Redefining Poverty in China and India

Making Growth more Inclusive, Part 2

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 second part of a two-part article (first part featured in January’s Angle), we focus on more inclusive growth in these two Asian giants.

India and, especially, China have enjoyed rapid economic growth, with a median growth rate of 6% and 10% in the 1980-2010 period, respectively. This has catapulted the impressive growth in per capita gross national income (GNI) in the two countries: in 1980, the GNI per capita based on purchasing power parity (PPP) was in the order of US$430 in India and US$250 in China. By 2010, the two countries had increased their per capita income up to US$3,560 and US$7,570, respectively. The high growth rates in China are largely explained by the high gross capital formation over the past 30 years, which as a percentage of GDP fluctuated around the median of 38%, vis-à-vis 24% in India, although the investment gap between the two countries has narrowed in recent years.

A significant part of the domestic investment in China, about 20% of GDP, has gone to infrastructure projects, which is nearly 10 times more than the share of GDP invested in infrastructure in India. That has facilitated the accelerated rate at which the Chinese economy has transited form agricultural to manufacturing production. In India, the transition has been towards the IT off-shore service industry with as much as 60% of the labour force remaining engaged in traditional farming activities. 

Figure 2 Correlation between growth and poverty reduction in China.
Source: Authors’ estimations with World Bank data, available at PovcalNet

Economic growth is a necessary condition to rising per capital income, but it is nonetheless insufficient to guarantee a steady trend towards poverty reduction. In China, for instance, the relationship between economic growth and poverty reduction is far from being linear, with episodes of high economic performance in the 1990s accompanied with increases in the poverty rates (see Figure 2). In India, since the late 1990s the country has experienced the fastest economic growth, and yet the speed at which poverty is being reduced has decelerated. This tells us about the importance of public interventions in making growth more inclusive. Indeed, it is now well understood that policies that are designed to maximise growth can only trickle down to the poor if they are accompanied by wealth redistribution, employment opportunities, investments in human capital, and the provision of social protection for the most vulnerable groups in society.

Tacking growing inequalities

Spatial inequalities are particularly evident across China, with western and interior rural communities experiencing much weaker effects from economic growth than the eastern coastal provinces. UNU-WIDER’s World Income Inequality database shows that the Gini coefficients in China, which measure the income inequality ranging from zero for ‘perfect’ equality to one for maximal inequality, have been consistently higher in rural areas than in urban areas, despite the observed growing inequality in urban areas largely attributed to unregistered migration from the countryside to the cities. This, in combination with the fact that the national Gini coefficients are higher than both the rural and urban Ginis, indicates that the rural–urban divide is driving the growing levels of inequity in the country. In India, the Ginis have been consistently higher in the urban areas, with the rural–urban divide also growing over the last two decades. This is illustrated by the ratios of the rural to urban consumption expenditure that have declined from 0.63 in the early 1970s to 0.58 in the mid 1990s.

Fiscal policies have a lot to do with wealth redistribution. Tax rates in China and India are low, with most revenues coming from indirect taxes. This also reflects the low share of government revenues as percentage of GDP, which oscillates around 20%. This is in contrast with the average of 50% observed in OECD countries. Tax systems in both countries remain limited to maximising redistributive policies, and to a large extent, they will also limit the capacity of these countries to tackle extreme deprivation in the coming years.

Employment generation

China and India also face significant challenges in terms of employment generation. Rising unemployment is a driving factor in the incidence of poverty in urban areas in China, which has been exacerbated by market-oriented structural reforms and large migration flows of unskilled workers from rural areas to the cities. Migrant workers face exclusion from formal employment arrangements and state benefits such as housing, health and school subsidies, as well as income support from social protection schemes.

But the capacity of China to continue absorbing a larger share of the global consumer goods markets is becoming increasingly limited, with other emerging markets, including India, aggressively competing to get a share of the market. By the same token, it is unclear the extent to which the growing IT industry in India will be able to be the catalyst for a sustained growth, given the large unskilled labour force in the country that remains poor and disconnected from the booming economy.

Public service provision

China and India have made important progress in public service provision, which is associated with the reduction in the poverty rates observed in the two countries. The most recent Human Development Report (2011) shows that the respective Human Development Index (HDI) for China and India has grown at an average annual rate of 1.73% and 1.51%. But challenges persist. In rural China, for instance, accessibility to healthcare is largely financed by out-of-pocket expenses that absorb a large share of household expenditure among poor households. In India, there are serious concerns about the quality of public services, which are very low by international standards. When desegregating the HDI by its components, we also observe that in India both health and especially education indicators fall behind countries with similar per capita incomes. Evidence of schools without books and teachers, and health clinics without doctors and drugs is vast and disturbing. It also shows the importance of increasing public expenditure on the social sectors to improve the accessibility to, and quality of, health and education, and ultimately, reduce poverty.

Strengthening social protection

Social protection in the two countries remains highly fragmented. In China, the Minimum Living Subsidy Scheme, (also known as Di Bao) was introduced in 1997 to support the urban unemployed poor who had been affected by the market-based structural reforms. The programme remains limited as it excludes those who although in poverty are not registered in the civil affairs department office. As pointed out earlier, these are by large migrant rural workers who move to the city in search of livelihoods. In the mid 2000s, the Di Bao was gradually extended to the rural areas to cover nearly 42 million rural people, but the size of the transfers are unlikely to reduce the incentives to migrate to the cities. The rural Di Bao, together with the urban Di Bao, cover nearly 150 million people, which represents the second largest social protection programme worldwide in terms of scale and coverage, just behind India’s National Rural Employment Guarantee Scheme (NREGS).

The NREGS provides a guarantee of 100 days of waged employment per year to unemployed unskilled workers, currently covering nearly 48 million households, or about 240 million people. In fact, India’s social protection system is complex but incomplete. It spans from categorical and means-tested age and disability pensions, and income transfers for schooling and healthcare accessibility, to unemployment schemes such as the NREGS that rely on self-selection for the identification of beneficiaries and therefore exclude those who due to disability, illness, or age are unable to particulate in the scheme. The programmes are also unevenly distributed across the country, with many states and communities yet to be covered.

More co-ordination and institution building are clearly needed, but at the same time, social protection will only provide a sustained process of poverty reduction if it is supported by growth, redistributive policies, improvements in public service provision and employment opportunities. To the extent that the two countries will be able to address these challenges, poverty reduction will be significantly achieved on a global scale. The redefinition of the poverty lines gives us positive clues, but the final outcomes are yet to be seen.

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

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

WIDERAngle newsletter
February 2012
ISSN 1238-9544