Reassessment of status and performance of poverty alleviation measures

Zhong, Funing College of Economics &Management, Nanjing Agricultural University 1 Weigang Nanjing 210095, E-mail: [email protected]

Liu, Hua College of Economics &Management, Nanjing Agricultural University 1 Weigang Nanjing 210095, China E-mail: [email protected]

Miao, Qi College of Economics &Management, Nanjing Agricultural University 1 Weigang Nanjing 210095, China E-mail: [email protected]

Abstract This paper tries to compare the appropriateness of various indicators: poverty incidence, poverty depth, and poverty severity, to identify the impacts of various policy measures based on different poverty measures, and to discuss policy implications of with different indicators. Using grouped data, we calculate changes of different poverty measures in rural China since 1985. The results find that different poverty measures have various impacts on values option and the evaluation of policies. Possible policy implication is that some policy to increase farm will reduce the status of poverty, and some policy to increase non-farm income will possibly reduce poverty incidence and make poverty depth and poverty severity serious.

Keywords: income gap, poverty incidence, poverty depth, poverty severity

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. Reassessment of poverty status and performance of poverty alleviation measures

Eradicating and hunger is one of the eight UN Millennium Development Goals (MDGs) agreed by leaders of most countries. This goal calls for reducing by half the proportion of people living on less than a dollar a day by 2015 with 1990 as the base year. According to the Millennium Development Goals Report 2006 (United Nations, 2006), this figure in Eastern Asia had been reduced from 33% in 1990 to 14.1% in 2002, surpassing the goal in both the time and target. There is no doubt that the achievement of poverty alleviation in China has contributed to a great extent to the overall success in this region. However, it does not mean that the poverty-related threat of social instability confronted by China could be neglected; rather, the Chinese government is calling for greater efforts “to build a harmonious socialist ”(CCCCP, 2006) and allocating increasingly more public resources to support measures towards this goal. The major underlying reasons for the current campaign might be (1) the income gaps among regions, sectors, and especially between urban and rural areas are widening despite rapid reduction in the number of people living under extreme poverty; and (2) the common-used criterion in measuring poverty, i.e., the rate of poverty incidence, is not a good indicator of poverty status, at least not sufficient to reveal the true relation between social tension and poverty status. This paper tries to estimate the status of poverty with various indicators: poverty incidence, poverty depth, and poverty severity, to identify the impacts of various policy measures on different poverty indicators, and to discuss policy implications of measuring poverty with different indicators.

The rest of the paper is organized as the follows. Section 1 provides a brief introduction to poverty measures, particularly emphases the signification of poverty incidence, poverty depth, and poverty severity, and discusses the effect of various policy choices on poverty measures. Section 2 estimates the status of poverty in rural China, and tries to explain the different changes of poverty measures. Section 3 presents the main conclusion and the policy implication. I. Poverty Measures and Options of Poverty Reduction Policies A. The Methodology of Poverty Measures Generally as the status of poverty is discussed, people firstly think about poverty head-count ratio, also by the name of poverty incidence (PI). This index mean the number of person below the poverty line divides the number of total person. The index of PI is defined as HC PI = (1) n where HC denotes the number of person below the poverty line, n is the number of total population. This poverty measure only describes the question of “yes or not” poverty. However, the index of poverty incidence does not indicate that some poor persons far from the poverty line are poorer than some poor persons near the poverty line. Too worse, if the government reviews the poverty incidence as the poverty

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. measure, the police of poverty alleviation will be propitious to some poor persons near the poverty line who most easily break away from the poverty. It is “good-looking” for the achievement of the police to help some poor persons near the poverty line. In fact, some poor persons far from the poverty line need more assistance. Another poverty measure is poverty depth to depict the degree of poverty. The formula of poverty depth (PD) is

 Z − x  ∑  x

 Z − x  2 ∑  x

α z  z − x P = f (x)dx α ≥ 0 (4) α ∫  z  0   where x is the income per capital, f(x) is its density (roughly the proportion of the population having income x), z denotes the poverty line, and α is a nonnegative parameter. Ifα=0, 1, and 2, then Pa respectively define the head-count index, the , and the squared poverty gap index. Notice that the FGT class is relative to total population. For example, if α=2, then equation ( 4 ) becomes

