Redefining Poverty in China and India

  • 2012•04•10

    Miguel Niño-Zarazúa and Tony Addison

    Redefining poverty in China and India

    Photo: UN Photo/Kibae Park

    China and India are making immense strides in development. But while growth in both countries has been impressive, there is now much concern about whether this growth is yielding sufficient poverty reduction. This WIDER Angle article looks at the definition of the poverty line in both countries and the key challenges facing these two Asian giants.

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    The past 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 percent in 1990 to 25 percent in 2005, and may yet fall to 15 percent by 2015, or 900 million people.

    However, US$1.25 represents 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.

    China and India account for much of the fall in the number of people living below that threshold. But despite their progress, both countries are still marked by deep poverty. In both nations, 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 methodological approaches used to construct these 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: 2,400 and 2,100 kilocalories per capita per day for rural and urban areas, respectively.

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

    The new estimates increased the poverty headcount ratio for rural areas from 28 percent using the 1993 methodology to nearly 42 percent using the Tendulkar methodology, which is very close to figures reported using the World Bank’s US$1.25 per day poverty line. By the new estimates, more than 327 million Indians in rural areas are living in poverty, an increase of 105 million people in absolute terms.

    1993 Methodology1
    Tendulkar Methodology1
    World Bank Poverty Lines (PPP of 2005)2
    rural urban combined rural urban combined US $1.25 US $2
    1993-94 37.3 32.4 36 50.1 31.8 45.3 49.4 81.7
    2004-05 28.3 25.7 27.5 41.8 25.7 37.2 41.6 75.6
    Government of India Planning Commision (2011) press note on poverty estimates

    World Bank′s PovCalnet database

    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 Organization 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 the figure below. In the early 1980s, 94 percent of China’s rural population and 44.5 percent of its urban population lived on less than US$1.25 a day. By 2005, the percentage of people in poverty had fallen to 26 percent in rural areas, and to just 1.7 percent in urban areas. This represents a fall of 627 million people, 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).

    Correlation between growth and poverty reduction in ChinaSource: 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 it 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 not 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 percent. 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 does it matter?

    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.

    Making growth more inclusive

    India and, especially, China have enjoyed rapid economic growth, with a median growth rate of 6 percent and 10 percent in the 1980-2010 period, respectively. This has catapulted the 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 US$430 in India and US$250 in China. By 2010, this had increased 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 percent, vis-à-vis 24 percent 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 percent of GDP, has gone to infrastructure projects, which is nearly 10 times more than in India. That has facilitated the accelerated rate at which the Chinese economy has transited from agricultural to manufacturing production. In India, the transition has been towards the information technology (IT) off-shore service industry, with as much as 60 percent of the labour force remaining engaged in traditional farming activities.

    Economic growth is a necessary condition to rising per capita 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. 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 highlights the importance of public interventions in making growth more inclusive. Indeed, it is now well understood that policies designed to maximize 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 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.

    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 percent. This is in contrast with the average of 50 percent observed in OECD countries. Tax systems in both countries remain limited to maximizing 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 for a share. By the same token, it is unclear the extent to which the growing IT industry in India will be able to catalyse sustained growth, given the large unskilled labour force 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 percent and 1.51 percent.

    But challenges persist. In rural China, for instance, healthcare access is largely via 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, to 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 not registered with the civil affairs department office. As highlighted earlier, these are mainly migrant rural workers who move to the city in search of livelihoods.

    In the mid 2000s, the Di Bao was gradually extended to 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 unable to particulate in the scheme due to disability, illness or age. The programmes also are 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.