(First draft not for citing)

Inclusive Growth and Poverty Reduction in PRC as Emerging Middle Income Country

Li Xiaoyun1, Wang Xiaolin2 and Li Linyi3 International Poverty Reduction Center in China (IPRCC)

Li Xiaoyun, PhD and Prof. in Development Studies, Dean of College of Humanities and Development Studies, China Agricultural University and Senior Advisor of International Poverty Reduction Center in China (IPRCC) 2 Wang Xiaolin, PhD in Economics and Director of Research Division of International Poverty Reduction Center in China (IPRCC) 3 Li Linyi, PhD in Development Studies, Researcher of International Poverty Reduction Center in China (IPRCC)

1. Introduction
Over the last 30 years, rapid economic growth has made PRC as emerging middle income country. The growth rate in the PRC has been consistently high-average 10 percent per year from 1980 to 2008. The rapid economic growth has brought significant improvements in the living stands of its people. During the last three decades, average per capita household incomes (include both rural and urban) grew at about 7 percent on average per annum (Lin 2008). Poverty incidence decreased from 84 percent in 1981 to 16 percent in 2005, the number of poor people decreased from 835 million to 205 million in the same period (Chen and Ravallion, 2008). This close association between high economic growth and significant poverty reduction suggests that the PRCs economic growth can be considered the pro-poor under the definition that any growth that cuts poverty deserves to be called pro-poor (Ravallion and Chen, 2003). As estimated by several studies, the growth-poverty elasticity in China from 1990s to the year 2000 ranges from 1.07-2.7 (Wen, 2006, Ravalion and Chen 2007), and from 2000-2008, the elasticity is still at 1.09 (Li, 2010). This remarkable economic development, particularly the linkage between the growth and poverty reduction has attracted a great attention from international development community and other developing countries especially in Asia and Africa. However, this noticeable economic achievement in PRC has also been accompanied by a rapidly rising income and non-income inequalities. In recent years, PRC has become a much more unequal society. In the last 30 years, inequality has increased within and between rural and urban areas, and nationally. PRCs Gini Coefficient has increased from 0.29 in 1981 to 0.47 in 2007 and the latest estimate is 0.49 (World Development Indicators 2009), almost putting China on a par with highly unequal countries such as Brazil. With this increasing inequality in PRC, there has been a growing concern that the benefits of the growth are not being equally shared and are leading to increasing political and social tensions. Thus therefore, to reduce inequality becomes a major challenge facing PRC in the future.

Since 2004, the concept of inclusive growth has been proposed to respond the urgent need that both development strategies and policies can be developed to address the issue. The concept focuses both on creating opportunities and on making the opportunities accessible to all. Growth is inclusive when it allows all members of the society to participate in and benefit from the growth process on an equal basis regardless of their individual circumstances (Zhuang, 2008). The concept provides both intrinsic and instrumental framework for policy making system to respond two fundamental elements of quality growth, high and sustainable

growth and equal access to opportunities. In 2009, The President Hu Jintao of PRC proposed to take all aspects into development and encourage inclusive growth in the forum organized by the UN Economic and Social Commission for Asia and Pacific Region. He further suggested to include inclusive growth in to the PRCs Twelfth Five Years Plan in order to address the challenges the PRC faces to maintain its high economic growth and keep social equality towards harmonious society development.

This paper follows inclusive growth framework and highlights the major challenges facing the PRC in reaching inclusive growth as emerging middle income country. The first section after the introduction highlights PRCs economic growth and poverty reduction, and particularly analyses how previous growth has led poverty reduction, and the major strategies and policies to reduce poverty and ensure growth to be inclusive. The second section highlights the major challenges facing the PRC in achieving sustained inclusive growth. The third section highlights what other countries can learn from PRCs poverty reduction success and lessons for achieving inclusive growth. The last section presents the conclusions and recommendations for more inclusive growth and poverty reduction in PRC.

2. Economic growth and poverty reduction in PRC

2.1 Poverty reduction in PRC: overview
PRCs poverty reduction has been remarkable since last 30 years in terms of either PRCs own poverty line or the World Banks estimation. According to the PRCs official statistics using the PRCs poverty line, the absolute poverty population in PRC reduced from 250 million in 1978 to 13 million in 2008 (Table 2). The poverty incidence dropped from 30 percent to 1.5 percent during the same period. The World Bank estimated that the PRCs poverty incidence dropped from 63.76 percent in 1981 to 9.9 percent in 2004 by $1.08 a day PPP while using $ 2.15 a day PPP, the poverty incidence declined from 88.12 percent in 1981 to 34.89 percent in 2004 (Table 1). Since 1980s, the number of the poor out of poverty in the PRC shares 75 percent of the global poverty reduction, and from 1990 to 2002, this number accounted for 90 percent of the world poverty reduction after the year 2000 (the World Bank 2009). However, if measured by $ 2.15 a day PPP line, the PRCs poverty reduction performance is also significant, still over 400 million people remains poor given the fact that PRC is within the MICs category (Table 1).

Table 1 Chinas Poverty Reduction Trends $1.08 a day PPP 1993 price Poverty population 1981 1984 1987 1990 1993 1996 1999 2002 633.66 425.27 310.43 374.33 334.21 211.44 222.78 176.61 Headcount 63.76 41.02 28.64 32.98 28.36 17.37 17.77 13.79 $ 2.15 a day PPP 1993 price Poverty population 875.77 819.11 744.07 819.11 802.86 649.47 627.55 524.24 452.25 Headcount 88.12 79.00 68.64 72.16 68.13 53.34 50.05 40.94 34.89

2004 128.36 9.9 Source: Shaohua Chen, Ravallion Martin, 2008

2.1.1 Rural poverty In Fact, the PRCs poverty has been largely in rural areas because rural population shares largest part of its whole population. Since the 1980s, both absolute and relative poverty in rural China has been reduced significantly. Absolute rural poverty population decreased from 250.9 million before 1980 to 13 million in 2008, poverty incidence dropped from 3.40 percent to 1.5 percent at the same time, while low income rural population decreased from 62.13 million in 2000 to 27.07 million in 2008, and overall poverty incidence dropped from 10.1 percent to 4.2 percent during the same period (Poverty Monitoring Report in Rural China 2010).
Table 2 Rural Poverty Reduction in the PRC since 2000 (unit: 10,000) Total poverty Absolute poverty population Poverty line (CNY) 1978 1981 1990 2000 2001 2002 100 200 300 625 630 627 Numb er 25000 12500 8500 3209 2927 2820 Percenta ge 30.7% 15.1% 9.50% 3.40% 3.20% 3.00% 865 872 869 6213 6102 5825 6.69% 6.60% 6.20% 9422 9030 8645 10.20% 9.80% 9.20% Low income population Poverty line (CNY) Numb er Percenta ge population Numb er Percenta ge

2003 2004 2005 2006 2007 2008

637 668 683 693 785

2900 2610 2365 2148 1479 1300

3.00% 2.80% 2.50% 2.30% 1.60% 1.50%

882 924 944 958 1067 1196

5617 4977 4067 3550 2841 2707

6.00% 5.30% 4.30% 3.70% 3.00% 2.70%

8517 7587 6432 5698 4320 4007

9.10% 8.10% 6.80% 6% 4.60% 4.20%

Source: Poverty Monitoring Report in Rural China, 2010

Not only in terms of poverty incidence, has the seriousness of the poverty in PRC also been improved. The poverty gap index decreased from 4.99 in 2001 to 0.8 in 2007, and the squared poverty gap index also dropped from 1.75 in 2001 to 0.2 in 2007 ( the World Bank 2009).
Table 3 Changes of Poverty Gap in the PRC 2001 Poverty Gap Index Squared Poverty gap Index Source: World Bank, 2009 4.99 1.75 2003 4.27 1.50 2004 3.32 1.14 2005 1.6 0.5 2006 1.1 0.3 2007 0.8 0.2

