Chapter 21The Effects of Public Expenditureon Pro-poor Growth in Rural China:A General Equilibrium SimulationApproach

Yibing Wang and Xiaoyun Ma

Abstract This paper analyzes the effects of public expenditure on poverty indifferent regions of rural China. A general equilibrium simulation is used toexamine the effects of government actions on the rural poor populations’ welfare.The data used in this paper are available from the China’s National Bureau ofStatistics. The results of this study indicate that the economic growth in China ispro-poor no matter what simulation scenario is adopted. The public expendituresfrom the governments made significant contribution to the reduction of povertyseverity in rural China. In other words, the poor in rural China benefited from fruitsof the economic growth induced by the public investments. However not all theregions have profited uniformly from the economic growth.

Keywords Public expenditure � Economic growth General � Equilibriumsimulation

21.1 Introduction

Poverty used to be narrowly defined as a state wherein a person is below aminimum threshold of supply in food, income or consumption [1]. This narrowview is obsolete today for the specialists in social sciences as well as for orga-nizations and development economists. More stress is placed on the way how thepoor view their own situation and the way poverty is conceived within different

Y. Wang (&)School of Business, Shandong University at Weihai, Weihai, Chinae-mail: wang_yibing@yahoo.com

X. MaSchool of Economics and Management, Ningxia University, Yinchuan, Chinae-mail: fatyma@foxmail.com

Z. Sun and Z. Deng (eds.), Proceedings of 2013 Chinese Intelligent AutomationConference, Lecture Notes in Electrical Engineering 255,DOI: 10.1007/978-3-642-38460-8_21, � Springer-Verlag Berlin Heidelberg 2013

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cultures. It is widely accepted that the poor is those who do not meet the perceivedminimum conditions within societies throughout the world. Ravallion and Datt [2]noticed that such a definition takes into account the public interventions in primaryeducation, basic medical cares and road maintenance etc. This alternative defini-tion of poverty allows a researcher to make rigorous analysis and recommendproper intervention policies.

Kakwani [3] analyzed the impact of poverty among the target groups. It wasfound that rational public expenditures and optimal distributions appear to beefficient in reducing the inequality and poverty of populations. The debate todaylies in the nature and the relevance of the government intervention. How canpublic expenditures reduce poverty through economic growth? Barro [4] pointedout there is a positive correlation between the public expenditures and the eco-nomic growth in a region. However, is this growth beneficial to the poor? Is a pro-poor growth established in rural China?

This study intends to examine the effects of government actions in povertyreduction via economic growth. Some economists made relevant researches pre-viously. Kraay [5] found that a public expenditure leads to a qualified growth ofpro-poor when it is more beneficial to the poor than to the wealthy or when itscontribution to the poor is percentage higher than its contribution to the nationalincome. From then on the pro-poor growth is defined as better distribution of theunequal public expenditures and termination of expenses only beneficial towealthy groups.

21.2 The Poverty and Inequalities in China

There are 122.38 millions of inhabitants in rural China lives in poverty [6].Table 21.1 shows the evolution of poverty from 2002 to 2011 in rural China. Thepoverty reduction in rural China displays a saddle pattern since 2002. The ruralpoverty population increased from 28.2 million in 2002 to 29 million in 2003.Thanks to the increase of public expenditure in rural China since 2004 the ruralpoverty population declined rapidly from 26.1 million in 2004 to 14.79 million in2007. The poverty standard was revised upwards in China in 2008. The ruralpoverty population continued to decline until 2010. In 2011 the poverty populationhas jumped to 122.38 million from 26.88 million, an increase of more than 300 %.The incidence of poverty in rural China displays a similar pattern. Estimated at3 % on average in 2002, the population of poor people reaches its peak in 2011[6].

