Working Paper No. 60 China's War on Poverty
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Working Paper No. 60 China’s War on Poverty by Scott Rozelle* Linxiu Zhang,** Jikun Huang*** August 2000 Stanford University John A. and Cynthia Fry Gunn Building 366 Galvez Street | Stanford, CA | 94305-6015 * Professor Scott Rozelle, Department of Economics, University of California, Davis ** Associate Professor, Deputy Director, Center for Chinese Agricultural Policy, Chinese Academy of Agricultural Sciences, Beijing *** Professor, Director, Center for Chinese Agricultural Policy, Chinese Academy of Agricultural Sciences, Beijing China’s War on Poverty By Scott Rozelle Department of Agricultural and Resource Economics University of California, Davis Linxiu Zhang Center for Chinese Agricultural Policy Chinese Academy of Agricultural Sciences, Beijing Jikun Huang Center for Chinese Agricultural Policy Chinese Academy of Agricultural Sciences, Beijing 1 Abstract China’s poverty reduction in the past two decades has been impressive; but the effectiveness of its poverty alleviation programs still needs to be studied. In doing so, this paper reviews the development of China’s policies towards poor area over twenty years, emphasizing how investment funds have been allocated under poverty alleviation programs. Through simple econometric analysis, we discover that poverty alleviation can be largely attributed to economic growth, and the effectiveness of the poverty programs has been limited by problems related to targeting, project design and inefficient fund allocation. We also find that household-based projects and funds that directly reach the local agencies have contributed the most to the success of such programs. Finally, the paper advocates a different strategy for poverty alleviation that focuses on investment in human capital. 2 Introduction Few observers deny that China has made remarkable progress in its war on poverty since the launching of economic reform in the late 1970s. According to China’s and international statistics, during the two decades of reform more than 200 million Chinese rural residents have escaped poverty (World Bank, 1999). The incidence of rural poverty has fallen equally fast. But while most agree with the scope of the fall in poverty, the reasons for the decline in the rural poor are less understood. Understanding the determinants of success in poverty alleviation and the growth of the economy in poor rural areas is important beyond its academic interest since there are 50 to 120 million people living below the nation’s poverty line. Is the reduction in poverty due more to the growth of the rest of the economy and the success that poor areas have enjoyed in linking themselves to China’s robust economy? Or, should credit be given to the nation’s poverty program? In assessing the record of poverty investments, other questions arise: Have the nation’s poverty investments been targeted effectively? Have funds that have been invested positively affected growth? Answers to these questions are important in designing policies to alleviate China’s remaining poverty. In this paper, we will attempt to answer some of these questions as a way of providing information to policy makers that can help guide their future decisions affecting poverty alleviation. To meet this overall goal, we will pursue several specific objectives. First, we briefly describe China’s poor area policy and examine how China’s leaders have invested the funds of one of the developing world’s largest poverty alleviation programs. Second, we seek to provide a detailed examination of the record on poverty alleviation. Finally, we attempt to assess how much of the fall in poverty is from the nation’s poverty policy, centering our attention on issues of targeting and program growth effects. To narrow the focus of such an ambitious set of objectives and to reduce the amount of data needed to examine some of these questions, we necessarily restrict the scope of our analysis. For example, we focus primarily on rural poverty. Although urban poverty is a new, and perhaps increasing, phenomenon, it is still small relative to rural poverty in terms of both headcount and severity. In this paper, we also focus primarily on the plight of the poor in China’s officially designated poor areas. In the analytical part of the paper, we examine how well China’s leaders choose the counties for inclusion in the national poverty program, but to the extent that there are poor individuals or families in non-poor counties, it is difficult with China’s data to study this aspect of poverty. Fortunately, many of those inside and outside of China who have worked extensively in poor areas believe that most of China’s poor indeed live in officially-designated 3 poor areas (Piazza and Liang, 1997). We also examine poverty mainly on the basis of an income metric. While there is not a one to one correspondence between income and other measures of human welfare, Wang and Zhang (1999) and the World Bank (1999) show that there is a fairly high degree of correlation between areas with low income and those that do poorly on measures such as illiteracy, infant