The forthcoming World Bank Poverty Assessment finds that in recent years China has continued to reduce poverty on an impressive scale. The poverty rate according to the Bank's $1 per day consumption line (measured at internationally comparable prices) declined from 16 percent of the population in 2001 to 10 percent in 2004, a decline of one-third in three years. In other words, more than 60 million people were lifted out of poverty in three years alone. The official poverty line in China, which is set at a much lower level of consumption and income, also showed declining poverty between 2001 and 2004.  Most of the poor still live in the rural areas, but the Poverty Assessment finds that more than half of the poor live outside the officially designated poor areas. 

China's poverty reduction has been a big part of global poverty reduction. Between 1990 and 2002, the latest year for which global poverty numbers are available, China reduced poverty by 195 million people according to the $1 per day consumption standard.  This was more than ninety percent of global poverty reduction, which amounted to 207 million people. China's share is so high in part because regions such as Sub-Saharan Africa experienced an increase in poverty. China’s share in poverty reduction far outweighs its share of global growth, which was about 28 percent between 1990 and 2005 at internationally comparable prices.

China’s impressive growth has been an important driver of poverty reduction, but not everybody has equally benefited from this growth. Incomes of people with lower incomes have risen less than incomes of those with higher incomes. As a result, income inequality went up. Income inequality between urban and rural areas and coastal and inland provinces has gone up, as has income inequality within urban areas and within rural areas.  If corrected for price differences among various localities, income inequality has increased by less, because on average prices have gone up by less in those areas where income growth was less. 

Rising income inequality has in part been the result of desirable developments: (i) reforms have created the incentives for people to better their lives, which was needed to increase growth in the economy as a whole; (ii) skills have been increasingly rewarded according to market principles rather than administrative decree; and (iii) China’s opening up has meant that some high-skilled Chinese citizens are now rewarded at internationally prevailing wages.  Income inequality also increased because benefits that were given in-kind in the past (such as housing) are now part of people’s salary.

Preliminary findings suggest that at the very bottom of the income distribution, incomes have experienced a slight decline during the period 2001-3. China’s household surveys suggest that average real income of households in the lowest 10 percent of the income distribution declined by 2.4 percent, whereas all other income groups experienced a gain in income. As noted above, the poverty rate has continued to fall in China, so many of the poor still gained in income. Measures such as the rural tax and fee reforms implemented since then may well have reversed this trend: in 2003, the poorest 10 percent paid almost 6 percent of their income in fees and agricultural taxes, which are now abolished. It is also important to note that the people in poverty in 2003 were not all the same as the people in poverty in 2001. The findings only report on average income of the lowest 10 percent of the income distribution in two years, and they do not track individual households between these years. Some households that were in the bottom 10 percent in 2001 likely escaped poverty by 2003, whereas others may have fallen back into poverty. The initial findings from the Poverty Assessment suggests that over 2001-4, there was considerable movement in and out of poverty: about 70 percent of the poor as measured by income were temporarily poor because an income shock, such as layoff, injury, ill health, or crop failure had pushed them into poverty.

The preliminary policy implications are that overall growth continues to provide a good environment for improving lives of the poor. However, the findings suggest that, as in other countries, there are poor people in China who will not escape poverty by growth alone, for instance because they lack human capital or, to a lesser extend, are disabled or too old to work. The share of these people among the poor is likely to rise as poverty declines, and thus it is becoming harder to reduce poverty as the poverty rate declines.  The finding that many of the remaining poor people are not living in designated poor areas means that those people are not lifted out of poverty by supporting growth in poor areas alone. Therefore, the government’s initiatives to reinforce policies targeted at individuals households (such as Dibao, Rural Dibao, education subsidies for the poor) as well as policies that reduce the effects of temporary income shocks (unemployment, health and crop insurance) will gain in importance as the country strives for the Harmonious Society. The World Bank is supporting several of these initiatives, including through a rural health project, and research on improving Dibao, pensions, unemployment insurance and agricultural insurance.

(China Development Gateway December 1, 2006)