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UNU-WIDER Redefining Poverty in China and India: What Does This Mean for the Fight Against Global Poverty? Part 1

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A teenager wears torn rubber boots in a muddy local market in Bac Ha, Viet Nam. As of 2005 figures, half the world population—more than 3 billion people–is estimated to live on less than USD 2.50 a day. Bac Ha, Viet Nam. UN Photo/Kibae Park.

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Redefining Poverty in China and India: What Does This Mean for the Fight Against Global Poverty? Part I

Tony Addison and Miguel Niño-Zarazúa

China and India are making immense strides in development. Growth in both countries has been impressive. But there is now much concern about whether impressive growth rates are yielding enough poverty reduction. The present debate about their poverty lines is a reflection of this. In this first part of a two-part article, we consider the definition of the poverty line in China and India. Part 2, in next month’s Angle, focuses on the key challenges facing these two Asian giants.

The last two decades have seen a big fall in the number of people living on less than US$1.25 a day, the World Bank’s international poverty threshold—down from 1.9 billion in 1990 to 1.4 billion in 2005. By this measure, the global poverty rate fell from 42% in 1990 to 25% in 2005, and it may yet fall to 15% by 2015, or 900 million people.

However, US$1.25 does represent a very low standard of living. Those below it are in extreme deprivation, and many people above this threshold would regard themselves as being poor. 

Two big countries, China and India, account for much of this fall in the number of people below the US$1.25 threshold. But despite their progress, both countries are still marked by deep poverty. In both China and India, the debate on poverty—and specifically the poverty line to be used—has recently intensified. Poverty measures have always been a source of controversy, as there is no general consensus about the conceptual and methodologies approaches used to construct poverty lines. The present debate in both countries illustrates this vividly.

India’s poverty line

In September 2011, the Indian Planning Commission presented new estimates for the country’s poverty lines in urban and rural areas, setting these thresholds at 965 and 781 rupees per capita per month (or about 32 and 26 rupees per capita per day), respectively.

Since the early 1990s, India’s official poverty estimates have been made on the basis of the methodology recommended by the Lakdawala Committee established in 1993. These poverty lines are based on per capita consumption levels associated with a commodity bundle that yielded a specified level of caloric intake believed in 1973-74 to be appropriate for rural and urban areas (2,400 and 2,100 kilocalories per capita per day for the rural and urban areas, respectively).

More recently, in December 2005, the Planning Commission appointed a Committee chaired by Suresh Tendulkar to review the Lakdawala poverty lines. In 2009, the Tendulkar Committee concluded that some changes were necessary, and recommended to locate the poverty line in the consumption levels observed in the 2004-05 National Sample Survey (NSS), after correcting for the rural–urban price differential.

The new estimates increased the poverty headcount ratio for rural areas from 28.3% using the 1993 methodology to nearly 42% using the Tendulkar methodology, which is very close to figures reported using the World Bank’s US$1.25 per day poverty line (see Table 1). The new poverty estimates show that more than 327 million Indians living in rural areas are in poverty, an increase of 105 million people in absolute terms.Table 1: India’s poverty headcount ratios. 1 Government of India Planning Commission (2011) Press Note on Poverty Estimates. 2 World Bank’s PovCalNet database. 

Three critical issues in India’s poverty line

At the centre of the most recent discussions are three critical issues. First, the Tendulkar Committee reported an observed calorie intake of 1,999 and 1,776 kilocalories per day for those near the new poverty line in rural and urban areas, respectively. These levels of calorie intake are regarded as low relative to the minimum dietary energy requirement recommended in the Report of a joint Food and Agricultural Organization-United Nations University-World Health Organisation Expert Consultation published in 2004. Second, the new methodology did not consider the possibility of changes in consumer preferences, which means that the commodity bundle of 1973-74 does not now capture the current pattern of consumption in India. Third, differential rates of inflation for food and non-food items were not taken into account.

The new poverty line has also caused an intense debate in political circles to the extent that the Planning Commission and the Ministry of Rural Development had to state that a socio-economic and caste-economic census was underway to revise the existing poverty lines, although the Tendulkar poverty line will remain as a reference point for eligibility for the subsidized food and other social protection programmes.

China’s poverty line

China has been very successful in reducing extreme deprivation, as is evident from Figure 1. In the early 1980s, 94% of China’s rural population, and 44.5% of the urban population lived on less than US$1.25 a day. By 2005, the percentage of people in poverty had fallen to 26% in rural areas, and to 1.7% in urban areas. This represents a fall of 627 million people in poverty, from 835 million in 1981, to 207.7 million in 2005. Remarkably, the fall in the number of China’s poor exceeds the number still living in poverty in sub-Saharan Africa (about 388 million people) and Latin America (47.6 million people).

Figure 1. Headcount Index (US $1.25 a day)
Source: World Bank’s PovCalNet database

 
However, China has not been exempt from controversy in the way it measures poverty despite the fact that the country has lifted the poverty line on several occasions since the late 1970s, when the country embarked on market-based reforms.

China’s official poverty lines have been derived based on a bundle of items dominated by food grains that have neither been updated adequately to reflect changes in consumption patterns, nor adjusted to take into account inflationary trends in both food and non-food items. The result was one of the lowest rural poverty lines in the developing world. In December 2011, the Chinese government announced it would lift the country’s rural poverty line from 1,274 yuan per year in 2010 to 2,300 yuan, an increase of over 80%. This, once adjusted by the purchasing power parity of 2005, is equivalent to approximately US$1.80 per day, a threshold well above the US$1.25 used by the World Bank for international poverty comparisons.

Why is it important to redefine poverty lines in China and India?

The present debate and action on redefining the poverty lines of China and India is significant for at least two reasons. First, it signals a policy shift from ‘trickle down’ economics that emphasizes growth pure and simple, towards the notion of inclusive or pro-poor growth. Second, by lifting the official poverty lines, the two countries have increased in principle the number of people that are eligible to receive support from social protection policies. If social protection programmes in the two countries prove to be effective in facilitating poverty exit, this could lead to a significant reduction in global poverty, even if less progress is made in sub-Saharan Africa, Latin America, and the rest of East and South Asia. However, the two giants face important challenges in that process, and we return to the policy issues in the second part of this Angle article next month.

Tony Addison is Chief Economist-Deputy Director, UNU-WIDER.

Miguel Niño-Zarazúa is a Research Fellow, UNU-WIDER.

Part 2 of this article follows in WIDER Angle February 2012.

WIDER Angle newsletter
January 2012
ISSN 1238-9544

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