For simulation purposes, we deliberately make a pessimistic assumption on income growth in rural China. It is assumed that rural per capita income grows by only half of the predicted rate, or 1.512%. This low growth rate might be plausible because of some unforeseen factors. For instance, if China fails to double its GDP in the next decade, or if rising urban–rural inequality that works further to the detriment of the rural population, rural income growth will slow down. Low growth of rural income is not unprecedented in the reform period. After a short period of rapid growth in 1978–1985, rural income grew less than 1% per year in the period 1986 to 1994.
For each estimate of per capita mean income growth, we can derive a corresponding growth rate of the Gini coefficient through multiplying the income growth rate by the elasticity of Gini coefficient with respect to income. By doing so, it is assumed that the change in the Gini coefficient will follow the historical trend of the relationship between inequality and income growth in 1978–1994. Rural China used to be a rather egalitarian society before economic reforms so that the Gini coefficient in 1978 was quite low (.21). Rapid income growth under economic reforms was associated with a rapid increase in inequality. By 1990, the Gini coefficient was .38. It increased particularly rapidly in the 1990s, reaching .46 by 1998 (see below). If the Gini coefficient continues to grow as quickly in the next 15 years as it did in the past 20 years, rural China will become one of the least egalitarian societies in the world.
On the other hand, once the value of the Gini coefficient rises up to a certain high level, further income growth may not lead to a further rise in the Gini coefficient. Particularly, if government policy is going to become propoor and various methods are deployed to check inequality from rising, it is possible to have income growth without worsening income distribution. This scenario, however, seems unlikely for the immediate future in rural China.
Consequently, we still think that inequality will continue to rise as income grows.
Based on the above discussion, we propose four simulation scenarios for the prediction of poverty from 1990 to 2015. The scenarios and their underlying assumptions are given in Table 6.
The summary results of simulations are provided in Table 7. The detailed simulations by year are not presented but available on request.
Table 6
Scenarios of poverty prediction and their assumptions (rural China)
Scenario 1 is based on an optimistic assumption of income growth at 3.024% and a low inequality growth. The predicted poverty incidence will be reduced by 69%. By the end of the study period, the poverty headcount rate will be 7.7% with a poor population of 79 million people. The Gini coefficient will rise to .57.
Table 7
Simulation outcomes on poverty reduction from 1990 to 2015 (poverty is measured by the high poverty line)
Scenario 2 is also based on an optimistic assumption of income growth but it is
combined with a high inequality growth. This scenario predicts that the incidence of poverty will be reduced by 61%. By the end of the data period, the poor population will be 99 million people and the Gini coefficient will rise to .62.
Scenario 3 is based on a pessimistic assumption of income growth at 1.512% and a low inequality growth. Under this scenario, the incidence of poverty will be exactly halved by the end of the data period, with a poor population of 128 million people. The Gini coefficient will rise to .51.
Scenario 4 is based on the same assumption of income growth but with a high
inequality growth. It predicts that the incidence of poverty will be reduced by 43% and the Gini coefficient will rise to .54.
In summary, in all the scenarios except Scenario 4, China is able to achieve the set target of halving its poor population by the year 2015. In both the high growth scenarios, the set target of poverty reduction is easily achieved. In the low-income scenarios, the target is just achieved or cannot be achieved. It can be concluded that income growth is still a necessary condition for poverty reduction irrespective of the level of inequality. However, inequality is important for poverty reduction for any level of income growth. With a slower inequality growth, poverty can be reduced much faster.
In all the four scenarios, even the optimistic assumption on income growth is not too optimistic as China has achieved a much higher growth in the past two decades. The pessimistic assumption on income growth can be too pessimistic, as we assume that future income growth is only half the rate required to achieve the economic plan. Yet, even under the pessimistic assumption of income growth, China can still manage to cut its poverty population in 2015 if inequality growth is not high.
On the other hand, even the most optimistic scenario predicts that China will still have a large number of rural poor in 15 years time. This means that the battle against poverty is far from over and the process may be lengthy and painful in the years ahead.