2.1.2 Urban poverty The urban poverty in the PRC was not given attention before the 1990s due to a relative full employment in urban areas. It became the issue during the middle of the 1990s due to an increasing number of laid off workers under the structure adjustment (Li 2004). The PRCs urban poverty largely concentrates on those who are underemployed, laid off, retired and elderly. Different from rural poverty reduction policy, there has been a lack of urban poverty line in PRC. Using the definition of the National Statistics Bureau of the PRC, the urban poverty incidence was 5 percent in 1995, 6.7 percent in 1997 and 2.2 percent in 2002 (Li 2006). Currently, the Urban Minimum Living Standard (MLS) is used to estimate the urban population in PRC (Table 4).
Table 4 Urban Minimum Living Standard and Urban Poverty Population in PRC 2004 CNY/month/capita 152.0 2005 156.0 2006 169.6 2007 182.4 2272 2008 205.3 2234.8 2009 227.8 2345.6 2010 251.2 2310.5 2011 270.5

Population 10,000 2205 2234.2 2240.1 Source: Ministry of Civil Affairs of PRC, 2011

There has been around 23 million urban population supported under this scheme since 2004 as indicated in the Table 4; this implies that in 2009, the annual income 2733 CNY would be the line for being the urban poor and the number of the urban poor was 23.45 million; however, according the latest study by the Chinese Social Science Academy, in 2009, average income per capita in urban China is 17,175 CNY, the urban poverty line should be around 7500-8500 CNY per year per capita. Based on that, the number of the urban poor in the PRC should be round 50 million. Thus by using the MLS line, the urban poverty is underestimated around 50 percent.

2.2 Making growth inclusive: agricultural development and poverty reduction in the PRC
Growth-poverty linkage is certainly an important indicator for inclusive growth by any definition. Poor people benefits from growth through two different mechanisms, directly benefiting from growth with more equal access to development opportunities; and to be protected from exclusion. Furthermore, if growth is to be effective itself for poverty reduction, it must be propoor, and for such growth to take place, the sector that employs the majority of the poor should make a great contribution to overall growth, thus poor people can benefit from growth. The PRCs remarkable poverty reduction has been accompanied by high economic growth and rapid agricultural growth as well. From the end of the 1970s to the middle of the 1980s is regarded as the stage when the PRCs rapid economic growth took off. The contribution of the agricultural sector to overall economic growth is much more significant considering that industrial growth was substantially derived from agriculture-based rural township enterprises which were developed based on capital and raw material from agriculture. In this context, the PRCs rapid economic growth during that period was actually based on agriculture.
Figure 1. Annual GDP growth rate and sector contributions in China

Source: Author's calculations, based on China Statistical Yearbook

In PRC, poverty declined mostly during the time from 1978-1985 when both the overall economy and agricultural sector grew rapidly. The country was dominated by the rural population at the time, so reducing rural poverty was urgent for overall poverty reduction, The rural poverty incidence measured by Chinas national poverty line declined from 30.1 percent in 1978 to 15.7 percent in 1984, almost 50 percent of the poor in PRC was out of poverty, while farmer income increased by 16.5 percent annually, and agriculture grew from 4.1 percent to 12.9 percent, at an average rate of 8.0 percent (Huang Jikun, 2008), the sectors growth contribution to the overall growth rate increased from 21 percent in 1978 to 35 percent in 1985. The country gained highest economic growth rate, highest agricultural growth rate, highest farmers income growth rate and highest poverty reduction during the same period time. In addition, within agricultural sector, wheat and rice which engaged most rural families in the PRC remained high growth rate and cotton as the rural industry raw material grew also at a highest rate during the time. The poverty-agricultural sector growth elasticity in PRC was 2 percent after the 1980s. Despite a decline of the share of the sector in the whole economy, the agricultural sector is still a vital factor for poverty reduction in PRC. The poverty-agricultural growth elasticity was 1.51 percent, the poverty-industry elasticity was 1.07 percent, and the service sector was 0.97 percent during 2000 to 2008 (Li, 2010). Chinas poverty reduction, therefore, is largely based on an agriculture-linked growth which made the PRCs previous growth pattern inclusive.

2.3 Strategies, policies and institutions for inclusive growth and poverty reduction in the PRC
2.3.1 Institutional development for poverty reduction PRC started its first targeted poverty reduction program in 1982 immediately after the reform policy commenced. The State Council of the PRC established The State Council Leading Group for Three West Areas Agricultural Development and launched the Three West Areas Development Program. The program set up the objective to eliminate the hunger within five years in three areas located in Ningxia and Gansu where poverty was severe and natural resources were heavily degraded. 2 billion CNY was invested from 1982-1992 under the program. However; national wide rural poverty in the areas which could not benefit from the open policy merged critical along with a rapid economic growth after the 1980s, thus a national policy for poverty reduction was introduced. In 1984, the State Council of PRC issued its first official document calling for urgent action to tackle the poverty in the country. Following this document, the State Council decided to expand the PRCs poverty reduction program from

Three West Area to 18 areas covering 331 counties all over China. In 1986, the National Peoples Congress included component of those 18 areas development into its Seventh Five Year Plan (1986-1990). In the same year, the State Council set up formally the Leading Group Office for Poverty Reduction and Development (LGOP) to lead and coordinate national wide poverty reduction program. Following this organization development, all provinces and cities and counties in PRC also set up their local poverty reduction and development office. This institutional development marked the start of the PRCs development oriented rural poverty reduction program. Despite the fact that both Three West Agricultural Development Program and the further poverty reduction program in 331 countries had made poverty declined, for instance from 1986-1993, the farmers income increased from 208 CNY to 483 CNY annually per capita and poverty population deceased from 125 million to 80 million, rural poverty was still severe up to the middle of the 1990s. In 1994, the State Council of PRC further expanded the number of its poverty reduction targeted countries from 331 to 596. 2.3.2 The strategies and polices to enable the poor to take part in development opportunities: the PRCs development oriented and regional development based rural poverty reduction program The PRCs rural poverty reduction program from the middle of the 1980s to the end of 1990s had been largely development oriented and based on regional development approach. During the period from the middle of the 1980s to the middle of 1990s, large part of the investment had been put in promoting rural industry development and infrastructure development in the poor areas. The rationales for this approach lied in followings. Firstly, industry can bring growth; secondly, industry development can increase local revenue; thirdly, industry can return poverty reduction loan; lastly, industry can increase employment. From 1986-1993, more than 800,000 economic crop plantations were developed and more than 50,000 rural enterprises were developed and, in addition, 100,000 kilometers rural road were completed under the program; however, the program implemented had largely focused on improving rural industry and infrastructure, and had not targeted directly on the poor. In 1993, PRC launched its ambitious plan called Eight-Seven Poverty Reduction Program aiming to eliminate 80 million absolute poor of poverty within 7 year up to the year 2000. The plan was the first one with a clear objective, target and series of policy means to tackle the rural poverty in the country. The plan set a decentralized system giving provincial government the responsibility to allocate financial resources to the countries designated by the central government. At same time, the partnership program was developed to match each rich

