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New PPPs reveal China has had more poverty reduction than we thought

David Dollar's picture

Dongxiangis one of the poorest counties in Gansu. It looks like the moon: stark, barren landscapes, and some households we visited have per capita income around US$100. In the Bank's recent China macro quarterly we included an appendix on the implications of the new PPP estimates for poverty analysis in China (PPP or Purchasing Power Parity).  Perhaps because it was an appendix it did not receive much attention. 

The new PPPs reveal that prices are about 40 percent higher than had been assumed under the old PPP, which was an academic guestimate.  Some researchers immediately applied the new PPP conversion factor for GDP to household data and came up with hugely higher estimates of the $1 per day poverty rate for China.  However, the World Bank does not use the GDP conversion factor in measuring poverty.  The research department of the bank will produce a conversion factor for poverty analysis that takes account of two important things:

(1) the basket actually consumed by the poor is different from the GDP basket; and

(2) the poor almost exclusively live in rural areas where prices are lower. 

This work is still underway but the research department has given us a range for their new estimates.  Their old estimate of $1 per day poverty rate was 10% in 2004; the new estimate will be in the range of 13-17%.  Does this mean that there has been less poverty reduction than had been trumpeted?  Actually, just the opposite: there has been more.

The reason for this is that the better price data will also be applied to earlier estimates of poverty (all of which are based on constant Chinese yuan data).  The World Bank estimate of $1 per day poverty in China at the beginning of reform will be raised to somewhere in the range of 71-77%.  The old estimate was 64%.  So, we used to think that 54% of China’s huge population had been lifted out of poverty during economic reform.  The improved estimate will be around 59%. 

Leaving aside the numbers, this is an aspect of China that many outsiders do not well appreciate.  Traveling around rural areas, one can see that China is still a relatively poor country, with the second largest number of $1 per day poor after India.  At the same time, there has been tremendous progress.  At the beginning of reform, we now know that China was substantially poorer than Sub-Saharan Africa.  This dual aspect – China has had tremendous poverty reduction and yet remains relatively poor today – was brought home forcefully to me on a recent trip. I spent two days bumping around rural Gansu, visiting World Bank projects that support basic education, rural health, TB control, rural water supply, and voluntary migration. Gansu is the second poorest province in China; we went to Dongxiang, one of its poorest counties. It looked like the moon: stark, barren landscapes. This area has serious water shortage (the Dongxiang people say, “nine out of ten years are droughts”). Some households we visited have per capita income around $100.

It is natural to be struck by the glaring disparity between rural Gansu and coastal cities such as Shanghai, with their skyscrapers and neon. But when I travel I always like to ask people, in my mediocre Chinese, how their lives have changed in the past decade. It is hard to find anyone whose life is not far better than before. A 70-year-old man who had been cured of TB was so enthusiastic about the changes. With TB he couldn’t play with his 8 grandchildren; now he can. His oldest grandchild has moved away – to Zhejiang near Shanghai, where he owns a restaurant – probably serving Lanzhou hot noodles, we joked. Partly through the money coming back from him, the old man has a TV and a satellite dish. He spoke bitterly of the privations of the past, and the fact that now they have “tasty morsels” to eat.

Speaking bitterly of the privations of the past, a man said they now have "tasty morsels" to eat. In a village close to Lanzhou airport we met Dongxiang people who had voluntarily resettled out of their poor county to irrigated land in the Hexi corridor. Another old man told us proudly that he was the first of his village to relocate, ten years before. The government gave them land and two truckloads of bricks per family. They lived in tents while they built their own houses. They now have far higher income, partly because of the better land, but mostly because of the easy access to Lanzhou, where villagers go to work construction for months on end or do business. I asked the old man if he ever regretted moving. Without two seconds hesitation, he said: “Not once. The old village had poor transportation, no school, poor crops. Now we have good transportation, school for the kids, more income.” He laughed and said his time is nearly up, but life would be better for the large number of kids who by then had gathered around our group.

