China's (uneven) progress against poverty

China's (Uneven) Progress Against Poverty Martin Ravallion and Shaohua Chen1 Development Research Group, World Bank 1818 H Street NW, Washington DC, 20433, USA While the incidence of extreme poverty in China fell dramatically over 1980- 2001, progress was uneven over time and across provinces. Rural areas accounted for the bulk of the gains to the poor, though migration to urban areas helped. The pattern of growth mattered; rural economic growth was far more important to national poverty reduction than urban economic growth; agriculture played a far more important role than the secondary or tertiary sources of GDP. Rising inequality within the rural sector greatly slowed poverty reduction. Provinces starting with relatively high inequality saw slower progress against poverty, due both to lower growth and a lower growth elasticity of poverty reduction. Taxation of farmers and inflation hurt the poor; external trade had little short-term impact. Keywords: China, poverty, inequality, economic growth, policies JEL: O15, O53, P36 World Bank Policy Research Working Paper 3408, September 2004 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. 1 The authors are grateful to the staff of the Rural and Urban Household Survey Divisions of China's National Bureau of Statistics for their invaluable help in assembling the data base we draw on in this paper. Helpful comments were received from David Dollar, Tamar Manuelyan Atinc, Justin Lin, Will Martin, Thomas Piketty, Scott Rozelle, Dominique van de Walle, Shuilin Wang, Alan Winters and seminar/conference participants at the National Bureau of Statistics, Beijing, the McArthur Foundation Network on Inequality, the Center for Economic Research, Beijing University, the Australian National University and the World Bank. Addresses for correspondence: mravallion@worldbank.org and schen@worldbank.org.  1. Introduction This paper aims to document and explain China's record against poverty over the two decades following Deng Xiaoping's initiation of pro-market reforms in 1978. We apply new poverty lines to newly assembled distributional data -- much of which has not previously been analyzed -- and we address some of the data problems that have clouded past estimates. We thus offer the longest and most internally consistent series of national poverty and inequality measures, spanning 1980-2001. While data are less complete at the provincial level, we can estimate trends since the mid-1980s. Armed with these new measures, we address some long-standing questions in development economics. How much did poor people share in the gains from growth? Did the sectoral and geographic pattern of growth matter? What role was played by urbanization of the population? How did initial distribution influence subsequent rates of growth and poverty reduction? What role was played by economic policies? Our principal findings are as follows: Finding 1: China has made huge overall progress against poverty, but it has been uneven progress. In the 20 year period after 1981, the proportion of the population living below our new poverty lines fell from 53% to 8%. However, there were many setbacks for the poor. Poverty reduction stalled in the late 1980s and early 1990s, recovered pace in the mid-1990s, but stalled again in the late 1990s. Half of the decline in poverty came in the first few years of the 1980s. Some provinces saw far more rapid progress against poverty than others. Finding 2: Inequality has been rising, though not continuously and more so in some periods and provinces. 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 2  time with a steeper increase in inequality in urban areas. Relative inequality between urban and rural areas has not shown a trend increase once one allows for the higher rate of increase in the urban cost of living. Absolute inequality has increased appreciably over time between and within both urban and rural areas, and absolute inequality is higher in urban areas. Finding 3: The pattern of growth matters. While migration to urban areas has helped reduce poverty nationally, the bulk of the reduction in poverty came from within rural areas. Growth in the primary sector (primarily agriculture) did more to reduce poverty and inequality than either the secondary or tertiary sectors. Starting in 1981, if the same aggregate growth rate had been balanced across sectors, it would have taken 10 years to bring the poverty rate down to 8%, rather than 20 years. The geographic composition of growth also mattered. While provinces with higher rural income growth tended to have higher poverty reduction, growth did not tend to be higher in the provinces where it would have had the most impact on poverty nationally. The pattern of growth mattered to the evolution of overall inequality. Rural and (in particular) agricultural growth brought inequality down. Rural economic growth reduced inequality in both urban and rural areas, as well as between them. Finding 4: Inequality has emerged as a concern for both growth and poverty reduction. With the same growth rate and no rise in inequality in rural areas alone, the number of poor in China would be less than one-quarter of its actual value (a poverty rate in 2001 of 1.5% rather than 8%). This calculation would be deceptive if the rise in inequality was the "price" of high economic growth, which did help reduce poverty. However, we find no evidence of such an aggregate trade off. The periods of more rapid growth did not bring more rapid increases in inequality. Nor did provinces with more rapid rural income growth experience a steeper increase in inequality. Thus the provinces that saw a more rapid rise in inequality saw less progress 3  against poverty, not more. Over time, poverty has also become far more responsive to the (continuing) increase in inequality. At the outset of China's current transition period, levels of poverty were so high that inequality was not an important concern. That has changed. Furthermore, even without a further rise in inequality, the historical evidence suggests that more unequal provinces will face a double handicap in future poverty reduction; they will have lower growth and poverty will respond less to that growth. 