province to the poor province as well as different ministries and agencies to launch their own poverty reduction programs. The program continued similar approach applied earlier for enterprise development and infrastructure, but began to focus on farming, livestock and agroprocessing development in order to let the investment more linked to the poor. Over 7 years, the farmers income increased from 922 CNY per capita annually in 1993 to 2253CNY in 2000. The poverty incidence dropped from 8.2 percent in 1993 to 3.4 percent in 2000 based on the PRCs poverty line. The PRCs rural poverty reduction strategy before 2000 was characterized as regional development based and aimed to accelerate overall economic growth in the poor areas through a large investment in infrastructure and capacity building, thus can encourage the poor to participate economic activities. However, this regional development based rural poverty reduction program failed to target the poor. The program significantly improved rural infrastructure and conditions for economic growth and enabled substantial number of farmers to join the growth process and increased averagely farmers income, but at same time, large number of the poor was left behind by the program. 2.3.3 Making more equal access to the poor for development opportunities through empowerment: the Poor Village Poverty Alleviation Program (PVPAP) (2001-2011) Despite the fact that those poor counties had been developed through large scale of investment in infrastructure development, deviations in targeting the real poor and insufficient participation of the poorest were merging to be the major institutional constraints, and it was suggested that the county-targeting strategy should be changed (World Bank, 2001). Following this circumstance, the government of PRC began to consider developing more effective targeting mechanisms that would ensure that the funds allocated would reach the hands of the poor. The Asia Development Banks technical support (TCA3610) was initiated to help PRC develop a participatory methodology in order to shift Chinas poverty targeting from county to village level and to further empower the poor to make decisions instead of conforming to top-down planning. This technical assistance eventually led to the development of the Poor Village Poverty Alleviation Program (PVPAP) which comprises three components, targeting through poor village identification, empowerment through participatory village development planning and bureaucratic planning through county level integration (Li Xiaoyun et al. 2009). Since 2002, the Leading Group Office for Poverty Alleviation of the State Council (LGOP), through 27 Provincial Poverty Alleviation Development Offices (PADOs), has identified 14,8200 poor villages, which accounted for 21.4 per cent of the administrative villages in China. Of these 130827 are located in the central and western part of China, accounting for

88.4 per cent of all poor villages in those regions. In addition, 17224 of the poorest villages located in the eastern part of China account for 11.6 per cent of the poorest villages and 8.5 per cent of the local administrative villages in the region. All those poor villages were distributed in 1861 counties across the whole country, accounting for 68.8 per cent of the total number of counties of China (Poverty Monitoring Report in Rural China 2003). This targeting covered 83 per cent of the poverty population in China (LGOP, 2004). In contrast, when the county-level targeting system was applied, there were 592 poor counties in China, accounting only for 21.9 per cent of the total number of counties in China and covering only about 53 per cent of the poverty population (Li Xiaoyun, 2006). In other words, after adopting the villagelevel targeting system, the county-level coverage rate of the poverty alleviation resource increased to 46.9 per cent and the coverage rate of the poor population increased to 30 per cent. According the national poverty monitoring survey, the poverty reduction fund to the poor villages has increased to average 169,000 CNY per village in 2009 comparing 130,000CNY per village in 2002, increased at 22.7 percent (Poverty Monitoring Report of Rural China, 2010). More flaunted is the fund increase to the household level in the poor villages. The percentage of the household who received the amount from 500-5000 CNY and above all increased in 2009 comparing to that in 2002 as indicated in the Table 5. Participatory village planning process enabled more household to take part in the project design process. The percentage of the household who selected the project by themselves has increased from 38.1 percent in 2002 to 52.3 percent in 2009, the voice of the poor in deciding project has been enhanced (Poverty Monitoring Report in Rural China, 2010). The case study also shows that the majority of the villagers know about the planning process and significant number of villagers indeed participated village development planning process as indicated in Table 6.
Table 5 Percentage of the households received fund (%) Amount of fund received by household (CNY) Below 500 500-1000 1000-2000 2000-5000 Above 5000 2002 60.0 17.1 15.1 6.1 1.7 2009 36.5 22.1 22.7 14.0 4.9

Source: Poverty Monitoring Report of Rural China 2010

Table 6 Actual participation of the poor in village poverty alleviation planning in XX village in Jiangxi Province No. of yes % of yes No. of male yes 30 % of male yes 88.2 No. of female No. of female yes 22 yes 78.6

Do you know about the VPAP? Are the projects formulated by farmers? Do you know about the procedure for project application and approval? Have you participated in the formulation of the VPAP? Did your family get the project? Did the projects meet your urgent needs? Are the majority of project households poor households? Source: Li Xiaoyun, 2006

52

83.9

9.7

14.7

3.6

0.0

0.0

0.0

26

41.9

20

58.8

21.4

38

61.3

21

61.8

17

60.7

11.3

8.8

14.3

11

17.7

14.7

21.4

2.3.4. Making growth more inclusive to the poor: the PRCs rural social protection programs The strategy and polices to ensure the poor to benefit from growth from protective perspective were only introduced after the year 2000. With a significant increase of disparity, it becomes difficult to reduce poverty only through providing development opportunities through development oriented poverty reduction program. Therefore, PRC started series of social protection programs directly targeting the poor, which makes the PRCs growth and poverty reduction strategy towards more inclusive. A: fiscal transfer to agriculture. Since the year 2000, PRC has substantially increased its fiscal expenditure on agriculture, which enabled the poor benefit from growth as most the poor engage in agriculture. The public expenditure on agriculture increased from 1.671 trillion CNY in 2004 to 7.161 trillion in 2009. In 2006, agricultural tax was completely exempted. Subsidy to agriculture increased from 14.4 billion CNY in 2004 to 94.9 CNY in 2008 as the Table 7 indicates. The PRCs agriculture has become the net subsided from the net taxed (the World Bank, 2008).

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Table 7 Public expenditure and subsidies to agriculture (unit: 100 million CNY) 2004 Total expenditure on agriculture Food crop subsidy Seed subsidy Farm machine subsidy Inputs subsidy Annual growth rate Source: Ministry of Finance of PRC 1671 116 28 0.7 -2005 2975 132 38.7 3 -20.04% 2006 3397 142 41.5 6 120 78.18% 2007 4318 151 66.6 12 276 63.36% 2008 5955 151 120.7 40 638 87.84%

The fiscal transfer to agriculture has made a significant contribution to the poors income increase. The percentage of the transfer to the total income for both absolute poor and relative poor all increased from 2005 to 2007 as the Table 8 indicates. In 2008, the fiscal transfer to agriculture made poverty incidence dropped by 2 percent (National Statistic Bureau, 2008).
Table 8 Contribution of the fiscal transfer to farmers income Transferred income (CNY) Year National average 2005 2006 2007 2008 147.4 180.8 222.3 323.2 Absolute poor 33.1 57.6 62.8 100.4 Relative poor 42.1 52.6 72.5 National average 4.5 5.0 5.4 6.8 Absolute poor 6.0 9.4 9.4 10.1 Relative poor 4.9 6.1 7.4 Percent of fiscal transfer to total income (%)

