Microsoft Word EcRefChina Oct06. doc

 
II:2
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 Social Outcomes 
Observers of the Chinese economy during the reform period agree, of course, that the 
eightfold increase in the general (average) income standard of households is an 
extraordinary 
social
achievement during the course of just a quarter of a century. 
Moreover, the gradual emergence of open labor markets and product markets with 
equilibrating prices (hence without physical rationing) has also increased the freedom for 
individuals to choose type of employer, work place and consumption bundle – and, 
indeed, to set up a business and become an entrepreneur. Using Amartya Sen’s (1985) 
general terminology, individuals’ “capabilities” have increased not only as a result of 
higher income but also as a consequence of increased freedom of choice. 
The drastic reduction in “absolute poverty” is another major, although related, social 
achievement. Applying the conventional international poverty line for absolute poverty 
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According to Zhang, 2004, more then 28 million state workers were laid off during the short period 
1998-2002. 

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(real income of approximately $1 a day),
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the World Bank (2003a) estimates that the 
fraction of households living in absolute poverty in China has fallen from about 50 
percent in 1981 to about 7 percent in 2002. This implies a reduction in the number of 
individuals in absolute poverty by about 400 million during the reform period. If the 
poverty line is instead drawn at about $2 a day,
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the reduction is from about 88 to about 
45 percent of the population – thereby illustrating the obvious fact that China is still a 
country with widespread poverty. 
Against the background of China’s fast GDP growth, the reduction in absolute poverty is 
no mystery. However, international experience shows that there is not always a tight 
relation between aggregate economic growth and the incidence of poverty (Sen, 1985; 
Bardhan, 1996; Islam, 1990; Lipton and Ravallion, 1995).
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In particular, the sector 
composition of growth is important. An illustration is that nearly half of the decline in 
absolute poverty in China (by the one-dollar definition) took place in the early 1980s, 
basically as a result of the increased productivity, and the improved terms of trade, for 
agriculture in connection with the shift from collective farms to family farms. Indeed, 
Ravallion and Chen (2006) calculate that 75-80 percent of the drop in national poverty 
incidence since the beginning of the reform period is a result of the reduction in poverty 
among the rural population.
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It is, however, also well known that 
relative
poverty has increased from the mid-1980, in 
the sense that per capita income of the poorest sections of the population has increased 
less than the income of other groups. Indeed, the economic situation of the shrinking 
group of individuals remaining in severe poverty seems to have improved only modestly. 
For instance, according to Ravallion and Chen (2003), the mean growth rate for the 
poorest decile during the 1990s was only 3.6 percent, while per capita GDP growth was 
above 8 percent. As a result, while the poorest 10 percent of households earned 2 percent 
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US 
$
1.08 a day in 1993 PPP. 
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US 
$
2.15 a day in 1993 PPP. 
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Time-series regressions reported by the World Bank (2001, pp.17-18) suggest that each additional 
percentage point of nationwide growth in per capita GDP in China has been associated with a fall in the 
fraction of individuals living in absolute poverty in rural areas by 0.8 percentage points during the 1990s 
(one-variable regression). Cross-provincial regression indicates an even stronger relation: 1.8 percentage 
points. Rather similar results are recorded by Ravallion and Chen (2004). 
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Fan, Zhang and Zhan (2004) have hypothesized that the heavy infrastructure investment in interior 
regions over several decades prior to the economic reforms finally paid off in terms of higher 
productivity in the agricultural sector, when economic incentives in that sector were drastically 
improved by the shift to family farms.

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of aggregate disposable household income in 2001, the richest 10 percent earned 35 
percent (World Development Indicators, 2006). 
This rise in relative poverty should, of course, be seen in the context of the widening of 
the 
overall
dispersion of income distribution in China during the reform period; see, for 
instance, Renwei (2000). According to the World Bank (2003a, 2004), the Gini 
coefficient of per capita household income in China increased from 0.28 in 1981 to 0.32 
in 1990, and to 0.43 in 2001; several other studies give similar results.
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It is well known 
that increased income gaps across provinces and (from the mid-1980s) also between urban 
and rural areas have contributed to this development. 
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In the words of Zhang et al. 
(2001), China’s provinces have developed into so-called “income clubs”– with rich clubs 
in the eastern (coastal) regions, middle-income clubs in the center, and poor clubs in the 
western (highland) regions.
While the relative per capita income gap