The data about income inequalities evolution in rural China are calculated fromthe data provided by China’s National Bureau of Statistics (NBS). The incomeinequalities in rural China increased significantly. The Gini coefficient hasincreased 4.17 % from 0.29864 in 2002 to 0.3111 in 2011. The Gini coefficientshows an upward trend in the short run and could easily surpass the warning line of

184 Y. Wang and X. Ma

0.4, which could bring serious negative effects on social development andeconomic growth.

The income inequality in rural China displays a widening trend. The incomeratio of high income over low income group has soared along with the increase ofGini coefficient. The income ratios of almost all other income groups over lowincome group display a widening trend. The income ratios of middle income, mid-high income and high income group over low income group have increased from1.95, 2.63 and 4.88 in 2002 to 5.45, 7.53 and 14.35 in 2011 respectively. The onlyexception is the income ratio of mid-low income group over low income group,which decreased slightly from 1.47 in 2002 to 1.40 in 2011. In sum, incomeinequalities between the poor and the rich are reinforced while the income of mid-low income group is falling down rapidly close to that of low income group.

Income inequalities in China go up despite the continuous and regular rise ingovernmental expenditures. The governmental expenditures’ share in GDP increasesrapidly. The Chinese current expenditures amounted to 18.33 % of the grossdomestic product (GDP) in 2002 against 23.1 % in 2011 (NBS, 2012). It appears thatgovernmental expenditures do reduce absolute poverty but not relative poverty.

21.3 The Literature Review

A pro-poor growth promotion—which improves the poor people’s ability toparticipate in the economic activity and to get an advantage from it—will beessential to get the poor out of poverty and reach the millennium objectives for thedevelopment [7]. Why has growth succeeded in reducing poverty in some coun-tries and not in others? How can the poor participate in the economic growthprocess and take advantage of it? Why the growth favorable to the poor isimportant and how can the backers promote it? The answers to those questionsconstitute the essential of the literature review.

The theories that treat the public expenditures as the source of the economicgrowth do not win unanimous support among the economists. Many researchers[8] clearly claim that public expenditures explain the economic growth in a

Table 21.1 Distribution ofwinners

Region SIM1 (ja) SIM2 (ja)

The north 0.18 0.22The north–east -0.26 0.08The north–west -0.07 -0.01The south 1.25 1.48The south–west 0.01 0.94The east 1.84 1.91The middle 0.02 1.13The middle-west 0.94 1.03The whole 1.01 1.21

21 The Effects of Public Expenditure on Pro-poor Growth in Rural China 185

positive way. However authors [9] concluded in their works that public expen-ditures do not make much contribution to the improvement of the growth rate inthe developing countries.

Dévarajan [10] was one of the first to use the concept of unproductive andproductive public expenditures. This classification permits to characterize theexpenditures likely to affect in a positive and significant way the growth of thegross domestic product in the short-and-medium-term. Public expenditures whichare described as unproductive in the short-term are considered productive in thelong-term. Gunter [11] explained a more global analysis about the public inter-ventions and their ability to reduce the numerical index of poverty. Gunter [11]explained that sole use of public expenditures could not guarantee a growthprofitable to the poor. They think that in order to fight efficiently against poverty, itis better to combine the actions and economic policies in several domains. Theinfrastructure projects relating to education, accommodation and health hardlyever reach their term. Gupta and Mitra [12] confirmed that public interventionsaimed at poverty reduction remain marginal and inefficient.

Concerning China, many economists have been interested in the phenomenonof urban and rural poverty. Ravallion [13] found economic growth spurred bypublic expenditures reduced poverty in China.

As it can be noticed, the public expenditures do not necessarily lead to a pro-poor growth. That’s the reason why this paper tries to analyze the impact ofgovernment actions on poverty in rural China.

