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Consumption and Income Poverty in Rural China: 1995–2018 Yanfeng Chen, Qingjie Xia, Xiaolin Wang*

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Consumption and Income Poverty in Rural China: 1995–2018 Yanfeng Chen, Qingjie Xia, Xiaolin Wang* China & World Economy / 63–88, Vol. 29, No. 4, 2021 63 Consumption and Income Poverty in Rural China: 1995–2018 Yanfeng Chen, Qingjie Xia, Xiaolin Wang* Abstract This paper studies consumption and income poverty in rural China during the period from 1995 to 2018 using Chinese Household Income Project (CHIP) data. It fi nds that the wellbeing of Chinese rural residents has improved signifi cantly during this period as part of China’s rapid industrialization and economic growth. The incidence of poverty has fallen substantially, either measured in terms of income or consumption. However, consumption poverty is not consistent with income poverty. It was the substantial growth of consumption or income that brought about the sharp fall in poverty, whereas the redistribution of consumption or income in particular during the period from 2002 to 2018 was unfavorable for poverty reduction. A large number of rural household workers moved away from household farming to participate in local or urban non-farming activities, resulting in a fall in poverty in the households that engaged purely in farming, and economic growth led to a sharp fall in poverty within different rural household groups. Key words: consumption poverty, economic growth, income poverty, rural China JEL codes: D60, I32, R00 I. Introduction The concept of poverty has been evolving. Rowntree (1901) argued that poverty is generally defined as consumption or income poverty. In the late 1970s, Sen (1979a) argued that poverty is largely caused by the deprivation of personal “capabilities” such as health and education. At the turn of millennium, Alkire and Foster (2007, 2011) proposed a multi-dimensional poverty measurement based on Sen’s “capability” *Yanfeng Chen, Post-doctoral Researcher, National School of Development, Peking University, China. Email: [email protected]; Qingjie Xia (corresponding author), Professor, School of Economics and Institute of South–South Cooperation and Development, Peking University, China. Email: [email protected]; Xiaolin Wang, Professor, Institute of Six-sector Industries, Fudan University, China. Email: wangxiaolin@ fudan.edu.cn. This paper was funded by the Major Research Project of National Social Sciences Foundation of China (Nos. 19ZDA051 and 18ZDA080). ©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences 64 Yanfeng Chen et al. / 63–88, Vol. 29, No. 4, 2021 approach. In its “rooting-out poverty campaign,” implemented since 2014, the Chinese government has adopted a simplified multidimensional poverty standard, i.e. that the people should not worry about food and clothing, and should have “three guarantees” – 9 years’ compulsory education for children and youth of school age, basic medical care, and housing safety. By their definition of income poverty, a total of about 800 million poor people have been lifted out of poverty in China over the last 40 years since the country’s reform and opening up (Xian et al., 2016; Ryder, 2017). In this paper, we intend to verify this argument by examining consumption poverty against income poverty in rural China (because Khan (1998) argued that poverty is largely a rural phenomenon in China). Regarding consumption and income poverty, Sen (1979b) pointed out that the former should be classifi ed as direct and the latter as indirect indicators. Consumption poverty identifi es those whose actual consumption fails to meet their minimum needs, while the income method identifies those who do not have the ability to meet these needs. Consumption, relative to income or wealth, is more accurate in revealing people’s real economic well-being (Deaton, 1997; Johnson, 2004), reflecting the material resources that people own more comprehensively and a family’s resources other than money, such as their level of education, health care, housing, private cars, and social security (Meyer and Sullivan, 2011, 2012, 2013). Cutler and Katz (1992) argued that income, which often fl uctuates, is easily affected by temporary shocks and is prone to measurement errors. By contrast, consumption is not only more stable than income but can also be measured more easily. Finally, consumption is also a common indicator for the study of poverty and inequality in developing countries. The World Bank defines those living on US$1.90 a day, based on purchasing power parity (PPP) for the year 2011, as extremely poor, which is also based on consumption (Ferreira et al., 2016). Many scholars therefore believe that consumption may be a better way to measure poverty (e.g. Jorgenson and Slesnick, 1987; Cutler and Katz, 1991; Slesnick, 1993, 1994, 2001; Jorgenson and Dale, 1998). To