July 05, 2005

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China's (Uneven) Progress against poverty

Ravallion, Martin and Chen, Shaohua, "China's (Uneven) Progress Against Poverty" (September 2004). World Bank Policy Research Working Paper No. 3408.

During the discussion about China's New Left, Dylan pointed out the above working paper from a couple of economists at the World Bank. Over the weekend I finally had time to read it, and it is a remarkable piece of work for anyone interested in China's income gap, the split between rural and urban and the remarkable poverty alleviation in China. Worth reading in full if you have the time (skip the equations), but Dylan nicely summarised the findings:

1. China has made huge progress against poverty, but it has been uneven progress. Half of the decline in poverty achieved since reform and opening up came in the first few years of the 1980s. Poverty reduction stalled in the 1990s.
2. Inequality has been rising. In marked contrast to most developing countries, relative inequality is higher in China's rural areas than in urban areas. Absolute inequality has increased appreciably over time between and within both rural and urban areas.
3. The pattern of growth matters. Growth in the primary sector (mainly agriculture) did more to reduce poverty and inequality than either the manufacturing or service sectors. Rural economic growth reduced inequality in both the urban and rural areas, as well as between them.
4. Inequality is a concern both for economic growth and poverty reduction. With the same historical economic growth rates and no rise in inequality in rural areas alone, the number of poor in China would have been less than 1/4 of its actual value today. Rising inequality is not a "price" of high growth: statistics show that the periods of more rapid growth did not bring more rapid increases in inequality. The statistics suggest that more uneual provinces will face a double handicap in future poverty reduction: they will have lower growth and poverty will respond less to that growth.
The paper itself contains even more interesting pieces. For example the (Chinese) National Bureau of Statistics (NBS) did not perform household surveys at all during the Cultural Revolution. The authors create a poverty line of 850 yuan per annum in rural areas and 1200 yuan p.a. in urban areas, noting that poverty is becoming a relative rather than absolute term and costs of living have a big impact. One aspect of this the authors do not address is the massive rural migration to cities. Clearly despite the higher living costs of cities, economically the move makes sense for many rural dwellers even despite the higher poverty threshold. But are these people confusing nominal rises in wealth with real ones. In other words, they might be earning more but they might be spending relatively more just to survive as well. I'd like to think millions can't be wrong, but it's a question worth pursuing in analytical detail, especially when the externalities of catering to booming cities are considered.

But wait, there's much more...

The authors note China's urban population share went from 19% in 1980 to 39%, a massive and rapid change. By contrast India went from 23% to 28%. But the authors point out this might be due as much to expanding cities encompassing rural areas as it is migration.

Putting some numbers on the falls in poverty, the paper says poverty fell from 76% in 1980 (thank you, Mao) to 23% in 1985. But the fall in poverty hasn't been a straight line. The authors say the late 80s and early 90s actually saw rises in poverty before another fall in the mid 90s. Most interestingly coming into the late 90s there were signs of rising poverty in rural areas. I find that surprising given China's incredible economic growth since the Asia crisis of 97. What it means is the coastal/urban regions have benefitted both from the economic boom and at the expense of the rural hinterlands.

Moving on, the authors find the fall in Chinese poverty has been the net result of two strong but opposing forces: rising inequality and positive growth. In the past 20 years poverty has become more responsive to inequality. The rich are getting richer and the poor poorer. Yet in absolute terms everyone is better off. As I noted above, the move now is from absolute poverty to a more relative measure - surely a sign of success in poverty alleviation.

Unsurprisingly the authors find that growth in the agricultural sector has been the primary driver of poverty alleviation.

In looking at inequality between rural and urban areas, the authors find once you allow for the cost of living the answer is inequality has not changed between the two areas, although there has been a trend in absolute inequality between them. But within each area there has been growing inequality, albeit with patches where it went the other way. The authors say:

In marked contrast to most developing countries, relative income inequality is higher in rural areas, though the rate of increase in inequality is higher in urban areas; it looks likely that the pattern in other developing countries will emerge in China in the near future.
They don't back up this last assertion, which makes it difficult to judge. It seems more likely that past patterns will continue.