Source: Poverty Monitoring in Rural China, 2010

B: New Rural Cooperative Health Program. The PRCs reform has stimulated economic growth on the one hand; however, it had dismantled rural health and education system which was relatively cheaper to cover the cost for the poor on the other hand. The cost of health and education became a burden for most rural population after the 1980s. From 1980 to 2003, farmers income increased 12.7 times, and farmers consumption increased 10.9 times, while expenditure for health increased 32.9 times which was much higher than both income and

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consumption increase (Han Jun, 2006). According to the result from the poverty monitoring by the National Statistics Bureau, the health expenses shared 45 percent of the total family expenditure for the absolute poor household annually in 2004. In 2002 the government of PRC imitated New Rural Cooperative Health Program aim to cover 80 percent of farmer in 2010. As indicated in the table 9, up to 2009, 833 million rural populations has joined the program, over 94 percent of rural population now is covered by the program.
Table 9 Status of New Rural Cooperative Health Program Year 2004 2005 2006 2007 2008 2009 1 333 678 1451 2451 -2716 2 0.80 1.79 4.10 7.26 8.15 8.33 3 75.20 75.66 80.66 86.20 91.5 94 4 26.37 61.75 155.81 346.63 662.3 911.9 5 0.76 1.22 2.72 4.53 5.85 7.59 6 35 51 57 77 113 120

Note: 1: The number of county jointed the program; 2: Number of rural people jointed the program (100 million); 3: Percentage of the jointed (%); 4: Total expense (100 million CNY); 5: Total amount received buy the beneficiaries (CNY100 million); 6: Total amount received per capita (CNY/person)

The program has improved the poors access to health care. Since 2002, percentage of rural population who cannot access health care in the poor countries declined from 16.2 percent to 11.4 percent in 2009 and the percentage of the household who has economic difficulty to access health care also declined from 65.8 percent to 58.5 percent as the Table 10 shows.
Table10 Changes of the Poors Access to Health Care 2002 1 2 3 4 Note: 16.2 65.8 20.2 64.2 2003 14.7 65.2 18.7 65.7 2004 14.8 64.7 19.5 64.9 2005 13.9 61.9 17.4 63.9 2006 13.5 62.7 16.6 61.5 2007 11.4 58.5 13.8 59.0 2008 10.7 56.3 11.9 57.9

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1: Percentage of cannot access in the poor counties; 2: Percentage of cannot access due to economic reasons in the poor counties; 3: Percentage of cannot access in the poor villages; 4: Percentage of cannot access due to economic reasons in the poor villages Sources: Poverty Monitoring Report in Rural China 2010

In 2004, the government of PRC launched a complementary health program to cope with the situation that high cost for serious health problem cannot be compensated through the cooperative health system. In 2009, total expenditure on this complementary program reached to 4.94 billion CNY and 7.3 million rural people benefited from the program. The Table 11 indicates the status of the program.
Table 11 Status of the Complementary Health Program 2004 Total investment(100 million CNY) Number of rural people covered (10,000) Total expenditure per capita Source: Ministry of Civil Affairs of PRC 3.78 232.7 162 2005 4.8 199.6 240 2006 8.8 241.9 366 2007 20.5 377.1 543 2008 27.4 759.5 360.3 2009 49.4 730 676.6

C: Rural Compulsory Education Program. In 2004, the government of PRC decided to implement the policy of two exempt and one subsidy, which is to exempt the tuition fee, charges for books and materials and subsidy for boarding fee for the poor household. This program was soon expanded to a free fee compulsory education program. The program has substantially reduced the rural household expenditure on education. From 2006-2010, the total investment to this program reached 2.652 trillion CNY. The average share of the program to household expenditure reached to 2.8 percent for all rural families and 6.2 percent for the poor families in PRC (the World Bank, 2008). The program especially contributed to the expense decline in education for the poor household as indicated by the Table 12. As the consequence, the enrolment rate for 7-12 years old and13-15 years old increased from 94.9 to 97.7 percent and 83.3-94.0 percent in the poor countries from 2002-2008 respectively.
Table 12 Share of education cost to the total family expenditure 2002 The poor village The poor countries Rural average 10.23% 10.61% 11.46% 2003 10.82% 11.26% 12.13% 2004 12.05% 12.74% 11.33% 2005 11.38% 11.92% 11.56% 2006 9.58% 10.03% 6.77% 2007 5.95% 5.92% 9.48% 2008 6.80% 7.20% 8.60%

Source: Poverty Monitoring in Rural China, 2010

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D: Rural Minimum Living Standard Program and Rural Five Guaranteed Program. In 2004, PRC began to experiment Rural Minimum Living Standard Program and in 2007, the government decided to scale up the program to the national wide. The program aims to cover those who cannot take part in economic activities due to various reasons. Since 2004, the investment to this program has been significantly increased. As the Table 13 shows that total investment increased from 1.74 billion CNY in 2004 to 22.23 billion CNY in 2008. The number of the total beneficiaries reached to 42.843 million rural poor. The Rural Five Guaranteed Program started in the 1950s. It became a national fiscal transfer in 2002. The program only targets those who have no mean to support their life either through their own labor or through their social network. The Table 13 also indicates the trend of increasing coverage in rural China.
Table 13 Status of Rural Minimum Living Standard Program and Five Guaranteed Program (Number of beneficiary 10,000) 2004 The number of beneficiary(10,000) Standard (CNY/month per person) Level of compensation (CNY/month per person) Number of rural people under the guaranteed program Standard of the guaranteed program (CNY/year/person) Source: Ministry of Civil Affairs of PRC 1608.2 1953 2176.1 -349. 7 503. 3 531.3 548.6 488 76 38 2005 825 70.9 34.5 2006 1593.1 70 38.8 2007 3566.3 82.3 50.4 2008 4305.5 76 38

E: New Rural Old Pension Program. Initiated in 2009, the program aims to become national wide to cover potential 45 million rural old people in 2012. The program includes all those who are not covered by urban pension system

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3. Challenges facing the PRC for inclusive growth and poverty reduction
China is now classified as a middle income country. In 2008, its average GDP per capita, based on current prices, reached 3267 USD; average national income per capita is 2940 USD, and national income per capita is 6010 USD, based on PPP. The majority of middle income countries adopt a poverty line above 2 USD. Based on this poverty line of 2 USD, China has a poor population of 474 million people, which means that one third of the total population is living on less than 2USD per day (UNDP/LGOP, 2011). Despite the fact that PRC has made a great effort to cope with the problems affecting its sustained growth and poverty reduction, there are a number of new problems and challenges that China will have to face in the next ten years to achieve its goal of large scale poverty alleviation. Poverty reduction will become more constrained by an increasing inequality; low and complex poverty line regime continues to lead the leakage of the poor; new transitional poverty is emerging in the process of urbanrural integration, and this will become more prevalent; economic transformation and urbanization will lead to large scale migration; limited participation of the rural poor affects village governance and the performance of rural developmental poverty alleviation programs.