 Z − x  ∑  x

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. the quantity of needful resource to eliminate poverty. Considering that this paper aims at measuring the status of poverty, only poverty incidence, poverty depth and poverty severity is used in this study. The first one indicates how large is the proportion of people living under a given poverty line, the second indicates how far is the average income of the poor as a whole below the poverty line (in percentage terms), and the third indicates how uneven is the income distribution among the poor. The index of poverty incidence is easily understandable, as it directly reflects the proportion of beneath-poverty-line population to the total population. It can be compared vertically and horizontally. However, on the condition of the same proportion of poverty population, the status of poverty can be much various. So, two additional indices are needed as complementary. The index of poverty depth figures out the gap between the average income of the whole poverty population and the poverty line. It is propitious to understand the poverty situation of the whole population; however, it can not reveal income distribution within the poverty population. The index of poverty severity calculates the square summation of the gap between poverty population income and the poverty line, that is, it gives different weight to different income level, and lower income is given higher weight. The index of poverty severity reveals the income gap within poverty population. When taking the index of poverty depth into consideration, we can focus our attention on reducing poverty level rather than merely reducing the poverty population. With the index of poverty severity considered, we can be more attracted by the benefits concerns of those lowest-income population groups.

B. Options and Effects of Poverty Reduction Policies The index choice of poverty measures has direct impact on values option and the evaluation of poverty reduction policies. We assume the first policy is that the income distribution curve inwardly circumvolve around the y-axis at the lowest point which is intersecting with y-axis. The first policy induces that the increasing share income of poverty population is positive proportion to their original income level, that is, the higher of original income is corresponding with the more increasing income. The second policy is that the income distribution curve upwardly circumvolve around the x-axis at the cross point with the poverty line, that is, more poor persons will increase more income (See Figure 1). In two extreme cases, the entire public fund is invested to increase the income of the highest income groups near the poverty line (the third policy), the other is invested to increase the income of the lowest income groups far from the poverty line (the fourth policy) (See Figure 2). From Figures 1 and 2, we find that if the index of poverty incidence is used as the standard, the third policy option is the best choice. However, if the index of poverty depth or the index of poverty severity is used to measure the effects, then the third policy is the worst of all. On the other hand, if the index of poverty severity is used as the standard, then the fourth option is the best. As poverty incidence has been used as the sole or dominant indicator in measuring poverty alleviation achievement, with the other two indicators basically used in academic discussions, naturally, most countries and international institutions

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. are focusing their efforts in reducing the number of poverty incidence. As a result, they are usually targeting those living not far below the poverty line in order to maximize the effect of poverty alleviation efforts. However, it is quite likely that the other two indicators may move towards opposite direction as a result, leading to worsened situation for the remaining poor. It is widely acknowledged that social stability is much more relied on income distribution than the absolute level of average income, so the first indicator of poverty may not as important as the other two in linking poverty alleviation efforts to harmonious society, especially when the absolute number of the poor has been greatly reduced.

Policy 1

Per capita income Income distribution curve

Policy 2

Poverty line

Population proportion

Figure 1 Impact of Different Policy Options on Poverty Measures (I)

SBDG is policy option 3 ：the resource are invested in the poorest ； Per capita income SEFH is policy option 4 ：the resource are invested in these closest to the poverty lion E F Income distribution curve

A Poverty line B C G

H D

Population proportion

Figure 2 Impact of Different Policy Options on Poverty Measures ( ⅡⅡⅡ)

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. II. The Status of Poverty in Rural China This section will estimate the poverty measures in rural China and explain the possible cause of different poverty measures. There are some theoretical and practical issues in deciding the poverty line, which will be not discussed in this paper. For the purpose of this study, we simply use the official poverty line of 206 Yuan in 1985 based on a survey of 67,000 rural households about consumption and expenditure in 1986. The poverty lines of other years are adjusted by CPI. For example, the 707 Yuan in 2005 equals to 206 Yuan in 1985. The poverty lines are shown as the last column of Table 1. The data are the grouped and correspondent rural population proportion which come from the China Statistical Yearbook (NSB, various years).

