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Fighting Poverty: Findings and Lessons from China’s Success

Across China, there were over 400 million fewer people living in extreme poverty in 2001 than 20 years previously. By 2001, China had met the foremost of the Millennium Development Goals — to reduce the 1990 incidence of poverty by half — and it had done so 14 years ahead of the 2015 target date for the developing world as a whole.

As countries prepare for the United Nations Summit in September 2005 to evaluate progress toward these goals, researchers Ravallion and Chen have assembled new data going back to around 1980 and extracted critical findings and lessons from China’s success in the battle against poverty.

China’s success against poverty since the reforms that began in 1978 is undeniable. A closer inspection of the numbers, however, holds some warnings for the future and caveats on the implications for fighting poverty in the rest of the developing world.

Huge (but uneven) overall progress

Between 1981 and 2001, the proportion of population living in poverty in China fell from 53 percent to just eight percent. However, this progress was not smooth. Significantly, half the reduction occurred in the first half of the 1980s, and the decline was not continual thereafter, with periods of some set-backs for China’s poor (such as the late 1980s and late 1990s).

Consider the specific situation in China at the time reforms began: the Great Leap Forward and the Cultural Revolution had left a legacy of severe, pervasive rural poverty by the late-1970s. Arguably, there were some important but relatively easy gains to be had by simply undoing failed policies, notably by de-collectivizing agriculture.  Much of the rural population that had been forced into collective farming with weak incentives for work could still remember how to farm individually. Returning the responsibility for farming to individual households brought huge gains to the country’s poorest.

“Although we cannot offer a rigorous test against alternative explanations,” says Martin Ravallion, poverty expert at the World Bank, “we can hypothesize that the halving of the national poverty rate in the first few years of the 1980s was largely attributable to picking these ‘low-lying fruit’ of agrarian reform. But this was essentially a one-time reform.”

The specter of rising inequality

There are warning signs that income inequality, on the rise since the mid-1980s, is slowing down poverty reduction in China. The country will need to address this problem if it is to maintain its past rate of progress against poverty.

“We estimate that with the same growth rate and no rise in inequality in rural areas, the number of poor in China would have fallen to less than one-quarter of the actual value,” says Ravallion, “this would have meant a poverty rate in 2001 of 1.5 percent rather than eight percent.”

Ravallion and Chen found no evidence that the rise in inequality was the ‘price’ of high economic growth. Periods of rapid growth did not bring more rapid increases in inequality. And provinces that saw a rapid rise in inequality saw less progress against poverty, not more.

Evidence from the post-reform period in China suggests that more unequal provinces are likely to face a double handicap in future poverty reduction - they will have lower growth, and poverty will respond less to that growth.

As the low-lying fruit of pro-poor reforms grow scarcer, poverty has become far more responsive to rising inequality. When China began the transition, poverty levels were so high that inequality was not a major concern. This has definitely changed.

 Inequality trends in China

  • In marked contrast to most developing countries, relative inequality is higher in China's rural areas than in urban areas. However, there has been convergence over time with a steeper increase in inequality in urban areas.
  • Unlike most other studies, Ravallion and Chen's research shows that relative inequality between urban and rural areas has not shown a trend increase since reforms began. This difference with past work reflects the fact that they allowed for the higher rate of increase in the urban cost-of-living, and also that they studied a longer period of time.
  • Absolute inequality has increased appreciably, both between and within both urban and rural areas, and absolute inequality is higher in urban areas.

Sectoral imbalance in overall growth

About three-quarters of the overall reduction in poverty from 1981 to 2001 came from gains to the rural poor. Growth in the primary sector (largely agriculture) did much more to reduce poverty and inequality than growth in either the secondary or tertiary sectors.

But the gains to the poor since the mid-1980s were limited by considerable sectoral imbalance in China’s overall growth process, with agriculture getting a lower priority in key policy decisions. Ravallion and Chen argue that if the same aggregate growth rate had been balanced across the three sectors (primary, secondary and tertiary), it would have taken half the time to reduce the poverty rate to eight percent.

Clearly – and consistent with views from past research – China’s experience holds the lesson that promoting agricultural and rural development is crucial to pro-poor growth in most low-income developing countries.

As a caveat, it should be recognized, however, that the efficacy of agricultural growth in reducing poverty in China stems, at least partially, from an unusual historical circumstance – the relatively equitable land distribution that was achieved during de-collectivization.
 
The scorecard for policies

  • Agrarian reforms and lower taxes on farmers (notably through public procurement policies) have helped reduce poverty in China.
  • Macroeconomic stability – notably avoiding inflationary shocks – has been good for poverty reduction.
  • Public spending has reduced poverty, but not inequality, and the gains have tended to come from provincial/local government spending rather than central spending.
  • No clear evidence that greater external trade openness brought rapid gains to the poor.

The researchers

Martin Ravallion is Senior Research Manager, Poverty Research, and Shaohua Chen is Senior Information Officer with the World Bank’s Development Economics Research Group.

Related links

China’s (Uneven) Progress Against Poverty. Chen, Shaohua and Ravallion, Martin. Journal of Development Economics, forthcoming. Policy research working paper # 3408.

Learning from Success: Understanding China’s (uneven) progress against poverty. Chen, Shaohua and Ravallion, Martin. Finance and Development, December 2004.

 




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