How did China Reduce Rural Poverty?
The
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 food prices.
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 Chart 2.
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 employment opportunities.
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 jobs.
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.