3.1 Macro level economic constraints and income inequality

The PRCs future growth and poverty reduction will increasingly depend on macro-economic and social conditions. On the one hand, the PRCs economy is encountering the middle level income trap which requires continuous capital investment for adjusting the economic structure under the situation that the global market which has been one of the major driving forces for Chinas economic growth may stagnate due to the financial crisis, and more severely inflation over recent years. Yet despite the increase of farmers income, consumption remains limited within the rural population. Furthermore, increasing labor costs may reduce the competitiveness of PRCs industrial goods in the global market. Consequently, the labor intensive sectors which employ substantial number of the poor will likely be affected. This will have impact on poverty reduction. On the other hand, with an aging population and an increased need for social protection programs, government expenditure on these items is likely to increase. Given the PRCs strong role of the state in the economy, this will affect the capacity of the state to invest in other areas of the economy. The PRCs remarkable poverty reduction performance from the 1980s and the 1990s was largely based on its equal conditions. Significant poverty reduction happened during the time

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when the Gini coefficient was very low in PRC. In the late 1970s, the Gini coefficient in the urban and rural areas of the PRC was at 0.16 and 0.21 respectively. By 2006, the Gini coefficient in the PRCs rural and urban area rose to 0.37-0.35, and the national Gini coefficient increased to 0.49 as the Table14 shows. Increasing inequality seriously affects the PRCs growth to be inclusive. From 2000 to 2007, average farmers income in the PRC had increased from 2253 CNY to 4140 CNY, increased by 83.74 percent, while the income of the absolute poor and relative poor had only increased by 26.6 percent and 21.09 percent respectively as the Table15 shows. In addition, increasing inequality also forces the PRC to increase its expenditure on social protection program in order to offset actual decline or stagnation of the poors income. The increases in income inequality among urban household and widening urban-rural income gaps have been the key drivers of rising inequality (Li, 2008). Thus therefore, although the PRC has started to increase its social protection investment, without adjusting its income distribution system between urban and rural and between poor and rich, the PRCs previous growth and poverty performance will be unlikely sustained as inclusive and as a result, PRC would likely be trapped in a vicious welfare cycle.
Table14 Income Inequality in PRC Year 1978 1995 2000 2001 2002 2003 2004 2005 2006 Rural 0.2124 0.3415 0.362 0.365 0.3701 0.3763 0.3692 0.3751 0.378 Urban 0.16 0.28 0.3364 0.358 0.3624 0.3732 0.3489 0.35 0.356 0.389 0.417 0.459 0.460 0.447 0.469 0.47 0.496 National

Sources: The Year Book of Statistics: Rural Household Survey and Urban Household Survey Table15 Farmers Income Increase from 200-2007 (CNY/capita/year) Year National average The average in the poor counties 2000 2253 1338 516 807 The average in the poor villages Absolute poor Relative poor

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2001 2002 2003 2004 2005 2006 2007

2366 2476 2622 2936 3255 3587 4140

1277 1305 1406 1585 1726 1928 2278

1196 1327 1488 1633 1815 2165

531 531 579 552 614 653

813 814 854 860 869 977

Source: Poverty Monitoring in Rural China, 2010

3.2 Poverty leakage in urban and rural areas due to a inadequate poverty line
The rural poverty line was set in 1985 based on the monetary value of the food needed to produce nutrition equivalent to 2,100 calories per person per day plus the monetary value of nonfood consumption (NBSC, 2006b). This poverty threshold was an absolute poverty line and was adjusted according to the change of the rural CPI in 1990, 1994 and 1997. The poverty line adjusted in 1997 was based 85 percent food consumption (Engel coefficient), which is lower than 60 percent of food consumption used by the international standard. The government of PRC deliberately lowered the poverty line in rural areas with due political and financial considerations. Firstly, it serves to suppress the magnitude of rural poverty problem; second, it avoids the government taking up voluminous burden of instituting poverty relief measures (Yang, 2011). In 2000, the government of PRC adopted low income poverty line which was close to $ a day PPP and in 2008, the government abandoned the absolute poverty line and began to use $ a day line as the official rural poverty line. Despite those changes, the PRCs rural poverty line is still low comparing to an increase of rural per capita income. As the Table16 shows that the rural poverty line has dropped as a percentage of per capita net rural income, from 5.76 percent in 1985 to 21.52 percent in 2009. As the consequences, this rural poverty line leads to a number of issues for the PRCs inclusive growth and poverty reduction. Firstly, according to Yangs study, although the rural poverty line had been adjusted in accordance with the CPI, its purchasing power did not decline; the real purchasing power of poor families has been lower than their nominal purchasing power. If the rural poverty line is converted to examine the purchasing power of grain, its purchasing power declines. High food prices have for many years caused poor families to find themselves in an increasingly difficult situation (Yang, 2011). Secondly, the PRCs rural poverty line leads to a serious underestimation of the rural population and ultimately excludes substantial number of the poor from its poverty reduction programs. By

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using 1.08 USD PPP in 1993s price, the PRCs poverty population is 212 million in 2001, 177million in 2002 and 76 million in 2004, while by using the PRCs poverty line, the poverty population is only 91 million, 85 million and 76 million respectively. Thirdly, this poverty line creates difficult to legitimate increasing resources both politically and publicly. In fact, insufficient financial input has been he leading cause of the slow progress in the poverty reduction program. It was estimated that each poor village designated as the poor village need averagely CNY 2.28 million, while actually investment was only from CNY200,000 to 500,000 during the last ten years. In addition, as the PRC has jointed the category of middle income country, it is too low to apply $ 1 a day whereas all other middle income nations adopt $ 2 a day line. If taken $ 2 a day line, according to the estimation of the World Bank, 46.7 percent of the PRCs population is under the poverty line. This leads to a great challenge facing the PRC in terms of its strategy and finance for poverty reduction over next few decades.
Table16 Share of Rural Poverty to the Net Rural per Capita Income 1985 Net rural income (CNY/year per capita) Poverty line (CNY/year) Share to the net rural income (%) 398 206 51.76 1990 686 300 43.73 1995 1578 530 33.59 2000 2253 625 27.74 2005 3255 683 20.98 2009 5919 1274 21.52

Source: authors calculation based on Poverty Monitoring in Rural China, 2009, 2010

Due to a lack of urban poverty line in the PRC, urban minimum living standard can be taken as the urban poverty line. By using the urban minimum living standard line, there is also a gap to cover the urban poor. In 2004, there was only 3.9 percent urban poor covered by the program in 35 big and medium cities in the PRC, while the urban poor should be 8.1 percent using the minimum standard lines in those cities and only covered around 50 percent of the urban poor (Wang, 2006). The deficiency of reaching the urban poor can be considered as the result of an inadequate definition of urban poverty line. A large gap exits between the urban poverty line estimated based on Martins method. According to Wangs calculation as shows in the Table17, in 2004, the urban minimum living standard line was only 68 percent the poverty line calculated based on martins method. This implies that the PRCs urban poverty population is also seriously underestimated.

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Table17 Comparison between the Urban Poverty Line and Urban Minimum Living Standard Line (CNY/Year per capita) Region East Region Central region West Region National Source: Wang Youjuan, 2006 Poverty line 3411 2610 2664 2985 Minimum line 2407 1670 1735 2016 Poverty line/minimum line (%) 71 64 65 68

Current poverty line applied in PRC is also complex with dual structure for rural and urban and also for rural minimum living standard and rural poverty line for development oriented poverty reduction program. For instance, in 2009, the PRCs urban minimum living standard was CNY 2733.6/year/capita, while rural poverty line was CNY1196. This dual poverty line system practically lead to exclusion to those whose income is above rural poverty line, but migrate into urban area without official living persimmon (urban Hukou). At the same time, in rural areas, because rural minimum living standard program is managed under the Ministry of Civil Affairs by using rural poverty line, while the LGOP manages rural development oriented poverty reduction program by using same line. This would create overlapped investment in the same group of rural people unless another poverty line is developed for development oriented poverty reduction program although the State Council has called for linking up those two systems.