A man claimed not to have regretted once relocating to irrigated land in Hexi corridor: "The old village had poor transportation, no school, poor crops. Now we have good transportation, school for the kids, more income", he said. My casual impressions of Gansu accord with the improved poverty estimates – which show still significant poverty but huge progress since the beginning of reform.  Do other observers find that the new PPP estimates have changed their views of poverty in China?


China succesful poverty reduction through succcesful 5 year economic plan, finance, capital markets reform, WTO policy, Millions poor western peasants benefited by west east gas transmisstion project feed eastern cites with underdeveloped western natural resources, while government plan raise rural peasant income and tax cuts,influx of rural peasant to urban cities jobs, bring back income to raise rural living standard. Recent RMB,housing , stock market hot money influx with 500 % wealth gain lead to excessive consumer, business purchasing power already led to 8.7 % CPI inflation and China Peoples Bank credit tightening, raise interst rate 6 times, and 11 times bank deposit rate to 15 %.

Submitted by Anonymous on
I like to read the progress of third world development here today since I am taking strata 2 in development studies in Bengkulu University

You make a good point that peasant incomes have been going up rapidly in recent years. Last year average rural income increased 9.5% in real terms. The peasants have been helped by the abolition of agricultural taxes, remittances from family members who work in cities, and the high food prices this year. As for inflation, I think that the key issue is the rapid growth of money supply resulting from the large trade surplus. As you say, credit tightening and higher interest rates help somewhat, but China may need more appreciation of the yuan against the U.S. dollar to keep inflation under control.

China current macroeconomic and housing market control will achieve softlanding, with stock market lost almost 50 % and cooling in housing price, removing excessive RMB currency , equities, houisng market speculation. RMB will and should maintain current pace of appreciation, excessive or free float will not solve inflation problem, but induced excessive hot money influx resulted asset bubble and economic slowdown, financial crisis, repeating Thailand, Russia, Brazil style financial crisis and US runaway inflation. detail can be found on my paper presnted to China/global central banks governor conference on Simulaton of the casues, onset, spread, recovery early warninng of Asian/Global currency, financial crisis

Submitted by Cliff Tan on
David: I guess I'm more struck by the sheer magnitude of the PPP revisions on implied size of economies: If I read you correctly, both China's and India's PPP economic sizes were reduced by 40% in this revision, which would seem to point up the perils of relying on such size comparisons when it comes to the "largest" economy in the world, the "second largest" and so on. Would you agree? Regards, Cliff

Cliff: You are right that the magnitude of the change is sobering. The estimate that everyone was working with was an old academic guestimate, but it had gained wide currency. The new one is no doubt more accurate, but the big revision for China and for other countries too is a reminder that estimating PPP conversion factors is difficult and subject to error. I agree with you that in talking about the relative size of different economies, using market exchanges rates is best. Actual trade takes place at those exchange rates. The increase in China's GDP at market exchange rates is an accurate measure of increased demand in the world. The same cannot be said for the increase in PPP GDP. That said, PPP conversion is still the best way to go when discussing differences in real living standards. To say that per capita income in the US is twenty times higher than in China is misleading because of the differences in price levels. The PPP-adjusted difference of about ten to one is a more accurate estimate, though it is still subject to considerable error. David

Submitted by Joey on
Does the revised PPP data also mean RMB is less undervalued than people normally think?

Joey: good question. In general I do not think that the difference between PPP exchange rates and market exchange rates tells us much about whether a currency is over-valued or not. But some scholars do think so, and used the old PPP as evidence that China's exchange rate was undervalued. With the new PPP data, the gap between the PPP exchange rate and the market exchange rate is exactly what is expected at China's level of per captia GDP. So, by that argument the exchange rate is neither undervalued or overvalued. The reason that I don't like this approach is that I prefer to look at whether the exchange rate is enabling the country to meet its own macroeconomic objectives. In China now, the external surplus is creating too much liquidity and causing more inflation than the Chinese authorities want -- so in this situation some further appreciation of the currency would help the authorities meet their objectives. Regards, David

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