What has been the impact of inequality? Naturally higher inequality has made poverty alleviation relatively immune to economic growth in recent years. The authors ask if China's economic growth could have been so great without rising inequality. After some number crunching they conclude there is no sign of a short-term trade off between growth and equity. They also see no population shift effect on total inequality and that growth in agriculture is associated with lower inequality, while there is no correlation with growth in the secondary or tertiary sectors of the economy. In other words, the only growth that matters for China's poor is in agriculture. The authors do not consider why this is the case given it seems to ignore the urban poor, unless the urban poor's fortunes are closely tied to how things are going back home. But that would seemingly put the conventional wisdom (that the rural poor go to cities to send money back home) on its head. Another interesting avenue for someone to explore.

Another highlight of the report:

...positive shocks to rural incomes reduce inequality. Growth in urban incomes is inequality increasing in the aggregate and within urban areas, but not rural areas.
Again it seems the urban poor are getting the worst of it - their rural friends benefit if rural incomes rise, while they suffer if urban incomes rise. Remind me why they move to cities? Either they are seemingly economically irrational, or there's more to this than meets the eye.

Most interesting of all is the assertion it would appear reasonable to attribute the bulk of rural poverty reduction between 1981 and 1985 to this set of agrarian reforms. Which reforms? De-collectivization and the privitisation of land use rights. That's right. Simply undoing the worst of Mao's madness and giving people some kind of property rights resulted in the biggest reduction of poverty in human history. How much? The authors reckon these simple changes were responsible for 77% of the total poverty reduction.

Next comes the government's agricultural prices policy. Raising the compulsary purchase prices of agricultural goods (effectively a tax cut) there is strongly correlated with reductions in inequality and reduced poverty. Funny that - less government thievary reduces poverty.

The study finds trade policy is NOT a plausible candidate for explaining China's progress against poverty. It just emphasises what mattered the most was the granting of basic property rights.

When it comes to regions two things stand out. The authors find confirmation that coastal areas had much higher poverty reduction trends. But the province of Guangdong, home to Shenzhen (the first "liberated" Chinese city), saw significant and outsized reductions of poverty compared to everywhere else. Is it because the Cantonese are more industrious and business savvy? And does that mean Guangdong's inclusion in coastal area comparisons obscures the true story? There is a chance that the rural-urban gap may not be as pronounced as feared. It might be a Guangdong (and likely Shanghai) gap versus the rest of China. While on Guangdong, it is the one province that showed no uptrend in inequality and thus had the highest rate of poverty reduction despite only slightly above average growth and relatively high initial inequality. The rest of China needs to learn from Guangdong.

While on provincial differences, the authors find initially poorer and more equal provinces had higher subsequent rates of poverty reduction. The more equal provinces had higher growth rates.


In summary, what does all this mean?

1. The biggest and easiest gains came from undoing collectivization and giving individuals the responsibility for farming. In other words, Communism doesn't work.
2. Reducing taxes the poor face helps alleviate poverty. In other words, the less the Government interferes, the quicker people get out of poverty.
3. China benefited from a relatively equitable land distribution when collectives were broken up. Given what the country had to go through to get to that point, it's a silver lining in a very black cloud. Nevertheless it emphasises the importance of land reform and distribution in poverty alleviation.
4. Macroeconomic stability, especially avoiding inflationary shocks, has been good for poverty reduction. Given the imbalances currently building in China, this is a point to watch. Those that advocate a revaluation of the yuan could use this to argue they are helping China's poor. Given most of the poor's agricultural produce is domestically consumed a rise in the yuan shouldn't have much impact on the poor, at least initially.
5. China has done all the easy stuff in poverty alleviation. To go further, the country has to address the problem of rising inequality.
6. China's recent economic growth is coming from sectors that least help the poor. That implies inequality is only going to get worse.
7. The country is entering a phase where relative poverty matters more than absolute poverty, and thus economic growth will matter less in reducing poverty going forward.

If you were running China, what would you do to address these problems?

Follow up

26 million in 'absolute poverty' reports The Standard.
Brad DeLong chimes in.

Updated (July 21st)

Ben Muse links to a US study on regional income disparities in China.

posted by Simon on 07.05.05 at 03:36 PM in the China economy category.


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China and Poverty

Simon World has an in-depth look at China's uneven war on poverty.