3.3 Non-income poverty

The PRCs poverty reduction performance has been mainly cheered by the result measured by the income and consumption line which is a minimum for survival; however, viewed from a non-income perspective, poverty remains a serious issue for PRC. Despite the recent efforts made by the PRC to address the issue, health and education are still the main areas challenging the PRCs current and future inclusive growth and poverty reduction. The poverty reduction strategy based on income-consumption poverty misses significant non-income poverty conditions. Many households above the income-based poverty line are actually poor because they are disadvantaged in non-income areas. Consequently, this leads to serious leakage of the real poor. 3.3.1 Health and poverty

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Despite the improvement on access to health care through the New Rural Cooperative health System and its complementary program, the health care is still the major area that creates now poverty and deepens exist poverty. As indicated in the Table 11, the percentage of the poor who cannot access due to economic difficulty remains 56.3 and 57.9 percent in the poor countries and the poor villages respectively in 2008. In addition, the health expenditure to total expenditure for the poor families in both poor countries and poor villages had even increased from 2000-2008 as the Table18 shows.
Table18 Expenditure to Health to the Total Expenditure in Rural China (%) 2000 The poor villages The poor counties Rural average Source: 4.56 5.24 4.64 5.55 2001 2002 5.81 5.72 5.66 2003 5.57 5.7 5.96 2004 5.45 5.59 5.98 2005 5.60 5.69 6.58 2006 5.97 6.00 10.21 2007 8.15 8.36 6.52 2008 5.90 6.10 6.70

Difficult to access medical and health care is mainly caused by the segregation of urban and rural policy frameworks, which leads directly to an increasing gap in health care resource allocation between urban and rural areas, which has further increased the cost to migrant workers of using urban health care services. In the public health sector, as a result of inadequacies in information provision and the increasing gap between rural and urban incomes, the majority of poor rural areas and the low-income population has become the target of low-quality food and medicine sellers, making poor people more susceptible to potential harm (UNDP/LGOP, 2011). The New Rural Cooperative health program and related complementary program help relieving the financial burden for the poor; however, Illness-related poverty has become a widespread phenomenon in rural areas, within the poor population and amongst urban lowincome groups, because the participation rate of poor rural households is still low in many areas. Even in those projects which have a relatively high poor household participation rate, the problem of low compensation rates is still significant (Xie Huiling et al 2008). Research shows that illness as an external factor may not necessarily lead to persistent poverty, yet its impact might last for about 20 years. Finally, it is important to stress an additional key fact which children, the elderly and women are more likely to suffer particularly from illness-related poverty (UNDP/LGOP, 2011). 3.3.2 Education and poverty:

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Education-related poverty has been eased to some extent following the introduction of the cost reduction policy on compulsory education, but this in itself is not sufficient. It is estimated that currently there are 5 million children of school age who cannot complete their compulsory education, and these children are mainly located in poor areas in western China. In noncompulsory education, the high cost of tuition has restricted access by many children from poor households; children from low-income and poor households drop out of school and lose educational opportunities, resulting in insufficient investment in human resources. As the Table19 indicated, there had been a decrease of the education expenditure to total family expenditure in the poor counties and poor villages, however, education cost still remains noticeable. The share of education expenditure to the net income for those who lived under the PRCs absolute poverty line in 2005 was even 46.1 percent and 32.8 percent for those between the absolute and relative line. The data used is the averaged, if to take those who have children in school; the situation is even more serious. In 2004, for those families who had children in school, their education expenditure shared 45 percent of their total income (Chinas Development Report, 2007). The school redistribution policy implemented after 2000 is the major source of the problem. Reducing and merging primary and middle schools in rural China caused an increase cost for accommodation, food and transport.
Table19 Education Expenditure to Total Family Expenditure for the Poor (%) 2002 The poor village The poor counties Rural Average 10.23 10.61 11.46 2003 10.82 11.26 12.13 2004 12.05 12.74 11.33 2005 11.38 11.92 11.56 2006 9.58 10.03 6.77 2007 5.95 5.92 9.48 2008 6.80 7.20 8.60

Source: China Development Report, 2007

3.4 Social transformation and transitional poverty

PRC has experienced the largest population migration in its peacetime history (WB 2009). This has created about 150 million migrants and their overall numbers are still increasing. This process of migration will continue for the next fifteen to twenty years. While the workforce in rural areas moves to cities and forms large numbers of migrant workers, it also creates a considerable number of left-behind people in rural areas, notably the elderly, children and women. On the other hand, rapid growth in the production of non-agricultural goods in the rural economy, and the rapid growth of urbanization have also increased demands to convert agricultural land to other uses, resulting in approximately 40 to 50 million farmers losing their land (Han Jun, 2005). This rapid transformation has created transitional poverty.

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3.4.1 Migrate workers and poverty risk Social exclusion from institutional and social perspectives for migrate workers has merged as critical for PRC in recent years. Surveys show that in 2009 of those rural migrant workers who worked as employed staff, only 42.8% had a signed contract with their employers; 89.8% had a weekly working time in excess of 44 hours (regulated under the labor law); those who are employed in the hotel and catering industries work more than 60 hours per week (UNDP/LGOP,2011). In 2009, only 7.6% of employers paid pension insurance for rural migrant workers; 21.8% paid work injury insurance; 12.2% paid medical insurance; 3.9% paid unemployment insurance; and 2.3% paid reproduction insurance. In practice, discrimination against migrant workers is not only experienced at the level of legal and institutional arrangements, but also through bias and exclusion at conceptual, psychological and cultural levels (Xu Yong, 2006). Furthermore, the latter is normally more lasting and thus more difficult to eliminate than the former. Social exclusion reinforces the segregation of social strata, and thereby functions to keep rural migrant workers at the bottom of society. Children of rural migrant workers cannot enjoy educational rights equal to those of children of residents in cities; this will result in an increased educational gap between rural and urban children. Poverty can thus be transmitted from one generation to another. According to the large- scale survey carried out by the National Coordination Team on Women and Childrens Rights (2007), in 2006, only 36.4% of work units enforced the full length of legal maternal leave for female migrant workers; only 12.8% reimbursed the costs associated with

reproduction; 64.5% did not pay for maternal leave; 58.2% of female workers needed to go back to their original place to have pregnancy checks instead of having these in their place of employment; this not only caused them considerable inconvenience, but also increased women migrant workers economic burden and difficulties in accessing jobs. Female migrant workers have stated that very often they feel exhausted, with 46.3% being extremely tired. This figure is 18 percentage higher than that for male migrant workers, and 11.5 percent higher than that for women remaining in villages. 3.4.2 Landless and poverty Some landless farmers have obvious disadvantages in job markets due to their lack of nonagricultural skills, and a large proportion remain unemployed or semi-unemployed. Surveys show that the most difficult task that landless peasants face is to obtain new skills for other occupations. Additionally, the unemployment rate among the elderly who cannot easily adapt to new economic requirements and the number unskilled is increasing (State Council Development Research Center, 2009). Only a relatively small number of landless peasants

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can enjoy the same social security service as urban residents. Most form a marginal group living in a social security vacuum. Land deprivation also disaggregates the social system that is tied to the land - such as the ties between distant relatives, neighbors, lineage members and community members; thus, whilst farmers lose their land, they also gradually lose their former social capital. A survey shows that 48% of interviewed landless farmers do not identify themselves as urban citizens (Yu Xiaohui, Zhang Haibo, 2006). 3.4.3 Left-behind and poverty Many of the left-behind children have much looser contact with their parents than their peers, thus they are inclined to experience more psychological problems and pressures (National Womens Federation Children Work Division, 2008). Some left-behind women cannot stand the loneliness, and divorce rates increase (China Communist Party News network, 2009). Because children are not at their side and in most villages public cultural facilities and activities are scarce, nearly 50% of the left-behind elderly feel under pressure, and one third of them often feel lonely, and are frequently anxious, irritable and depressed (Ye Jingzhong, 2008).