Table 1 Poverty Measures and Poverty Line in China, 1985-2005 Poverty Poverty Poverty Line Year Poverty Depth Incidence Severity (adjusted by CPI ） 1985 13.84 23.89 13.05 206 1986 15.38 23.77 10.11 219 1987 13.86 23.49 9.79 232 1988 15.17 24.28 9.39 273 1989 19.42 26.49 10.86 325 1990 13.39 23.52 8.92 340 1991 14.67 25.84 10.61 348 1992 12.74 25.15 10.16 364 1993 12.62 27.03 11.69 414 1994 10.66 27.41 12.03 511 1995 9.08 27.76 12.61 600 1996 5.74 25.73 11.35 648 1997 5.46 27.51 12.91 664 1998 4.50 27.11 12.86 657 1999 4.46 26.49 12.23 648 2000 5.46 30.53 15.65 647 2001 5.36 31.72 17.36 652 2002 4.79 30.85 16.68 649 2003 5.04 32.71 18.32 660 2004 4.17 32.16 18.11 692 2005 4.01 38.16 24.94 707 Note: All poverty measures have been expressed as percentages. Source: Author’s calculations, with data from NSB. The estimated poverty measures for rural China are shown in Table 1 and Figure 3. We find that during 1985 to 2005 and as a whole, the poverty incidence declined from 13.84% to 4.01%, however, poverty depth and poverty severity have been raised, respectively, from 23.89% to 38.16% and from 13.05% to 24.94%. These numbers make it clear that while the scale of poverty reduced, the degree of poverty and poverty inequality aggravated, especially since 2000. At the same time, we notice that during 1990 to 1996, poverty incidence quickly dropped, and changed slowly in

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. other years. The contrast in measuring poverty status and effect of poverty alleviation with different indicators reveals not only the bias (or preference) of the Chinese government (and most countries as well) in choosing policy alternatives, but also the fact that the great achievement of poverty reduction has basically benefited from general development, with relatively small contribution from specific poverty alleviation measures. The fast growth in the national , especially the fast process of industrialization and urbanization, is likely to benefit rural population with more and better resources including human resources, with those lacking capacity to catch the opportunity left behind.

ratio 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

91 93 95 03 05 1985 1987 1989 19 19 19 1997 1999 2001 20 20 year PI PD PS

Source: Author’s calculations, with data from NSB. Figure 3 Trends of The Poverty Measures, 1985-2005

Statistics show that the income from farm sources has virtually maintained at the same level from the mid-1990s on per capita terms in rural China, while that from off-farm sources continues to increase, surpassing that from farm sources (see Figure 4). It is reasonable to assume that farmers in remote and areas with inadequate human resources are not capable to grasp such opportunities and hence they need more specific poverty alleviation program with necessary support from public funds in order to get out of poverty. In many cases, enhancing agricultural production with public support might be the best measure to improve the living of the rural poorest in less-favored regions.

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. income 1600 1400 1200 1000 800 600 400 200 0

85 87 89 91 93 95 97 01 05 19 19 19 19 19 19 19 1999 20 2003 20 farm income year non-farm income

Source: Author’s calculations, with data from NSB. Figure 4 Trends of Farm Income and Non-farm Income in Rural China

The economic growth and policy affect the poverty measures through non-farm income and farm income. In general, the poor persons with income level near the poverty line are more likely to increase their non-farm income than the poor persons with income far below the poverty line. In this case, poverty incidence will drop with increase in non-farm income, however, on the contrary, poverty depth and poverty severity probably may increase. It is to imply that the policies increasing non-farm income may reduce poverty incidence but increase poverty depth and poverty severity at the same time, while policies increasing farm income may impact all the three poverty measures in the same direction. With the following regression, we try to test the above hypothesis, and to answer the question why there are the different trends of various poverty measures. PI PD PS = α + α Nonfarm income + α farm income + ε ln ( / ) 0 1 ln( _ ) 2 ln( _ ) (6) α α where 1 and 2 denotes the farm income and non-farm income elasticities of the various poverty indices, respectively. Regression results are listed in Table 2.