Weblog: Dean's World
Tracked: July 11, 2005 05:33 PM


this is a lot of material, but quite difficult since it is verbose and the detailed data are not present (which would be easier for me).

here is what i regard as the most fundamental constraint: 800 million peasants live on arable land which covers only 7% of the nation, for an average of 1 hectare per person.

how much money can you squeeze out that one hectare? let us say technology doubles the productivity and price support doubles it again. so instead of 1,000 yuan per person per year, you yield 4,000 yuan per person and then you have nowhere left to go. there is no exit under the pure agricultural model. they better look at something else.

posted by: eswn on 07.05.05 at 05:35 PM [permalink]

If you click the link you can download the original report, which has 30-odd pages of data in the appendicies, including some good charts.

In the long run, you're right. Agriculture will only get the country so far. But in terms of poverty alleviation, it is just about the only thing that deals with the problem. As China gets richer, more people will leave the farm for the city. Eventually some of those farmers will become more successful and grow larger, taking over their neighbours' plots and becoming true commercial farmers. But that's way into the future.

Even based on the numbers you've suggested, a 400% improvement in incomes from land is a great result, and it will see even more people rising out of poverty. They can worry about where next down the track.

posted by: Simon on 07.05.05 at 05:44 PM [permalink]

Yes, as we all know, it's government policy to eventually increase the urban population to much, much higher than it is today.

For this reason alone, I imagine that the goverenment are also aware, or at least partially aware, of the fact that rural reforms can only go so far and if it wants to build a real world-class economy in the long run, then it will have to try even up the urban-rural population divide.

posted by: Martyn on 07.05.05 at 06:59 PM [permalink]

i think it is wrong to move more and more people into the existing big cities.

i would like to see a reverse migration of the migrant workers, who have accumulated enough capital and knowledge that they would want to go back home and build small enterprises. this would be supplemented by large private and public investments to generate rural employment. this is hard, because all the right micro-level decisions have to be made (and the Huaxi/Huankantou riot was the result of attracting chemical factories and destroying the environment). the central government can direct the large infrastructe investments (electricity plants, road, etc), but they can't assure the efficiency and correctness of all the micro-level projects.

one example that i thought of is Lijiang, from the poorest county in the nation to a tourist center that provides direct employment to tens of thousands. but not every place can be transformed into a tourist center.

posted by: eswn on 07.05.05 at 11:28 PM [permalink]

China needs to find a way to compete agriculturally by growing their agriculture to the point of being able to export food in large quantities. Most country's sustain their agriculture through subsidies. This could be one item.
Another would be to build the transportation infrastructure to the point where it is no longer adventageous to produce on the east coast (close to ports). The USA did this with cross country interstate highways. China is currently working on several of these highways...but witht he high tolls on these highways, many truckers are reluctant to use them as they bleed their profits. Subsidize highways and create, what the USA has, 'free-ways.'
Finally...cut taxes. The tax rates here are brutal. A moderately middle class income here pays roughly 40% in taxes. As you mentioned in your article...get the government out of the pocketbooks (and the internet!)

posted by: GZ Expat on 07.06.05 at 08:22 AM [permalink]

Well, Simon, you did it again! I am happy to see you continue the topic of new left. I feel the one of most important underlying official policy now is to expand the cities and force peasants to lose or leave their land. Making farming hardly profitable is necessary for this situation. As long as the labor can be absorbed continuously, this will be a huge sustainable engine for China's economy in the future. One thing the government has to do now is to publish a set of policy to encourage the small private business instead of subsidizing SOEs. However suitable banking, credit system and law enforcement are not there. The leader has to have courage to implement a gradual institutional change even with the obvious risk to accommodate this change. The former prime minister Zhu failed with the high salary of government employee as the only result. Wait and See what Hu will do. By the way, simon, I absolutely disagree that decreasing the government intervention will be the answer for the problem. Chicago boys failed in Chile 30 years ago. The lesson is that moderate governmental intervention has to be maintained, especially in the transition. Hopefully Hu can learn sth from Alejandro Foxley.

posted by: lin on 07.06.05 at 10:12 AM [permalink]

Lin, can you explain how the "Chicago boys" failed in Chile? Chile is South America's most prosperous and stable economy and has been for 30 years. While clearly the Pinochet regime was a human rights disgrace, at least economically they got it right.

ESWN: a natural consequence of economic development is a shift of populations from rural to urban areas. Why? Because people like living in cities, because farms become more productive, because farms need less labour as they use more capital. I don't think there's a single example where there's been a reverse migration in a developing country. That said, you're right that in rural areas there is a need for diversification to encourage further economic development.

posted by: Simon on 07.06.05 at 10:24 AM [permalink]


I ca see where you're coming from with theory that migrant workers could return to their villages and, with govt support, build the rural economy.