The health conditions of many of the left-behind elderly are poor, and they lack caring in their daily lives and have heavy workloads. Many do not have sons or daughters at their side to take care of them when they are ill. Given the prominent trend of feminization of agriculture work (Zhen Yan, 2008), the work intensity of left-behind women is increasing dramatically, and this not only seriously affects their health but also increase their susceptibility to disease; Yet many are unable to afford medical costs (Ye Jingzhong, 2008).

Surveys have shown that 81% of the left-behind elderly are still engaged in agricultural production; only 8% have obtained support from the state in cash or kind; and only 1% have social endowment insurance (Ye Jingzhong et al, 2008). This situation can only be improved when new rural endowment policies are enforced.

3.5 Limited participation and exclusion

The poor village poverty reduction and development program has improved participation by the poor in poverty reduction activities; however, the results of this participatory village development program are uneven. As the Table 7 indicates that only 11.3 percent villagers responded that the project met their urgent needs. The national poverty monitoring survey also shows that the percentage of the villagers who have chance to define the project contents before the projects are finalized has even decreased from 54.6 percent in 2002 to 45.9

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percent in 2009 (Poverty Monitoring Report of Rural China, 2010). Other study also shows that despite the increase of the fund to the household level which confirms an overall improvement of the targeting through this new approach, the fund to real poor remains challenge (Li Xiaoyun, 2006). The Table 7 also shows that only 17.7 percent of the villagers responded that the fund has reached to the poor. Overall, according to the conclusions from the national poverty monitoring survey, the new targeting approach has enabled a significant improvement of fund to the poor villages, to the household, however the degree to which the project meet the needs of the poor and the degree to which the project contents are defined by the poor remain to be noticed (Poverty Monitoring Report of Rural China, 2010). Those results suggest that participatory method can generate a significant change of development intervention, but real participation remains limited. Elite capture is another factor affecting the poors participation in rural areas. The Elite capture has been analyzed as resulting from a combination of factors: unequal access to economic resources, knowledge and manipulation of political processes, higher levels of educational attainment and privileged networking. As a result of the dominance of village elites, poor groups comprised mainly of women and the elderly cannot effectively participate in various projects due to their limited capacity and lack of access to resources. This situation has entrenched existing difficulties in poverty alleviation: on the one hand, due to the lack of existing organizational carriers, there are high costs associated with re-organizing weak groups in villages who are short of human, material and natural resources, and on the other hand, this will in turn affect the efficiency of poverty alleviation work.

3.6 The role of the PRC in international development

PRC has grown as one of the important players in international development. It provides development aid to other developing countries in three forms, grant, non-interest loan and favorable loan scheme. Over the last decades, the PRCs development aid has been operated in a non-conditional way, which has been welcome by the most receipt countries. The challenges merge whether the PRCs development aid could accompany the transfer of its technology as well as its poverty reduction experiences and lessons to receipt countries. Although its current aid program is based on the receipt needs, to make its aid program more effective in a poverty reduction perspective for receipt countries is concerned. In addition, the PRCs development aid program does not comply with the OECD/DAC framework. This also raises concern whether the PRCs development aid affects the collective efforts to improve the aid effectiveness to receipt countries.

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4. What can other countries learn from PRCs poverty reduction success
The PRCs poverty reduction process proves that a poor, rural-based country can become a middle income country with a rising share of industry and services in gross domestic product (GDP) and employment. Productivity and income per capita and job creation grow fast. In this process, agricultural productivity rises, while labor moves from farms to towns and cities, and there is a demographic transition as birth rates fall. The economy becomes involved in global supply chains in ways that generate continuous learning by doing and up-grading of enterprise level capacities (i.e. dynamic capacity development). A supportive, developmental state provides vision, planning, budgeting, co-ordination and the means for nationwide engagement. There are number of experiences and lessons of the PRCs poverty reduction success on which other countries can draw.

4.1 Growth and population dynamics

The PRCs transformation process proves that to reduce poverty requires high sustained economic growth; however, growth to be effective for poverty reduction also depends on population dynamics. The PRCs population policy has made a great contribution to overall poverty reduction through enhanced per capita growth rate. Over last 30 years, the PRCs natural population growth rate has been decline from 11.61 in 1979 to 5.28 in 2008 although its population control policy has been controversial. For most developing countries, particularly in the poverty striking Asia and Africa, the high population growth offsets economic growth. Despite positive contribution of the PRCs population policy to poverty reduction, insufficient labor supply and early entering to the aged society begin to be the challenge for PRCs in coming decades. The PRCs growth and population dynamics suggests that for those countries which have high population growth need to control population growth in order to enable growth more effective to poverty reduction; however, population policy has to be in a long run to avoid earlier birth of labor shortage and aged structure during low and middle income stage.

4.2 Agricultural development and poverty reduction

The PRCs agricultural growth has been the major pillar of economic growth and poverty reduction over the last three decades. Massive reduction of rural poverty is the result of increased agricultural productivity during the 1980s, followed by continuous migration to the

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cities. The rural population decreased from 80 percent in the 1980s to about 55 percent in 2000. This population shift was concurrent with a rapid increase in agricultural labor productivity and capital flowing from agriculture to other sectors, particularly labor-intensive manufacturing and service sectors that absorbed the rural labor force. PRCs agriculturebased inclusive growth has created a development path that successfully coupled agricultural development and poverty reduction. For most poverty striking countries, agriculture is still the main sector of the economy and rural population dominates the society, thus to reduce poverty requires indispensably the improvement of agricultural sector.

4.3 Inequality, growth and poverty reduction

The PRCs previous and current development experiences and lessons suggest that high level inequality harm growth and poverty reduction. The significant poverty reduction started from low level of inequality during the end of the 1970s and subsequent fall of poverty population during the 1980s was still based on a slow rise inequality. The poverty reduction rate moved at the slow rate when the inequality increased rapidly after the 1990s. For most poverty striking developing countries, poverty incidence is still high, but inequality moves fast. This compresses the space for growth and poverty reduction. Therefore, to reduce inequality becomes urgent for most poor countries, particularly in Asia and Africa to break through the vicious cycle of inequality and poverty.

4.4 Effective developmental state and poverty reduction

The PRCs noticeable economic growth and poverty reduction is the result of market oriented reform; however, the process has been significantly directed by a strong role of the state. The PRCs state role has been well reflected in its commitment to growth and poverty reduction, its efficient implementation capacity, and consistent development and poverty reduction strategies and policies. Accountability development has been the central in the PRCs political agenda. There are many measures taken by the PRC to develop the whole system into development oriented such as capacity building, peer competition among local government, performance review mechanism. For most of poverty striking countries, particularly the fragile states, strengthen the role of the state becomes critical to poverty reduction. The PRCs can offer rich experiences and lesson over this capacity building process.