6. Conclusions and policy implications
Before we draw any conclusions, it is necessary to point out a few limitations on the data and the approaches adopted to analyse and estimate poverty. The first limitation is that we are unable to derive comparable poverty lines for both the urban and rural sectors. Hence, a direct comparison of urban and rural poverty incidences is inconclusive, although it is possible to prove that rural poverty is far more serious than urban poverty.
Another limitation is that we are unable to derive regional poverty lines for the rural population. As a result, the estimated incidence of poverty may have been understated in the high-income provinces but overstated in the low-income regions.
A third limitation is that the prediction of poverty in the future is based on a set of arbitrary assumptions. If any of these assumptions proves to be unrealistic, the predicted results will be rendered unreliable.
Despite these limitations, this paper provides a lot of useful information unavailable from any previous study on poverty in China as it uses by far the largest data sets available to researchers outside the state statistical authority. A few important conclusions can be drawn from the results.
First, the incidence of poverty in China is far greater than the most recent government estimates. The government aimed to eliminate absolute poverty by the year 2000 in the late 1980s. The estimates in this paper suggest that the rural sector alone had a poor population of between 103 and 187 million people. The lower estimate is four times the official figure and the higher estimate is six times. The huge discrepancy between the estimates in this paper and the official figures implied that poverty in China was far from being eliminated by the year 2000. In fact, poverty reduction is fragile between years. Despite a significant increase in per capita average income, the incidence of rural poverty rose by over 2 percentage points from 1995 to 1998 if it is measured by a low poverty line, but declined by over 2 percentage points if it is measured by a high poverty line. The fluctuation in the incidence of poverty has a number of serious implications. It indicates that poverty reduction is not guaranteed by income growth alone. The benefits of increased income may be over offset by the negative effects of more inequality. It also implies that a large proportion of low-income people are clustered near the defined poverty line so that some people may be considered nonpoor in one year but fall into poverty in another. This is the so-called transient poverty in the literature (Jalan & Ravallion, 1998). Transient poverty is mainly caused by the fluctuation in per capita income. Rural incomes are influenced by a variety of factors. For example, a flood, a drought, or illness of family members can have such a detrimental effect on household incomes that make nonpoor households become poor in a short period of time. The vulnerable people are usually in the low-income groups who have little capital assets (or savings) to withstand any short-term reduction in incomes without falling into poverty.
Second, the slow process of poverty reduction in China is not due to the lack of
income growth, but due to rising income inequality. China used to be a rather egalitarian society in both the urban and rural sectors before economic reforms. Since economic reforms, inequality increases almost continuously over time. Rising inequality may be an inevitable outcome of high economic growth in the early stage of development, but international experiences suggest that inequality is not a necessary condition for successful economic performance.
Third, inequality in China has some features different from those of other developing countries:
unusually high urban–rural income inequality,
unusually high interregional inequality,
nonagricultural income dominates rural income inequality.
Fourth, although there is significant evidence of urban poverty, the incidence of povertyin the urban sector is still relatively little compared to rural poverty. Hence, poverty in China is still predominantly a rural problem, but it does not mean that urban poverty should be ignored, particularly the poverty caused by rising unemployment and rural-tourban migration.
The conclusions drawn from this paper have important policy implications on poverty reduction. First of all, the fight against poverty should still focus on the rural sector, but sufficient attention should be given to the issues of unemployment and social security in the cities. Secondly, poverty reductio should not just rely on income growth, but on the reduction of inequality as well. Since inequality is a multidimensional issue, reducing inequality should also use a multidimensional approach.
Only when China is serious in tackling every aspect of inequality can it be possible to develop a sustainable basis for continuing reduction of poverty. The government can do a lot of things to help the poor. Apart from allocating more resources to the poverty alleviation programme, it is more important to use these funds more effectively. Some funds can be used for short-term purposes, but the majority of funds should be used to invest in long-term projects, such as education, health care, microfinance, transportation, and telecommunications. Compared to many other developing countries, China has achieved a great deal in all kinds of poverty reduction efforts, but there are still large room for improvement. What is more important is that the government should not be complacent about the seriousness of poverty and the difficulty in reducing it.
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