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Growth alone can’t conquer poverty in China

02 June 2016

By Matthias Stepan and Sebastian Heilmann

In times of slower growth, the Chinese government’s promise to abolish poverty in China by 2020 will be hard to keep. Beijing will have to actively support weak segments of society.

Many children in rural China still live in poverty.
Image by Nick Hogarth for CIFOR via Flickr/ CC BY-NC-ND 2.0

In March 2016 China’s leadership set the goal to abolish poverty by 2020. This is an ambitious benchmark, considering that 56 million people still live below the domestic poverty line. In times of slowing economic growth it will be difficult for Beijing to keep its promise. The lagging progress in economic restructuring and a tense labour market even raise the risk that millions could fall back into poverty after having climbed out of it.

The Chinese government refuses to be intimidated by this scenario. According to its 13th five-year plan, poverty will have to be conquered in five years from now. Never mind that developmental experts argue that changing the living conditions of the “remaining poor” will be the toughest challenge in China’s fight against poverty since the 1980s.

China has reached a stage in which it cannot rely on growth alone. A sound mechanism for fiscal redistribution and a reliable social safety net will be necessary to achieve the enormous task of eliminating poverty.

In October 2015, the World Bank raised its international poverty line from 1.25 USD to 1.90 USD per day (based on purchasing power parity rather than nominal exchange rates). Yet governments around the world also use their own definitions of absolute poverty. For many years, China’s official poverty line trailed behind what the World Bank defined as a minimum level of subsistence. But this changed in 2015, when China raised its domestic threshold above the World Bank’s - to 2300 CNY per year.

China’s progress in fighting poverty since the 1980s is impressive by any measure: according to World Bank statistics, the number of poor people in China fell from 878 million in 1981 to 87 million in 2012 – a tremendous contribution to world-wide poverty reduction. But which factors enabled this development? Was China’s success the result of top-down government planning or bottom-up entrepreneurial dynamics?

Early progress was built on growth

Wang Xiaolin, the head of research of the Beijing-based International Poverty Reduction Center in China, and his co-workers investigated the effects of government-led anti-poverty measures between 1989 and 2009. Their study concludes that progress up to 2006 was mostly the result of sustained economic growth and rapidly rising incomes.

The benefits of this growth, however, were extremely unevenly distributed. Until the mid-2000s, China’s government, while invoking socialist principles of justice and intervening into the economy in many other areas, refrained from using the fiscal and social system to redistribute the gains – allowing the gap between rich and poor to widen.

Yet many Chinese were still able to shake off poverty by leaving rural areas and finding employment in urban manufacturing and service industries. Others developed entrepreneurial initiative in newly booming business sectors. This is how hundreds of millions of Chinese increased their income opportunities. The government contributed to this dynamic by offering economic incentives, better education and vocational training. At the same time, it also invested in the physical infrastructure.

It was only after 2006 that the authorities tried to improve rural incomes and living conditions through anti-poverty programmes on a big scale. Those programmes included investments into infrastructure and the establishment of social security systems in rural areas. For the first time, those who could not rid themselves of poverty could now receive government benefits.

For many years, China’s urban middle class did not have to foot the bill for supporting underdeveloped regions. High levels of economic growth and a reorganisation of the tax administration provided the basis for a steady stream of revenue, allowing Beijing to subsidise the rural poor without resorting to fiscal redistribution.

China needs fiscal redistribution and a social safety net

But how will sinking or permanently lower rates of growth affect the anti-poverty fight in China? The World Bank’s Martin Ravallion contends that lower growth rates do not present an obstacle to combating poverty. On the contrary, he suggests that the redistribution of available income and the construction of a social safety net are the best ways to prevent economic growth from collapsing.

This would be the right solution, but it may be easier said than done. China’s government has been under increasing fiscal pressure since 2013. Social programmes, especially on the provincial and municipal level, are increasingly debt-financed. At the same time, urban society, which also includes members of the political elite, vehemently rejects higher taxes and other levies.

Ravallion also points to risks in another area: progressive environmental degradation will reduce the amount of available agricultural lands, causing millions in the countryside to lose the basis of their income and to fall back into poverty. In China, almost 20 per cent of land for food production was lost in the period from 2005 to 2013 alone.

Today, government support for socially weak segments of the Chinese population faces limitations similar to those in other political and economic systems. China’s leaders will strive to reach their goal of eliminating poverty by 2020 against strong political resistance and in adverse economic and environmental conditions. But since they have set the bar so high, they will be measured against their own expectations.

A German version of this article was published in Frankfurter Allgemeine Sonntagszeitung on 20 May 2016.

Read here why fiscal redistribution will also help China avoid the middle-income trap.

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The MERICS blog offers commentary and analysis on China’s political, economic and social development as well as its role in global affairs (and its relations with Europe).

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