China’s Productivity Performance and its Impact on Poverty in the Transition Period

The objective of this report is to document China’s productivity performance since 1978 and determine its impact on poverty. The report finds that China has made substantial progress in economic development since economic reform started in 1978. Strong economic growth has been fuelled by rapid productivity growth, and has been accompanied by impressive declines in the incidence of poverty. Productivity performance has not been uniform across the agricultural and industrial sectors, but both have contributed to aggregate growth and poverty reduction. Unfortunately economic reform has also brought increasing income inequality, mostly between rural and urban areas but also within both rural and urban areas and across regions as well. Labour productivity is found to have had a strong negative effect on poverty in China, with productivity increases in the industrial sector more important for poverty reduction than those in the agricultural sector. The econometric results do not show that trends in inequality have a significant effect on poverty. However, the process of economic growth, besides bringing the benefits of productivity increases, also brings structural adjustments that exacerbate income inequality through displacing workers. The government of China has an important role to play in further developing a social security system that will ensure the gains from productivity are more equally shared, thus maintaining a healthy and equitable society in which further productivity gains can be realized.