Decomposition Analysis of Poverty Reduction in Rural China: 2007–2018

• Published date: 01 March 2022
• Author: Chuliang Luo
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/cwe.12413

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 142–166, Vol. 30, No. 2, 2022

142

Decomposition Analysis of Poverty Reduction

in Rural China: 2007–2018

Chuliang Luo*

Abstract

Using the last three waves of the rural household surveys conducted by the Chinese

Household Income Project in 2007, 2013, and 2018, this paper focuses on changes in

poverty in rural China. The paper decomposes poverty change into the growth effect

and the inequality effect, and also decomposes the contributions of income components,

concentrating particularly on income from public transfers. Economic growth had a

very significant poverty reduction effect for both absolute and relative poverty, but

the inequality effect mostly offset it; in total, absolute poverty reduced significantly,

and relative poverty increased from 2007 to 2018. Local wage income became the

main contributor to both absolute and relative poverty reduction, replacing household

agricultural operational income, and the contribution of wage income from migration

declined. Public transfers effectively reduced absolute poverty but not relative poverty.

Keywords: decomposition by components, public transfer, relative poverty, rural poverty

JEL codes: I32, I38, O15

I. Introduction

Poverty reduction is usually taken as one of the most crucial targets in many less developed

countries. During the processes of economic development and economic transition

that have taken place since the late 1970s, poverty reduction has been consistently

and persistently enforced, especially in rural China (Chen and Ravallion, 2008;

World Bank, 2018). At the 18th National Congress of the Chinese Communist Party

in 2012, a new and more ambitious goal, to eradicate absolute poverty by 2020, was

set. Poverty reduction was then implemented forcefully. Targeted Poverty Reduction

(jingzhun fupin) has been implemented since 2013. During the period from 2013 to

2018, more than 10 million people were taken out of poverty every year. The incidence

of poverty, defi ned by the offi cial poverty line, reduced from 10.2 percent in 2012 to

*Chuliang Luo, Professor, School of Labor and Human Resources, Renmin University of China, China.

Email: luochl@ruc.edu.cn. This research is supported by the “Thematic Research Project on China’s Income

Distribution” (No. 21XNLG03) of Renmin University of China.

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Decomposition Analysis of Poverty Reduction in Rural China 143

0.6 percent in 2019. What are the main contributors to such a dramatic reduction in

poverty? That is the main question this paper is going to explore using the last three

waves of household surveys conducted by the Chinese Household Income Project (CHIP)

in 2007, 2013, and 2018.

Economic growth has been uneven during the economic transition in China. This has

become one of the stylized facts about China’s economy. The growth effect contributed

positively to poverty reduction, while the possibly accompanied widening inequality

contributed negatively to poverty reduction. According to Bourguignon (2004),

in terms of absolute poverty, growth is necessary for poverty reduction and rising

inequality increases poverty, which is also known as the “growth‒inequality‒poverty”

triangle. Many researchers, such as Chen and Wang (2001), Lin (2003), Wang and

Huang (2005), Wan and Zhang (2006), Du and Sun (2009), and Luo and Ping (2020),

examined the growth effect and inequality effect on poverty reduction in rural China and

generally found that the growth effect positively contributed to poverty reduction, but it

was offset by the inequality effect.

Income composition in rural China has changed a lot because of economic

development and transition – for example, a declining share of income from agricultural

activities and an increasing share of income from nonagricultural activities. Changes in

income composition might impact poverty reduction because different people benefit

from such changes in different ways. Some researchers have explored the contributors

to poverty reduction by considering income components. Luo (2012) found that income

from agriculture contributed to a large proportion of poverty reduction, while the

relative contribution ratio declined. Xie (2013) found that labor earnings were the main

contributor to poverty reduction. The effect of migration on poverty also attracted much

attention because rural laborers migrated increasingly into urban areas and the share of

income from migration to household total income increased dramatically. Zhang and

Zhang (2007) found that the contribution of migration to poverty reduction increased

and became the main contributor to poverty reduction in the late 1990s. Luo (2010)

also showed that wage earnings from migration made an important contribution to

poverty reduction, and this poverty reduction effect of migration was more pronounced

for lower poverty levels. Migration signifi cantly reduced the probability of falling into

poverty (Yue and Luo, 2010). However, recent research by Luo and Ping (2020) found

that the effect of migration on poverty reduction declined gradually.

Public transfers are important measures for poverty reduction, which can be

identified by the changes in income components, while the empirical findings on the

poverty reduction effect of public transfer were mixed. Xie (2013) found that the income

from public transfers only contributed to poverty reduction in a minor way. Li et al. (2018)