2. Data on income poverty and inequality in China We draw on the Rural Household Surveys (RHS) and the Urban Household Surveys (UHS) of China's National Bureau of Statistics (NBS).2 NBS ceased doing surveys during the Cultural Revolution in 1966-76 and stated afresh in 1980 (for rural areas) and 1981 (urban). While virtually all provinces were included from the outset, 30% had sample sizes in the early surveys that NBS considered too small for estimating distributional statistics (though still adequate for the mean). However, this does not appear to be a source of bias; we could not reject the null hypothesis that the first available estimates of our poverty measures were the same for these "small sample" provinces as the rest.3 While sample sizes for the early surveys were smaller, they are still adequate for measuring poverty; 16,000 households were interviewed for the 1980 RHS and about 9,000 for the 1981 UHS. Since 1985, the surveys have had nationally representative samples of about 70,000 in rural areas and 30-40,000 in urban areas. An unusual feature of these surveys is that their sample frames are based on China's registration system rather than the population census. This means that someone with rural 2 On the history and design of these surveys see Chen and Ravallion (1996) and Bramall (2001). 3 Included provinces had a poverty rate by our main poverty lines that was 1.9% points higher, but this is not significantly different from zero (t-ratio=0.32). This held for all other poverty measures. 4  registration who has moved to an urban area is effectively missing from the sample frame. Migrants from rural areas gain from higher earnings (the remittances back home are captured in the RHS), but are probably poorer on average than registered urban residents. Against this likely source of downward bias in poverty estimates from the UHS, the UHS income aggregates do not capture fully the value of the various entitlements and subsidies received exclusively by urban residents, though these appear to be of declining importance over time. While NBS has selectively made the micro data (for some provinces and years) available to outside researchers, the complete micro data are not available to us for any year. Instead we use tabulations of the distribution of income. The majority of these tabulated data are unpublished and were provided by NBS.4 The income aggregates include imputed values for income from own-production, but exclude imputed rents for owner-occupied housing. (Imputation is difficult, given the thinness of housing markets.) The usual limitations of income as a welfare indicator remain. For example, our measures of inequality between urban and rural residents may not adequately reflect other inequalities, such as in access to public services (health, education, water and sanitation -- all of which tend to be better provided in urban areas). There was a change in the methods of valuation for consumption of own-farm production in the RHS in 1990 when public procurement prices were replaced by local selling prices.5 To help us correct for this problem, NBS provided tabulations of the distribution in 1990 by both methods, allowing us to estimate what the income distributions for the late 1980s would have 4 There are a number of tabulations in the NBS Statistical Yearbook, but they only provide the percentages of households in each income class; without the mean income for each income class and mean household size these tabulations are unlikely to give accurate estimates of the Lorenz curve. Some of these data are available in the Provincial Statistical Yearbooks or the Household Survey Yearbooks. 5 Past estimates have used the "old prices" for the 1980s and the "new prices" for 1990 onwards, ignoring the change. Chen and Ravallion (1996) created a consistent series for 1985-90 for the micro data for a few provinces. However, this is not feasible without the complete micro data. 5  looked like if NBS had used the new valuation method. The Appendix describes the correction method in detail. Our corrections entail lower poverty measures in the late 1980s. In measuring poverty from these surveys, we use two poverty lines. One is the long- standing "official poverty line" for rural areas of 300 Yuan per person per year at 1990 prices. (There is no comparable urban poverty line.) It has been argued by many observers that this line is too low to properly reflect prevailing views about what constitutes "poverty" in China. It can hardly be surprising that in such a rapidly growing economy, perceptions of what income is needed to not be considered poor will rise over time.6 In collaboration with the authors, NBS has been developing a new set of poverty lines that appears to better reflect current conditions. Region-specific food bundles are used, with separate food bundles for urban and rural areas, valued at median unit values by province. The food bundles are based on the actual consumption bundles of those between the poorest 15th percentile and the 25th percentile nationally. These bundles are then scaled to reach 2100 calories per person per day, with 75% of the calories from foodgrains.7 Allowance 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). The methods closely follow Chen and Ravallion (1996) and Ravallion (1994). For measuring poverty nationally we have simply used the means of these regional lines. With a little rounding off, we chose poverty lines of 850 Yuan per year for rural areas and 1200 Yuan for urban areas, both in 2002 prices. (Ideally one would build up all national poverty 6 Poverty lines across countries tend to be higher the higher the mean income of the country, though with an initially low elasticity at low income (Ravallion, 1994). 7 Without the latter condition, the rural food bundles were deemed to be nutritionally inadequate (in terms of protein and other nutrients) while the urban bundles were considered to be preferable. The condition was binding on both urban and rural bundles. 