Poverty and Inequality in China and India: Elusive Link with Globalisation

The standard argument by pro-globalisers has been that the opening up of the economy leads to dynamic benefits, which improve the growth rate, and the latter in turn reduces poverty. The static allocation effect may also be pro-poor as it expands job opportunities for unskilled labour, which is plentiful in poor countries. China has captured the world market in many labour-intensive manufactures, and this has led to a major transformation of the economy, improving the rate of growth and of poverty reduction. It is the case that the rate of growth and the rate of poverty reduction have been nothing short of dramatic in China. Total factor producti vity in Chinese industry grew at an annual average of 3.1 per cent in 1978-93 and at double that rate in 1993-04 [see Bosworth and Collins 2007]. If one takes the admittedly crude World Bank poverty line of $ 1 a day per capita (at 1993 purchasing power parity), the proportion of people below that poverty line in China fell from 63.8 per cent in 1981 to 9.9 per cent in 2004 [see Ravallion and Chen 2007b]. If instead one takes a national poverty line (of 850 yuan per year for rural China and 1,200 yuan for urban at 2002 prices), the National Bureau of Statistics data suggest that the poverty proportion declined from 53 per cent to 8 per cent between 1981 and 2001 [see Ravallion and Chen 2007a]. Never before in history have so many hundreds of millions of people been lifted above the poverty line in such a short period. Since all this happened while the country had a phenomenal opening up of the economy, China has become a poster boy for the international financial press and free-trade economists when they wax eloquent about the poverty-reducing effects of globalisation. Yet there is no convincing statistical demonstration of this, as no one has yet tested a causal model where, controlling for other factors and applying a suitable identification strategy, global integration has been found to be the main cause of the dramatic decline of poverty in China. In the absence of such a demonstration, a careful eyeballing of the data suggests that the more important reason for the large decline of poverty over the last three decades may actually lie elsewhere. The annual national poverty estimates as well as World Bank estimates referred to above show that the largest part of the decline in poverty already happened by the mid-1980s, before the big strides in foreign trade and investment in China in the 1990s and later. For example, in the former estimates the poverty percentage in 1987 is already about one-third (i e, 16.8 per cent) that of 1981. In the World Bank estimates, of the half a billion people lifted above the $ 1 poverty line between 1981 and 2004, about twothirds got so lifted by 1987. Much of the extreme poverty was concentrated in rural areas, and its large decline1 in the first-half of the 1980s is perhaps mainly a result of: (a) the spurt in agricultural growth following de-collectivisation (agricultural output grew at 7.1 per cent per year on an average during 1979-84 compared to 2.7 per cent during 1970-78) [Lin 1992]; (b) land reform, which by an egalitarian redistri bution, subject only to differences in regional average and demographic size, provided a floor to rural income; and (c) readjustment of farm procurement prices. These are mostly internal factors that had very little to do with global integration. Some trade economists have pointed out to me that even in the 1980s, China Pranab bardhan