21.4 The Methodological Approach

The simulated general equilibrium approach is inspired by the works of Pereira[14]. Ravallion [13] defined the pro-poor growth rate (PPGR) as being the arealocated below the growth effect curve up to poverty rate. If gt(p) is considered asthe real consumption growth rate for the percentile p of the distribution and thepoverty rate at the initial point in time (t), then the PPGR is:

PPGR ¼Z

gtðpÞdp=Ht ð21:1Þ

The pro-poor growth rate is therefore the average growth of the populationconsumption featuring below the poverty line. If Pa is a measure of poverty, l theaverage income, ga the elasticity growth of income and ea the elasticity growth ofpublic expenditures, then the proportional variation of the households’ poverty is:

dPa=Pa¼gaðdl=lÞ þ eaðdG=GÞ ð21:2Þ

From that, the elasticity of global poverty da is deduced by dividing the aboveequation by the average income growth rate.

186 Y. Wang and X. Ma

da¼ ðdPa=PaÞ=ðdl=lÞ ¼ ga þ eaðdG=GÞ=ðdl=lÞ ¼ ga þ eak ð21:3Þ

The parameter da measures poverty change percentage further to a variation ofthe growth rate by one percent. The parameter k measures the Gini change per-centage further to a variation of the growth rate by one percent. Thus when k ispositive (negative) the growth process is followed by an increase (reduction) ofinequalities. In other words the growth will be qualified as pro-poor when k isnegative. Kakwani [3] deduced the pro-poor index from it, which is defined as:

ja ¼da=ga¼1 þ kðea=gaÞ ð21:4Þ

This index corresponds to the ratio of the elasticity of global poverty added tothe elasticity of poverty growth. It indicates the existence of a pro-poor growthwhen ja [ 1. In other words, the results of growth as regards redistribution areproportionally more profitable to the poor than to the non-poor. The growth is notstrictly pro-poor even if a reduction of poverty effect is witnessed when1 [ja [ 0. Finally economic growth leads to an increase in the state of povertywhen ja \ 0. The economic growth has no impact on poverty if ja = 0.

Poverty evolution is simulated under three growth hypotheses: pro-poor, neutralor on the contrary less favorable to the poor than to the rest of the population (inaccordance with the values of ja). To simulate the effect of a growth that changesthe distribution of the incomes among the population, we assume that the Lorenzcurve moves the following way:

Ltþ1 Pð Þ ¼ Lt Pð Þ � l P � Lt Pð Þð Þ ð21:5Þ

In Eq. (21.5) L (P) is the percentage of the income owned by the first p percentsof the population, when individuals are classified according to an ascending orderof income. When l is positive, this relation implies that the Lorenz curve movestowards the bottom, otherwise inequality increases. This hypothesis is usefulbecause it can be showed that l is equal to the variation in percentage of the Ginicoefficient. It only remains to link the evolution of the Gini index to that of thestandard deviation of the income logarithm distribution r which is made possibleunder the hypothesis that the distribution is log-normal. The setting of the probablevalues of ja will be made through a simulation with data from China.

21.5 Results of Simulations

Simulations are made according to several growth scenarios. We followed Chen[15] who carried out an empirical analysis in China. The first scenario (SIM1)postulates for the hypothesis that the considered variables are estimated with theirobserved levels. The second scenario (SIM2) is interested in the context of theinduced effects by a possible rise in the public expenditures. The results of the twosimulations are given in the following table.

21 The Effects of Public Expenditure on Pro-poor Growth in Rural China 187

In general no matter what scenario (SIM1 or SIM2) is adopted, the economicgrowth in China can be qualified as pro-poor because the two values of ja are allsuperior to one. In other words, the Chinese governments have carried out eco-nomic policies actions which open out onto the improvement of the well-being ofthe poor population. That conclusion is established if the simulation has been madein SIM1 with ja = 1.01. Similarly in SIM2, it is found that a possible increase ofthe public expenditures is profitable to the lower-income groups with ja = 1.21.