6  measures by applying the regional poverty lines to the provincial distributions and then aggregating. However, this would entail a substantial loss of information given that we have only 10-12 years of rural data at province level.) We use the 2002 differential between the urban and rural lines to calculate an urban equivalent to the 300 Yuan rural line. Finally, we convert to prices at each date using the rural and urban Consumer Price Indices produced by NBS. We also use these urban and rural poverty lines as deflators for urban-rural cost-of-living (COL) adjustments in forming aggregate inequality measures and for measuring inequality between urban and rural areas. Past work in the literature on inequality in China has ignored the COL difference between urban and rural areas, and we will see that this does matter. However, our COL adjustments are not ideal, in that a common deflator is applied to all levels of income. We provide three poverty measures: The headcount index (H) is the percentage of the population living in households with income per person below the poverty line. The poverty gap index (PG) gives the mean distance below the poverty line as a proportion of the poverty line (where the mean is taken over the whole population, counting the non-poor as having zero poverty gaps.) The third measure is the squared poverty gap index (SPG), in which the individual poverty gaps are weighted by the gaps themselves, so as to reflect inequality amongst the poor (Foster et al., 1984). For all three, the aggregate measure is the population-weighted mean of the measures found across any complete partition of the population into subgroups. Datt and Ravallion (1992) describe our methods for estimating the Lorenz curves and calculating these poverty measures from the grouped data provided by the NBS tabulations. 3. Poverty measures for China 1981-2001 It can be seen from Table 1 that the (census-based) urban population share rose from 19% in 1980 to 39% in 2002. This may be a surprisingly high pace of urbanization, given that there 7  were governmental restrictions on migration (though less so since the mid-1990s). For example, in India (with no such restrictions) the share of the population living in urban areas increased from 23% to 28% over the same period. We do not know how much this stemmed from urban expansion into rural areas versus rural-urban migration. The cost-of-living differential in Table 1 rises over time, from 19% to 41% in 2002. This reflects the fact that the urban inflation rate is higher than the rural rate; the index at base 1980 (=100) had risen to 438 in urban areas by 2001 versus 368 in rural areas.8 This divergence between urban and rural inflations rates started in the mid-1980s and undoubtedly reflects the rising costs of urban goods that had been subsidized in the pre-reform economy. Table 1 also gives our estimates of mean income for rural and urban areas. The large disparities in mean incomes between urban and rural areas echo a well-known feature of the Chinese economy, though our COL adjustment narrows the differential considerably.9 We will return in section 5 to discuss the implications for urban-rural inequality. Table 2 gives our rural poverty measures. Table 3 gives our estimates for urban areas, and Table 4 gives the national aggregates. Figure 1 plots the national headcount indices for both poverty lines. By the new lines, the headcount index falls from 53% in 1981 to 8% in 2001. Conservatively assuming the 1981 urban number for 1980, the national index was 62% in 1980. For all years and all measures, rural poverty incidence exceeds urban poverty, and by a wide margin. Rural poverty measures show a strong downward trend, though with some reversals, notably in the late 1980s, early 1990s and in the last two years of our series. The urban measures also show a trend decline, though with even greater volatility. 8 While there is a high correlation between the urban population share and the urban-rural COL differential, this appears to be spurious; there is no correlation between the changes over time. 9 Since the latter adjustment is based on the poverty lines, it may not be appropriate for the mean (at least toward the end of the period). But it is our best available option. 8  There was more progress in some periods than others. There was a dramatic decline in poverty in the first few years of the 1980s, coming from rural areas. By our new poverty line, the rural poverty rate fell from 76% in 1980 to 23% in 1985. The late 1980s and early 1990s were a difficult period for China's poor. Progress was restored around the mid-1990s, though the late 1990s saw a marked deceleration, with signs of rising poverty in rural areas.10 We can decompose the change in national poverty into a "population shift effect" and a "within sector" effect.11 Letting Pt denote the poverty measure for date t, while Pt is thei measure for sector i=u,r (urban, rural), with corresponding population shares nt , we can write an i exact decomposition of the change in poverty between t=1981 and t=2001 as: (1) P01 - P81 = [n01(P01 - P81) + n01(P01 - P81)]+[(P81 - P81)(n01 - n81)] r r r u u u u r u u Within-sector effect Population shift effect The within-sector effect is the change in poverty weighted by final year population shares while the population shift effect measures the contribution of urbanization, weighted by the initial urban-rural difference in poverty measures. The "population shift effect" should be interpreted as the partial effect of urban-rural migration, in that it does not allow for any effects of migration on poverty levels within urban and rural areas. Table 5 gives this decomposition. We find that the national headcount index fell by 45% points, of which 35% points were accountable to the within-sector term; within this, 33% points was due to falling poverty within rural areas while only 2% was due to urban areas. The population shift from rural to urban areas accounted for 10% points. The other poverty measures tell a very similar story, though the rural share is slightly higher for SPG than PG, and lowest for 10 Using different measures and data sources, Benjamin et al., (2003) also find signs of falling living standards amongst the poorest in rural China in the late 1990s. 11 This is one of the decompositions for poverty measures proposed by Ravallion and Huppi (1991). 9  H. As can be seen from the lower panel of Table 5, the pattern is also similar for the period 1991-2001, the main difference being that the "within-urban" share falls to zero using the old poverty line, with the rural share rising to around 80%. So we find then that 75-80% of the drop in national poverty incidence is accountable for poverty reduction within the rural sector; most of the rest is attributable to urbanization. Understanding what has driven rural poverty reduction is clearly of first-order importance to understanding the country's overall success against poverty. 4. Poverty reduction and economic growth The rate of economic growth is a key proximate determinant of China's diverse performance over time against poverty. The regression coefficient of the log national headcount index on the log national mean is