It's a interesting thoery, despite what Simon rightly points out above about people generally prefering to live in cities and rural migration increasing economies of scale by reducing the farming population/icreasing size of farms, the fact remains that China's urban/rural divide must be better balanced to reflect global norms if it ever wants to achieve a higher standard of living for the population at large.

At the moment (I might go off and chase up the figures in a minute) China's rural population is too large and lop-sided and this will hamper China's development more and more in the years to come. Some of the reasons are mentioned earlier in this thread.

posted by: Martyn on 07.06.05 at 11:16 AM [permalink]

Simon, probably tomorrow I will google the whole story of Chicago boys for you. Now I only remember that under Chicago boys' administration, poverty rate had gone up from 20ish% to somewhere above 40% from 1973-1998. The average growth rate was only 3.5% sth...The price that a society paid has not all been counted into these numbers yet. Chile has really boomed only after a new socialist government took the power based on a center-left coalition. Look at Clinton's, Blair's and Chilean's success, I can't help trusting the "NEW" LEFT! Or you guys called them neo-liberal or sth else?

posted by: lin on 07.07.05 at 12:41 AM [permalink]

Lin, I look forward to the story of the Chicago Boys.

I must admit that I don't know much about chile (apart from the fact that's it extremely nationalistic---according to one of the British Consulate guys here in Guangzhou who was there for a bit) but I know that just before and after Margaret Thatcher came to power in Britain in 1979 she sent political advisors to Santiago many times in order to study Chile's Hayek-esque form of Darwin-sink-or-swim type capitalism.

Therefore, I've always assumed the opposite of what you are saying about Chile.

posted by: Martyn on 07.07.05 at 04:27 AM [permalink]

Lin, I look forward to the article. But your two examples of "New Leftists" perfectly prove my case: both Blair and Clinton followed the doctrines of right wing economics to the letter - fiscal surpluses, independent monetary policy, welfare reform...they out-Tories the Tories and out-Republicaned the Republicans. That was Al Gore's mistake - he chose to veer left and got pounded.

Thanks for proving my case.

posted by: Simon on 07.07.05 at 10:05 AM [permalink]

Because it's a long article, so only some data are presented here, you can see More here

The Chicago School of Economics got that chance for 16 years in Chile, under near-laboratory conditions. Between 1973 and 1989……………….. The results were exactly what liberals predicted. Chile's economy became more unstable than any other in Latin America, alternately experiencing deep plunges and soaring growth. Once all this erratic behavior was averaged out, however, Chile's growth during this 16-year period was one of the slowest of any Latin American country. Worse, income inequality grew severe. The majority of workers actually earned less in 1989 than in 1973 (after adjusting for inflation), while the incomes of the rich skyrocketed. Conservatives have developed an apologist literature defending Chile as a huge success story. In 1982, Milton Friedman enthusiastically praised General Pinochet (the Chilean dictator) because he "has supported a fully free-market economy as a matter of principle. Chile is an economic miracle." (1) However, the statistics below show this to be untrue. Chile is a tragic failure of right-wing economics, and its people are still paying the price for it today…………………. After the IMF loans came through, the Chilean economy began recovering in 1984. Again, it saw exceptionally high growth, averaging about 7.7 percent a year between 1986 and 1989. (11) But like the previous cycle, this was mostly due to actual growth, not potential growth. By 1989, the GDP per capita was still 6.1 percent below its 1981 level. (12)……………… So what was the record for the entire Pinochet regime? Between 1972 and 1987, the GNP per capita fell 6.4 percent. (13) In constant 1993 dollars, Chile's per capita GDP was over $3,600 in 1973. Even as late as 1993, however, this had recovered to only $3,170. (14) Only five Latin American countries did worse in per capita GDP during the Pinochet era (1974-1989). (15) And defenders of the Chicago plan call this an "economic miracle!" Aggregate statistics are somewhat better. Between 1970 and 1989, Chile's total GDP grew a lackluster 1.8 to 2.0 percent a year. That was slower than most other Latin American countries, and slower than its own record in the 60s. (16)……….. By all measures, the average worker was worse off in 1989 than in 1970. During this period, labor's share of the national income fell from 52.3 to 30.7 percent. (17) Even during the second boom (1984-89), wages continued to fall. The following index shows the decline in both average and minimum wages:

