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

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.

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.

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?