In a specific way, the different areas haven’t uniformly benefited by the fruits ofthe economic growth. Those which remained on the fringe are essentially theregion of the middle, the middle-west, the north-east, the north-west and thesouth–west. They have a ratio of the global poverty elasticity related to povertygrowth elasticity with 0.02, 0.94, -0.26, -0.07 and 0.01 respectively through thefirst scenario. The winners and losers in SIM1 can be observed in the secondcolumn of Table 21.1.

The poor population of the north-east and the north–west in rural China has notreally profited from the economic growth. A majority of them are kept busy byworking in the fields which could not bring them strong incomes. These weakincomes can be explained by the rise in the cost of the inputs and other pesticidesand also by the reduction of the purchase price to the producer of the mainagricultural products like corn and wheat etc. The socio-economic infrastructuresare very few there.

Even if the results allow us observe a decrease in the poverty index, they don’tauthorize us to declare that the middle-west, the northern and the western regionsdisplay a pro-poor growth. The elasticity ratio of the total poverty is still betweenzero and one. Therefore the growth isn’t strictly pro-poor.

Therefore, for the rest of the regions in China, the results testify that the growthis pro-poor. This power of the authorities is particularly observed in the half-southern part of the country. Indeed, this big area gathers the most important partof the industrial and commercial activities, but above all, with the presence of thebig ports. The south-east part of China is equipped with modern social and eco-nomic infrastructures which make it one of the giants in south-east Asia. Theeconomic activities prosper there and the distributed incomes are high. The publicinterventions are therefore productive because they support the economic growthand are profitable to the poor.

By considering the scenario (SIM2) and by taking into account the inducedeffects through a possible rise in the public expenditures, the results are partlymodified. The hypothesis of the increase in the public expenditures has beenaccepted in the light of the theory of endogenous growth. This increase is inspiredby the average annual growth rate of the public expenditures in China.

With that second simulation, the analysis of the results shows a sensitive rise inthe number of regions which exhibit a pro-poor growth. Indeed, from nine regionswith the SIM1, we obtain eight regions with the SIM2. Likewise, a possibleincrease in the public expenditures will allow the reduction of the number of

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regions where poverty is more noticeable in comparison with Table 21.2. Only thenorth-western part seems less sensitive to the simulations because its povertyelasticity is smaller than zero. It is respectively by -0.07 and -0.01 with the SIM1and SIM2. This can be explained by the difficult access to that area. Some roadsthere are not asphalted and most economic and social infrastructures areinsufficient.

21.6 Conclusion

Our analysis has sought to analyze the contribution of the public expenditures topro-poor growth in China. The economic growth in China can be considered pro-poor no matter what simulation scenario is adopted. The economic policiesimplemented have resulted in an economic growth whose results were profitable tothe poor. This study reveals that not all the regions have profited uniformly fromthe growth. Most of the northern regions has negative poverty elasticity or lowerthan one, contrary to those of the centre and the south. The simulation confirmedthe hypothesis that an increase in public expenditures is beneficial because pro-poor growth is noticeable in an increasing number of regions. In comparison withthose results, it is important to emphasize the necessity to fight against the deepregional disparities for a better social cohesion of populations. The governments,who are responsible for the implementation of economic policies aimed at creatingpublic infrastructures, should privilege the north-eastern, the north-western and thesouth-western regions. The remedy of the basic economic and social structures inthe above mentioned zones should deserve to be priority projects in developmentstrategies.

Acknowledgments This work is supported by National Science Foundation of China (NSFC)under Grant 71262012.

Table 21.2 Distribution of regions

Region SIM1 SIM2

The north 1 [ja [ 0 1 [ja [ 0The north–east ja \ 0 1 [ja [ 0The north–west ja \ 0 ja \ 0The south ja [ 1 ja [ 1The south–west ja [ 1 ja [ 1The east ja [ 1 ja [ 1The middle ja [ 1 ja [ 1The middle-west 1 [ja [ 0 ja [ 1

21 The Effects of Public Expenditure on Pro-poor Growth in Rural China 189

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