By 1989, Chile's poverty rate was 41.2 percent, one-third of them indigent or desperately poor. (19) Shanty towns known as poblaciones grew around Santiago and other major cities, kept alive by las comunes, or soup kitchens. In 1970, the daily diet of the poorest 40 percent of the population contained 2,019 calories. By 1980 this had fallen to 1,751, and by 1990 it was down to 1,629. (20) Furthermore, the percentage of Chileans without adequate housing increased from 27 to 40 percent between 1972 and 1988, despite the government's boast that the new economy would solve homelessness. (21)

Chile's income inequality also became the worst on the continent. In 1980, the richest 10 percent took in 36.5 percent of the national income. By 1989, this had risen to 46.8 percent. By contrast, the bottom 50 percent of income earners saw their share fall from 20.4 to 16.8 percent over the same period. (23)

How did the Chicago boys accomplish this war against workers without the people rising up in revolt? The answer lies in Pinochet's reign of terror.

The previous paragraph just includes some data. I personally don't 100% agree with the author's opinion, however I do agree with Alijandro Foxley said: "development is an effort that you have to, in some way, conduct, that you have to awaken the creative forces, and just freeing up the markets will not always do that job for you.

Alejandro Foxley is an famous economist who turned right wing economic policy toward the center after chicago boys. And he, is a big believer for Political economy.

INTERVIEWER: What would be your final verdict on the Pinochet years in terms of economy?

ALEJANDRO FOXLEY: It's a very mixed performance. The average growth rate in the 17 years of Pinochet was a mediocre 3.5 percent. That's an average. In 10 years of democracy, we doubled our rate [to] 7 percent a year. So in that respect, I don't think they have much to show. But having said that, in terms of the deeper transformation of the economy, they certainly were able to anticipate what became a global trend afterwards. They were able to start a process of deregulating the markets, opening up the economy, and allowing everybody to have a share in world markets, to be able to compete, and the need to increase productivity. All of those things later became a global trend. That was their contribution. They were able to anticipate a global trend, and Chile has benefited from them.

INTERVIEWER: But at a terrible price?

ALEJANDRO FOXLEY: At a very high price. Believe me, at a very high human price.

back to top

Towards a New Development Strategy

INTERVIEWER: Tell me about the people you got to know in Boston [in the early '80s], and what outlook you shared.

ALEJANDRO FOXLEY: Well, I was at MIT at the time, as a visiting fellow. I got to know Domingo Cavallo and Pedro Aspe very well. Pedro Aspe became the minister of finance in Mexico when I was the minister of finance in Chile, and Cavallo in Argentina. And we developed a view that wasn't as rigid as the one the Chicago Boys had developed, in terms of development strategy. And I think that it shows. If you look at what Cavallo is doing in Argentina today, you will certainly see a much more pragmatic type of economist, someone who believes, as Jeffrey Sachs does, that development is an effort that you have to, in some way, conduct, that you have to awaken the creative forces, and just freeing up the markets will not always do that job for you.

You can find all interview materials here

By the way, Simon, I am not denying that Clinton and Blair moved to the right a little bit in order to wow the center. That's why I called it center-left coalition, and "NEW" left. However don't mistakenly consider them implementing right wing economics. First of all, Pro-business nature are universal for both right and left. It should not be counted in the right or the left.
Ok, we have seen Clinton raised tax for richest people, pay a fortune for public education, social security and medicare. Take a look at what right wings doing: Cut tax (mainly for richest people), teachers and government employee laid off, tuition skyrocketed, plan to privatize pensions......(hey, what if stockmarket collpase as it did swiped out chilean's pension...)
So you are saying Clinton out-Republicaned the Republicans?

posted by: lin on 07.08.05 at 06:38 AM [permalink]

Lin, I'll have to read the article over the weekend. But on a quick skim I've already noticed one thing - while Chile's average growth might have been 3.5% per annum over that period, its neighbours went through various economic catastrophes. That Chile managed stability in an ocean of turmoil is a helluva achievement.

I am saying Clinton did out-Republican the Republicans...but Gore blew it.

When did those on the left become pro-business?

posted by: Simon on 07.08.05 at 06:08 PM [permalink]

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