mortality, etc. Finally, in some cases we restrict our attention to specific provinces and study poverty mostly with more aggregate data at the county level. Specifically, for examining targeting and the determinants of growth, we use data from two poor provinces in western China, Sichuan and Shaanxi. Looking at only a subset of China’s poor regions necessarily means that idiosyncratic, provincial-specific policies and economic traits of the two provinces should be considered before attributing the findings to the rest of 0China. But, Sichuan and Shaanxi provinces are large and diverse provinces, with a combined population of about 180 million people, and their territories include vast areas of mountains and drought-prone plains that typify poverty in China. The World Bank’s recent poverty report (1999) identifies the depth of poverty in these areas as particularly severe. To this extent, we can consider the results drawn from these two provinces as being representative. Moreover, although there are some rich studies that have come out using household data (e.g., Ravallion, 1999), the data only go through the late 1980s. Since the data were collected without regard to China’s poverty policies, nothing is known about the participation of the households in any of the poverty programs, greatly restricting the ability to draw any conclusions about the effectiveness of policy. Our aggregate data provide longer time series and allow us to match performance indicators with policy program participation. Poor Area Policy While the Chinese leaders had not formulated an explicit national policy on poverty alleviation prior to 1986, this did not mean that the rural poor did not receive special attention. With little to lose given the marginal contribution of poor areas to the overall economy, reformers permitted communes in poor areas to decollectivize earlier than in other areas (as early as the late 1970s). The central government was already subsidizing poor areas, both through direct budgetary transfers (Park et al., 1996) and through subsidized grain sales and other assistance to farmers in need (Park, Rozelle, and Cai, 1994). With fiscal decentralization and increasing scarcity of budgetary resources, however, these forms of support were reduced over time.1 Market reforms led to widespread increases in production specialization, yields, and income (Weersink and Rozelle, 1997). These changes helped many escape poverty, especially those in 4 central and coastal China that had been hurt most by grain-first policies because they lived in areas not well-suited for grain production (Lardy, 1983). In the mid-1980s, leaders decided that redressing poverty of resource-poor households living in remote, isolated regions required more than favorable macro-economic conditions and decentralized decision-making (State Council, 1989a to 1989e; 1991). A special poverty alleviation task force, the Leading Group for Economic Development in Poor Areas (the Leading Group or LGEDPA) would be set up to oversee the new war on poverty. The task force would focus its efforts on counties that would be designated as officially “poor.” National and provincial leaders would allocate resources from their budgets, and direct banks to make loans to poor areas from special funds set up for poverty alleviation. In the rest of this section, we describe the process of poor county selection and examine the main poverty alleviation programs. Poor Area Selection When the government decided to set up a large-scale poverty alleviation plan in 1986, a standard was necessary for determining which counties would receive the specially allocated funds (Park et al., 1998). The Leading Group initially adopted a mixed set of poverty lines to choose poor counties. The basic standard for selecting nationally designated poor counties was net income per capita below 150 yuan in 1985 yuan. However, a higher poverty line was applied to counties in old revolutionary base areas and counties with large minority populations. For some counties in important revolutionary base areas and for several minority counties in Inner Mongolia, Xinjiang, and Qinghai, the poverty line was raised to as high as 300 yuan. Three hundred poor counties were chosen as counties to be supported by national poverty programs based on these standards, which used 1985 State Statistical Bureau data. In 1988, 37 pastoral counties were added (Tong et al., 1994). Some 370 additional counties also were designated for provincial government support in 1986. By 1988, the Leading Group and its provincial counterparts were running a program targeting 698 counties (about 1/3 of China’s counties). In the 1980s, aside from those in counties under special military administration, most of China’s poor lived among the more than 200 million residents who resided in officially designated poor counties (Piazza and Liang, 1997). These poor counties were distributed across 23 of China’s 27 provinces, but 78 percent of them were concentrated to the west of a north-south line that runs through the central mountainous parts of the country from Heilongjiang, Gansu, and Inner Mongolia in the north to Guangxi and Yunnan in the south.