No.73-How does the Pattern of Growth Impact Poverty Reduction in Rural China?

Kakwani, Nanak; Luo, Chuliang
Published: 2018/9/3 14:31:41    Updated time: 2018/9/3 14:35:14

Abstract: The high economic growth and increasing inequality have been the two main features of the Chines economy since the end of the 1970s. The economic growth contributed to a substantial reduction in poverty, and the worsening income distribution contributed to an increase in poverty. The adverse impact of worsening income distribution did not offset the massive reduction in poverty. The primary aim of this paper is to define and measure patterns of growth through poverty elasticity of income sources. It makes methodological contributions in the derivations of this elasticity. The paper analyzes the patterns of growth to Rural China in the period 2007-2013, utilizing the Household and Income Project (CHIP). The empirical results showed that the economic growth has been unfavorable to the poor. It amounted to a loss of almost 25% of growth rate. If China’s objective to eliminate poverty by 2020, such a degree of anti-poor growth should be of concern to the policy makers in China. The paper has drawn many policy conclusions. It has identified which policies are pro-poor, and which are not. And which policies can achieve a rapid reduction in poverty.
Keywords: Economic Growth, Poverty Reduction, Patterns of Growth, Income source elasticity

 Authors:

Introduction

Poverty in rural China has dramatically reduced since the economic transition that began at the end of the 1970s, as depicted in Figure 1. Based on the official poverty line in 1978, the incidence of poverty in rural China reduced from 30.7% in 1978 to 1.6% in 2007. The official poverty line was revised upward in 2010. As expected, the higher poverty line led to higher poverty rate each year, but the poverty trends did not change. The Chinese government set the new poverty threshold at Yuan 2300 per annum per person in 2010, which led to the much higher incidence of poverty each year. For example, the poverty rate in 1978 increased from 30.7% based on the 1978 poverty line to 97.5% by the new poverty line in 2010. Even with the much higher new poverty line, the poverty incidence continued to decline rapidly and was only 5.7% in 2015.

 

Figure 1: Poverty incidence in rural China

Source: NBS (2016).

If we accept that the reduction in absolute poverty is a meaningful development goal, then China has indeed succeeded in achieving this goal. The high economic growth and increasing inequality have been the main features of the Chines economy. The economic growth contributed to a substantial reduction in poverty, and worsening income distribution contributed to an increase in poverty. The adverse impact of worsening income distribution did not offset the massive reduction in poverty due to economic growth ((Wei and Gustafsson (1999) and Chen and Wang (2001)).

Economic growth is merely a gross measure of total output produced in an economy. Since economic growth does not inform how much different individuals in the population contribute to production, it does not have direct linkage with poverty reduction. In this paper, we argue that it is the pattern of growth that explains the channels through which economic growth reduces poverty. The primary aim of this paper is to define and measure patterns of growth 

The households draw their income from various sources that include both market and non-market incomes. The primary sources of market incomes include wages and salary, interest, investments, and self-employment and non-market incomes include various government and private transfers both in cash and kind. The sources of growth determine the patterns of growth that provide links to the poverty reduction. The objectives of this paper are to analyze the growth-poverty linkages through poverty elasticity of income sources. It makes methodological contributions in the derivations of this elasticity. The growth rates of individual income sources have different impacts on poverty reduction. The income-source elasticity provides a quantitative basis for measuring the magnitudes of the effects of different income sources on poverty reduction. Based on this elasticity, we have derived the indicators of patterns of growth, which we can estimate from the household surveys.

The paper analyzes the pattern of growth and its impact on poverty reduction in Rural China in the 2007-13 period.1 It utilizes the Household and Income Project (CHIP), derived from the more extensive national household surveys conducted by the National Bureau of Statistics (NBS). The dataset includes all urban, rural and migrant households from both 2007 and 2013 but we restrict this application to only Rural households.2

The paper has drawn many policy conclusions. It has identified which policies are pro-poor, and which are not.  Moreover, which policies can achieve a rapid reduction in poverty?

The rest of the paper is mainly composed of two parts. The one is about the methodological issues, as described in detail from section 2 to section 5. The other one is the application to rural China. In sections 6 and 7, we provide empirical analyses of effects of various income sources, especially for the transfer incomes, on poverty reduction. Finally, Section 8 presents the concluding remarks.

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1 The empirical contributions in the paper are constrained by the fact that data for two years (2007 and 2013) only are used. We have used the most recent surveys available. We could not use data for more years because the surveys prior to 2007 were not comparable with the current surveys.  

2 The incidence of poverty in urban areas is almost non-exitent so we have restricted our analysis to only Rural China.