and the rural economy where
most of the poor lived, and then shifted toward the
industrialisation of the coastal cities where the poor
were less evident except as migrants.
The first period 1979-84 was when policies of economic
reform focused on the countryside. Over these years,
the ''reorganisation'' and dismantling of rural people's
communes led to the parcelling out of land to households
on a broadly egalitarian basis, with peasant households
being given control over the use of land without having
the right to sell. Instead of the previous ''grain first''
policy, farmers were encouraged to diversify production
to more high-value produce. At the same time crop prices
were raised 30 per cent over the five-year period. In
addition, supplies of agricultural inputs including
chemical fertilizers were sharply increased and provided
to farmers at subsidised rates. All this led to significant
increases in agricultural incomes, and this translated
directly into reduced poverty because most cultivators
were net sellers of both cash crops and food grains.
The second period of substantial decline in rural poverty
occurred in the middle years of the 1990s. Once again
this was driven by the intersectoral terms of trade:
specifically, a steep rise in farm purchase prices,
especially of food grain, which doubled in the middle
of the decade. After a long time, rural per capita incomes
increased faster in real terms than urban incomes, leading
to the decline in urban-rural income gap described in
It is evident that in this period 1994-97, poverty reduction
proved to be highly income-elastic. In fact, a 21 per
cent increase in rural income was accompanied by a 40
per cent decrease in rural. However, this was essentially
because of the forces driving the increase in rural
incomes (the higher returns to cultivation) in a context
of egalitarian land distribution and domination of agriculture
in rural livelihood.
While income poverty in
rural areas has been reduced by rural-urban migration,
in the urban areas most of the poor are recent migrants,
who tend to be much worse off than other urban residents.
Studies tend to find much higher (up to 50 per cent
more) incidence of poverty among migrants than among
non-migrant urban residents. Migrant workers typically
have high turnover of employment, and also suffer from
the disadvantages of being excluded from the formal
labour market, public housing and access to health services
and schooling for children at low cost that urban residents
are entitled to by virtue of their hukou.
In addition, the urban poor who have urban resident
status are also entitled to a subsistence allowance,
the incidence of which has spread in recent years. In
the early 1980s the official urban poverty rate was
about 2 per cent and the absolute amount of the urban
poverty population was 4 million. This decreased to
only about 1 million in 1989 according to official estimates.
However, unofficial estimates are much higher. This
is essentially because of the gap in incomes and benefits
accruing to migrants compared to ''full status'' or registered
urban residents. Recently the Chinese government has
announced some measures to provide some facilities to
unregistered migrants, but the impact of these on urban
poverty is yet to be assessed.
One of the most important tendencies with a direct bearing
on poverty reduction is the overall pattern of growth
and structural change. China's recent growth has been
along the classic Kuznets-style trajectory, with an
increase in the share of the manufacturing sector in
both output and employment. A crucial feature of such
a positive tendency is agrarian transformation. The
share of agriculture in both output and employment has
declined since the early 1980s. This is different from
a number of other developing countries (including India)
where the share of agriculture in employment remains
high. So the ability of the Chinese growth pattern to
generate more productive and remunerative employment
outside agriculture played an important role.
In addition, per worker output in agriculture increased
dramatically from the early 1980s, reflecting the institutional
changes described earlier. What is significant is that
it continued to increase at a rapid rate thereafter,
such that it nearly doubled in the decade after 1995.
This has clearly played a very important role in rural
poverty reduction, dwarfing the effect of particular
poverty alleviation schemes, but it is necessary to
remember that it is the specific pattern of agricultural
growth in Chins that mattered. The growth was broad-based
and widely shared because of the egalitarian land distribution
as well as the simultaneous creation of non-agricultural
Overall, it could be argued that
poverty reduction in China has been more strongly related
to changes in economic structure and in inequality than
to GDP growth per se. If so, China's ability to sustain
the pace of poverty reduction will depend on its ability
to keep in place recent policies aimed at reducing inequality
as well as ensuring that the pattern of structural change
remains positive and dynamic.
This is in keeping with lessons derived from the pre-reform
experience as well. China was served well by a combination
of egalitarian land distribution and experience with
commune and cooperative forms of organisation, which
ensured a degree of income equality and helped release
and pool labour resources for undertaking non-agricultural
activities that were jointly managed with State support.
To the extent that economic reform undermines such egalitarianism
and adversely affects the growth of the TVEs, it would
set back the poverty reduction effort as well.
An even more critical issue may be employment generation.
Even in the period of high growth, the most important
and urgent economic problem China faced was unemployment.
In every year of the early 2000s, a labour force totalling
10 million entered the job market. In addition, there
were more than 5 million redundant workers from former
state-owned enterprises waiting for re-employment. Finally,
there were hundreds of millions of migrants from farming
families constantly moving around the country seeking
As a result, even the high rate of growth in China,
if not accompanied by structural and other changes that
ensure more job creation, cannot meet the pressure for
job creation. For example, in 2003, with a 9.1 per cent
aggregate GDP growth rate, 8 million jobs were created,
but even this was inadequate given the continuously
growing ''backlog'' of increase in the labour force and
reduced demand for labour in many traditional activities
including agriculture. This is a critical issue in the
current context, as the pace of growth is clearly slackening
and job losses are mounting with the export slowdown.
One impact of the current global crisis may therefore
be to slow down or even reverse the poverty reduction
effort in China, unless active measures are taken to
ensure that job creation continues in other activities.