investigate the argument that 800 million people have been lifted out of poverty since the late 1970s in China, we employ the 1995, 2002, 2013, and 2018 four-round Chinese Household Income Project (CHIP) rural household survey data. Apart from providing thorough household income information, CHIP data also offered household consumption expenditure in eight categories as defined by the National Bureau of Statistics (NBS). Before examining poverty in rural China we explored the changes in rural households’ income and consumption, and their distribution. The income per capita and consumption per capita of Chinese rural households rose signifi cantly for the period from 1995 to 2018, although their corresponding annual growth rates were much ©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences Consumption and Income Poverty in Rural China 65 lower than those of GDP per capita and national consumption per capita in that order. Income inequality also increased signifi cantly during this period. With this information, and according to the Chinese government’s official poverty line, we calculated the poverty headcount for consumption and income in rural China. It is interesting that the consumption poverty rate was higher than that of income for the years 1995 and 2002, but the former is almost negligible and lower than the latter for the years 2013 and 2018. Given this result, we used the non-parametric decomposition method described by Datt and Ravallion (1992) on the CHIP rural data and found that economic growth and industrialization (expressed as rural–urban migration) contributed to the dramatic fall in poverty. The remainder of this paper is as follows. Section II is a literature review. Section III introduces the data, poverty measurement methods, and other research methods used in this paper. Section IV introduces and analyses the changes in the household consumption poverty of rural China during the period from 1995 to 2018, and compares the difference between income poverty and consumption poverty on this basis. Section V provides a non-parametric decomposition of rural absolute poverty rate, and analyzes the effects of growth and redistribution factors on poverty reduction. Section VI concludes this paper. II. Literature review There are several studies on consumption poverty. Pendakur (2001) found that, during the period from 1969 to 1998, consumption poverty in Canada “fi rst declined and then rose,” in a way that was different from income poverty and its changes. Norris and Pendakur (2013) found that during the period from 1997 to 2009, the overall poverty and child poverty by consumption in Canada substantially reduced, but poverty of the elderly was hardly improved. Menchini and Redmond (2009) studied the problem of child poverty in 19 countries of the Commonwealth of Independent States and South Eastern Europe, and found that the countries with the lowest income and highest child population density had the highest rate of absolute consumption poverty. The relative consumption poverty rate of children was higher in the countries with higher national income. Rathnayake and Gunaratne (2006) used comprehensive data from Sri Lanka to create a set of composite indices based on weighted principal component factor analysis to measure consumption poverty. They found that the traditional methods, which are based on direct aggregation of various consumption components, overestimate poverty in some situations. Gunewardena (2007) found that the consumption poverty rate of Sri Lanka declined during the period from 1985 to 2002, but the decline was neither obvious nor stable, and economic growth and income redistribution had an important impact on ©2021 Institute of World Economics and Politics, Chinese Academy of Social Sciences 66 Yanfeng Chen et al. / 63–88, Vol. 29, No. 4, 2021 the poverty. Sumarto et al. (2007) used Indonesian data (2004) for analysis and found that consumption-related models had the best performance in predicting the expenditure and poverty. Bavier (2008) found that the income poverty rates and trends are similar to the rates and trends of consumption poverty, especially, at the bottom of the income or consumption distribution, there is no “huge deviation” between income poverty and consumption poverty. Meyer a nd Sullivan (2012) discovered that a consumption poverty index played a better role in identifying the most vulnerable groups and the trends characterizing their poverty than the offi cial poverty and auxiliary poverty indicators. McKay (2015) used three comparable high-quality household surveys to analyze trends in consumption poverty in Rwanda during the period from 2001 to 2010, and found that, in the fi rst half of this period, the consumption poverty rate declined slowly and inequality increased; in the latter half of this period, however, consumption increased rapidly,
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