Table 2 Effects of Income Growth on Poverty Measures

Poverty Poverty Poverty

Incidence Depth Severity Coef. of Ln farm income -0.0998061 -0.2009477 -0.5507383 t of Ln farm income -0.38 -2.22 -2.76 Coef. of Ln non-Farm income -0.471144 0.2307804 0.5424171 t of Ln non-Farm income -2.95 4.19 4.48 R-squared 0.9027 0.7919 0.7608 Source: Author’s calculations, with data from NSB.

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. From the above results, we find that, as for poverty incidence, one percent increase in farm and non-farm income will lead to its decrease by roughly 0.1% and 0.5%, respectively, with the former not statistically significant. Obviously increase in non-farm income has greater impact on reducing poverty incidence. However, for poverty depth and poverty severity, they will drop only when farm income increases, while an increase in non-farm income will lead to increases in both the indices, i.e. an increase in non-farm income may actually worsen the situations among the remaining poor. These results are consistent with our anticipation, and suggesting a re-orientation of the poverty alleviation policy and programs, if harmonious society is to be constructed.

III. Summary and Policy Implications Poverty incidence, poverty depth and poverty severity are the three inter-linked and differentiated indicators of poverty measures. The first index reflects the scale of poverty population, compared with total population in a country or region. The other two indexes reveal the status of poverty population, in terms of average level of poverty in relation to poverty line, and income distribution among the poverty population, respectively. A government may choose poverty alleviation measures based on its preference. It is quite possible to increase poverty depth and poverty severity by adopting some policies aimed at reducing poverty incidence. This raises a question regarding poverty measurement itself as which one is more appropriate and desirable. The study also reveals that the great achievement of poverty reduction in China since 1980s has basically benefited from general development, and basically based on poverty incidence alone. Changing the criteria in measuring poverty will certainly lead to re-evaluation of the performance of existing poverty alleviation programs. In accordance with social objective in building a harmonious society, it is preferred to add the other two poverty measures, and to re-orientate the policy goals by targeting the poorest. The fast process of industrialization and urbanization provide great opportunity for rural labor force, especially for persons who have more human capital. In fact, the income level of these people is near the poverty line. That is why poverty incidence quickly reduces following the fast general economic growth. Economic growth and the relative free labor have contributed to reduction in poverty population to a large extent. However, when poverty incidence reach to some lower extent, the problem of inequality within the poverty population become more serious. Therefore, we especially shall pay attention to poverty depth and poverty severity. We prove that some policy to increase farm income will improve the status of poverty, and some policy to increase non-farm income will possibly reduce poverty incidence but increase poverty depth and poverty severity at the same time. Under current situations the government and the public may be satisfied with the delusive signals of success as indicated by the significant reduction in poverty incidence and the linkage between general development and poverty alleviation. If they continue the current policy, the potential tension may accumulate to a dangerous

Please purchase PDF Split-Merge on www.verypdf.com to remove this watermark. level, leading to an eventual social and economic disorder. Changing the criteria in measuring the status of poverty and evaluating performance of poverty alleviation programs might lead to a new perception of poverty. In turn, re-orientation of policy goals and re-formation of poverty alleviation programs might be induced to target the poorest. Such a change in poverty reduction strategy is likely to contribute not only to helping the poorest but also to the building of a harmonious society.

References CCCCP (Central Committee of the Communist Party of China). The resolution on important issues in building harmonious socialist society. Passed by the 6 th Plenary Session of the 16 th Central Committee of the Communist Party of China on Oct. 11, 2006 in Beijing. Datt, Gaurav. Computational Tools for Poverty Measurement and Analysis. October 1998, FCND Discussion papers. Miao, Qi and Funing Zhong. Changing situation of rural poverty and orientation of rural poverty reduction policy in China. A paper presented at the International Conference on Poverty Reduction Strategy in the New Millennium, May 23-24, 2006, Beijing. NSB (National Statistical Bureau). China Statistical Yearbook, various issues. Beijing: China Statistics Press. United Nations. The Millennium Development Goals Report 2006. New York: the United Nations, 2006.

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