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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Questions

• How much progress has China made against absolute
  poverty?
• When and where was the greatest progress made?
• What happened to inequality? A
  poverty-inequality trade off?
• What were the proximate causes of uneven progress
  over time and across provinces? What role was
  played by public policies?
• What lessons does Chinas past success against
  poverty hold for China in the future and for the
  rest of the developing world?

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Data Five findings Five lessons
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Data
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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• Old lines seen as out of date too low no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 small for 30 of provinces, but no
  sign of bias
• Time series of tabulated distributions (micro
  data not available)
• Incomplete data at provincial level
• though we can still provide estimates of the
  trends.

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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.
• Allowances 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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Rising urban-rural COL differential
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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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Persistent data problems

• Sample frame based on registration system gt
  underestimation of urban poverty
• Survey compliance problems, esp., urban areas
• Single price indices, independent of level of
  income

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Five findings
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• Huge overall progress against poverty, but uneven
  progress
• Rising inequality, though more so in some periods
  and places
• The pattern of growth matters to both poverty and
  inequality in China
• No sign of an aggregate growth-equity trade off
• Poverty would have fallen much faster without
  rising inequality

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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 stalled again in the late 1990s.

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Headcount index, 1981-2001
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Headcount index for 1/day, 1981-2001
China
Developing world less China
East Asia less China
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Effect on headcount index of our correction for
the change in valuation methods
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Trend rates of change in rural headcount index
(upper line by province /year 1983-2001)
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Trend rates of change in rural headcount index
(upper line by province /year 1983-2001)
Fujian, Jiangsu
Beijing
Guangdong
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Finding 2 Rising inequality But not
continuously and more so 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.
• Relative 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.
• Absolute inequality has increased appreciably
• between and within both urban and rural areas,
• and absolute inequality is higher in urban areas.

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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 in rural and urban areas and
nationally
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Absolute inequality in rural and urban areas and
nationally
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Effect on Gini index and mean of our correction
for the change in valuation methods
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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)

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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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Regression decomposition for mean income growth

• Mean income
• Growth rate
• Test equation
• Null hypothesis

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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 sectors 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.

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Shares of GDP by sector
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Regression decomposition for sectoral
decomposition

• Test equation
• Null hypothesis

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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.
• But could a more equitable growth process have
  allowed the same rate of growth?

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Province level

• Complete series of mean income from 1980
• But less complete distributional data 11-12
  years
• Marked differences in initial conditions Gini
  index around mid-1980s varied from 18 to 33.
• OLS estimates of province specific trends

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Provinces with higher growth rates in rural mean
income saw faster poverty reduction
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Provinces with higher growth rates in rural mean
income saw faster poverty reduction
Reliability? Hlt2
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Provinces with higher growth rates in rural mean
income saw faster poverty reduction
Elasticity -2.4 (t -4.3) (dropping Beijing,
Shanghai, Tianjin)
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Wide variation in growth elasticities 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)
• Growth elasticity calculated as ratio of trend in
  H to trend in mean varies from 6.6 ro 1.0
  (mean-2.3)
• Geographic composition of growth mattered to
  aggregate rate of poverty reduction.

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Growth did not occur where it would have most
impact on poverty
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Inequality and the pattern of growth

• The composition of growth also 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 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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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 mean household income
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The periods of falling inequality had highest
growth in mean household 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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Initially poorer and less unequal provinces had
higher rates of poverty reduction

• Large effects going from the lowest initial
  inequality to
• the highest inequality cuts 7 points off the
  annual rate of
• poverty reduction.
• Initial distribution matters independently of
  growth both
• inequality measures remain significant (though
  with smaller
• coefficients) when one adds the trend growth
  rate to the
• regression for trend poverty reduction

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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?
• Nor did higher inequality permit higher growth

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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

• Important lesson for other developing countries.
• Though 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 Some forms of public spending and
taxation matter more than others

• Taxation Dont tax poor farmers to subsidize
  urban consumers! Higher procurement prices
  reduced poverty.
• These are distributional effects in large part
• This too is an unusual country circumstance
• a procurement system that taxed farmers by
  setting quotas and fixing procurement prices
  below market levels.
• This was a powerful anti-poverty lever in the
  short-term.
• Public spending Local but not central public
  spending reduced poverty, but not inequality.

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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 nor 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 (inflation, proc. price,
  mean Y).
• 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.