4.5 Transitional lessons

The PRCs poverty reduction success has been also accompanied by series of problems. Rapid transformation has widened the urban-rural gap in all political and social economic

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terms. The dual residential permission system plays the central role for the urban rural divide. The PRC has not been able to solve this problem due to advantaged urban warfare system. In addition, rapid urbanization has grabbed rural land continuously causing an increasing number of landless as well as lost of land value. These problems largely derive from neglecting right based development approach. This transitional lessons suggest that the countries which begin with a rapid transformation need to take right-based approach seriously otherwise high cost both political and social economically will be have to paid.

5. Recommendations
In conclusion, the challenges facing the PRC in inclusive growth and poverty reduction now becomes more complex than ever. Firstly, its domestic growth and poverty reduction has entered new stage characterized by transitional issues. Without proper strategy and policy to address those problems, the PRC unlikely remain its high growth and profound poverty reduction performance. To address those problems requires new policies different from previous ones, and more importantly requires the solutions from more institutional perspective; secondly, the PRCs inclusive growth and poverty reduction will increasingly link up with global context. Its increasing involvement in global economy particularly in other developing countries will also affect its efforts towards its domestic growth and poverty reduction, thus its development aid to other countries will likely merge as the issue.

5.1 The PRC needs to establish an urban-rural integrated development model to benefit the entire poor population
From a long-term perspective, the PRC must establish a policy framework and development model which can benefit vulnerable groups and enable them to share the fruits of urban-rural integrated development, avoiding current problems such as the increasing income gap, segregation, and tensions between rich and the poor groups commonly evidenced in the process of urbanization in many developing countries. Specifically, recommended policies include:

(a) Fully develop labor intensive industries to provide adequate job opportunities for the large number of rural migrant workers. Extend training programs for migrant workers. These programs have proven successful not only in China, but in many other countries - notably in Andhra Pradesh, India, providing employment options for vulnerable young labors, linking them to jobs in urban and semi-urban areas, following a three month training programme with staff from industries acting as mentors. In Bangladesh, similarly successful short-term

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programs have been implemented for poor rural households, preparing them with skills training for work in urban and semi-urban area, and with food assistance. (b) Establish urban-rural unified and equal production factor markets. Enforce the de-elitized household registration reform, enabling most people who are employed in cities to register. Entitle rural land with complete ownership, equalize the right and price of rural and urban land; and guarantee fair compensation for landless peasants. (c) Establish an urban-rural integrated rather than a segregated or fragmented public service policy framework, and treating urban and rural residents together as one group; set up a livelihood safety network covering and unifying urban and rural vulnerable groups at the national level. As outlined in the sub-report, international experience in this area stresses the need for policies to be portable. Many migrants enroll in social insurance schemes but then withdraw at a later stage because they cannot take the insurance benefits with them when they move. Additionally, often when they withdraw they can only take out their own contributions to these funds, whereas their employers contributions remain. To address migrants problems, not only must existing schemes be extended, but new independent programs must be created to meet the specific needs of rural-urban migrants. Considering the varying levels of economic development in different provinces and the current condition of fiscal transfer payments, it is suggested that each province be encouraged to unify the urbanrural public service systems within their jurisdiction, with support from the central government, and to pave the way for a national integrated system as the next step.

(d) Establish a fiscal transfer payment institution which addresses the dimensions of poverty, together with a dual system of person and location affiliation. Public services such as education, medical care, pension provision and poverty alleviation should have stronger compensation mechanisms, emphasizing beneficiaries rather than their attributed locations. (e) Fully consider the accessibility of the rural left-behind to basic public services. In the allocation of fiscal funds, address the increasing financial need to provide urban public services resulting from increasing urbanization and the need for the rural left-behind to access public services, and ensure this benefits left-behind groups, rather than maintaining or extending their marginalization when making fiscal transfer payments.

5.2 The PRC needs to adjust its urban and rural poverty line and also to enhance participation of the poor to reduce the leakage of the poor.

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The PRCs current urban and rural poverty line is too low even with $ 1 a day standard. Around 50 percent of urban poor is not covered by current urban minimum living standard program. With an adjusted rural poverty line, the PRCs rural poverty line still lower than $ 1 a day by using 2003s price. In addition, as the PRC has entered the middle income countries, the PRC needs to consider adopting $ 2 a day poverty line apply to both urban and rural. Specifically, to adopt relative poverty line is more appropriate for the PRCs conditions as the absolute poverty line only can serve the monitoring purpose, cannot help accurate targeting. Furthermore, to integrate both rural and urban poverty line would also help reducing an increasing urban rural disparity. Thus, to develop a same standard of poverty line for both urban and rural is urgent.

Despite improved participation by the poor in poverty reduction program over last 10 years through participatory village development planning, real participation by the poor needs to be further enhanced. This requires reducing the control for finance from both township and county level through legitimating the village development plan. To strengthen farmers organization merges critic because major development activities at village level are implemented through current elite centered governance structure, which often causes elite capture and exclusion.

5.3 To develop new rural poverty reduction strategy to cope with the middle income challenges
The PRC has not fully realized that its rural poverty reduction strategy needs to be adjusted according to its status as the middle income country. Previous and current , even the future rural poverty reduction strategy to be released are still based on low poverty line on the one hand, the approaches used and suggested for next 10 years are still following the income increase measures on the other hand. To develop new poverty reduction strategy to address middle income challenge requires:

(a) To develop new poverty line across urban and rural for having more accurate coverage through resources allocations. In addition, different level of the poverty line should be developed in different regions as the living standard is varies across the regions.

(b) To develop new type of development oriented poverty reduction program with more focuses on vulnerable groups to cope with all kinds of risks. This would include developing sensible livelihood insurance system and improving capital supply through more community based structure.

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(c) To restructure the PRCs fragmented institutional setting and to integrate urban and rural as well as development oriented poverty reduction program and minimum living standard into a well coordinated framework to reduce inefficiency reduce transaction cost. It may also be necessary to strengthen the authority of the State Council Poverty Alleviation Leading Group and to improve the functioning of the Poverty Alleviation Office, so as to enhance its organizational capacity for coordination, and to put it in charge of monitoring and evaluation.

(d) To set up a responsive monitoring and evaluation mechanism to keep track of all departments in relation to their proposed objectives and actual performances. The multidimensional poverty indicator should be developed to monitor the change.

5.4 The PRC needs to integrate inclusive growth and poverty reduction into its development assistance program. Specifically, it needs to consider:
(a) To enhance the cooperation with international and regional organizations to improve global and regional public goods delivery by taking the PRCs successful poverty reduction experiences and lessons. There are two areas that the PRC can offer to other countries particularly to Asia, development oriented poverty reduction program and disaster relief in poverty reduction perspective. (b) The PRCs foreign aid program has been largely development-effectiveness -oriented, and its aid program often has low management cost, thus to enhance the cooperation with established donors would benefit both receipt countries as well as the established donors. This could be done through G20 framework with SSC concept. (c) The PRCs foreign aid program needs to take its own development experiences and lessons into consideration and to encourage technology transfer and mutual learning.

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