A TIME AND A PLACE

China’s path out of poverty can never be repeated at scale by a country again

Obsession
China's Transition
Obsession
China's Transition

Since China began its market reforms in the late 1970s, it has lifted more than 800 million people out of poverty, slashing the rate from nearly 90% in 1981 to under 2%, as measured by the World Bank’s latest spending benchmark.

The rest of the world is lagging behind. Ahead of the UN general assembly this week, the Bill and Melinda Gates Foundation warned that the international community could miss the ambitious milestone it has set on poverty—to banish it by 2030.

The 2030 target and 16 other sustainable development goals replaced a set of millennium development aims that sought to halve extreme poverty between 1990 and 2005. Over that time, the number of people worldwide living in extreme poverty went down by over a billion, to 840 million. China accounted for about half the drop.

In the years ahead, the biggest gains must come from elsewhere. World Bank data show that of the one in 10 people in the world still living on under $1.90 a day, more than half are in Africa. The ranks of the extremely poor in sub-Saharan Africa have expanded since 1990—peaking in 2010 at 399 million (pdf, p.38). India, for its part, halved the share of its population living in poverty in the past two decades. Still, the country remains home to the largest number of poor people anywhere.

What has made China unique

China is sometimes looked to for lessons on how to reduce poverty—and there are definitely many to be had. However, the story of how China lifted its hundreds of millions is a particular story of implementing the right policies at the right time in the right place, as the country took advantage of the rise of globalization in a way that wouldn’t be possible today. Even for China.

Here are some of the conditions that made China’s gains possible:

Developing-country wages amid well-developed infrastructure

In 1978, China’s leader Deng Xiaoping kicked off the “reform and opening-up” campaign by focusing first on improving his nation’s dismal agricultural growth. Deng dismantled Mao Zedong’s communes, and allowed a return to family farming. That led to dramatic gains in agricultural incomes and savings, helping to provide funding for the industrial and urbanization coming next.

When companies first began to shift factories from the developed world, wages were low in China. Even by 2004, Chinese factory workers earned an estimated 64 cent per hour, as compared to $2.48 in Mexico, the lowest hourly compensation among the 30 foreign countries measured by the US Bureau of Labor Statistics. But low wages alone may not have made China that much more attractive than other countries with large, low-paid labor forces.

In the 1980s, China launched major efforts to build dams, irrigation projects, and highways. The Food-for-Work program, which offered free meals to workers, promoted highway construction in rural areas. Between 1994 and 2000, some 42,000 kilometers (26,100 miles)—about 1,200 kilometers a day—of rural highways were built a year. (Even now, India manages just about 20 kilometers a day.)

“By the early 2000s, China had a unique and probably unrepeatable combination of low, developing-country wages and good, almost-rich-country infrastructure,” wrote Arthur Kroeber, founding partner at Gavekal Dragonomics, a China-focused research consultancy founder, in his 2016 book China’s Economy.

The combination of low-wage workers with a basic education—adult male literacy was about 80% in 1980—drew foreign investment in factories and created millions of jobs. China’s per capita GDP went from being less than Bangladesh’s in 1980—under $200—to more than $8,000.

The revolution in cargo transport

China was well-prepared for the offshoring of factories from the West. Yet the factories wouldn’t have headed to China without gains in telecommunications and transportation that made it possible to manage far-flung supply chains, boosting global trade. At the heart of those changes was what seemed a relatively simple innovation—the shipping container, invented in 1956, and not widely adopted until about two decades later. The container made it easier to load more on ships and do it more quickly—allowing for bigger ships and cheaper cargo costs. According to the Economist (paywall), “containers have boosted globalization more than all trade agreements in the past 50 years put together.” Now, more than half a century after their appearance, most of the gains from its adoption may have already been made.

Innovation in consumer electronics

Personal computers. Walkmans. Mobile phones. All these ground-breaking gadgets started to change consumers’ lives in the 1980s and ’90s—opening up new lines of manufacturing. China’s export boom over that period was largely driven by electronics and machinery. Between 1992 and 2005, as the IMF noted (pdf), Chinese manufacturing exports shifted significantly from agriculture and soft goods, such as textiles and clothing, to higher-value items like consumer electronics and appliances. And as demand for these goods was about to explode, barriers to selling to the biggest markets—the US and Europe—were coming down, particularly after China entered the World Trade Organization in 2001. That’s quite different from these more protectionist times, especially with populist and nationalistic rhetoric on the rise in the West.

China’s share of global exports reached 13.8% in 2015, the highest share any country has enjoyed since the US almost 50 years ago.

Little competition from automation

When China began opening its doors to foreign investment, factories looking to cut costs had few alternatives to low-wage humans. Now countries thinking of focusing on boosting manufacturing and exports are competing against other low-wage economies—and countries in the developed world that can take advantage of the productivity gains made possible through automation. According to consulting firm BCG, the share of manufacturing tasks performed by robots will go from around 10% now, to 25% in 2025, which could help keep factories close to markets.

The limits on what can be copied

Some aspects of China’s battle against poverty are repeatable—and others come with pitfalls:

A tolerance for experimentation

Despite China’s one-party rule and highly concentrated power structure, often cited as the reason for its success in the battle against poverty, University of Michigan politics professor Yuen Yuen Ang notes that China actually encourages a fair amount of experimentation and decentralization. Pilot projects and new policies are tried out on a smaller scale and then either expanded nationally or abandoned. The policy at the start of reforms actually grew out of a grassroots experiment. In 1978, farmers in a poor village in eastern Anhui province signed a secret contract to divide up collectively owned lands among families. The local provincial official didn’t fight the effort—and later Deng decided to adopt this “household responsibility system” nationwide. Other countries could do a better job of expanding the adoption of successful small-scale experiments.

Massive spending on infrastructure

China’s infrastructure-investment model, which once served it so well, facing increasing scrutiny, given the country’s economic slowdown and high debt after stimulus spending to deal with the 2008 global financial crisis. “Poorly managed infrastructure investments are a main explanation of surfacing economic and financial problems in China,” wrote researchers at Oxford University in a paper published in September (pdf). “We predict that, unless China shifts to a lower level of higher-quality infrastructure investments, the country is headed for an infrastructure-led national financial and economic crisis.”

Advancement brings new challenges

China’s own battle against poverty isn’t quite over, of course. By the end of last year, there remained more than 43 million Chinese citizens still living below the nation’s official poverty line of 2,300 yuan annual income (about $350), measured in terms of 2010 purchasing power. China says it aims to wipe out poverty by 2020, with the ruling communist party vowing to build a “moderately prosperous society” ahead of the 100th anniversary of its founding.

“We must send our best talents to the front line,” president Xi Jinping said in a speech in June.

With slowing economic growth, high government debt, rising health-care costs, and the need to assist both left-behind children and elderly parents the last 40 million may prove a tougher challenge than the first half a billion.

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