Thursday, February 28, 2008

What lies behind China's success in poverty reduction (and perhaps a silent revolution in development economics)

A sporadic blog entry on development economics:

According to Martin Ravallion, Director of the Development Research Group of the World Bank, two-thirds of poverty reduction in China since 1981 took place in the 1980s, with 40 percent concentrated in the first three years. That was before foreign direct investment was encouraged. That was before international trade was opened up. That was before labor-intensive manufacturing sectors started growing.

The bulk of poverty reduction in China, therefore, should be attributed to agricultural productivity growth due to the introduction of the Household Responsibility System (HRS) around 1980. (The link between agricultural productivity growth and the HRS was established by Justin Lin, the new World Bank chief economist, in his paper published in AER in 1992.)

Mr Ravallion, in his working paper, mentions how Chinese political leadership pursues the promotion of economic development. They allow local governments to experiment new policies. If they succeed, such new policies are scaled up to the whole country. Interestingly, this sounds to me very similar to what Dani Rodrik and Esther Duflo advocate.

As is the case with all arguments on China's success in development, the biggest puzzle still remains. Why do top officials of the Chinese Communist Party have an incentive to promote development in a political system that cannot be called democracy in a standard way.

UPDATE (March 2, 2008): So it's not surprising that Justin Lin announces the trial-and-error approach to poverty reduction (HT: Dani Rodrik).

UPDATE 2 (March 2, 2008): Here's Justin Lin's view on development. Again it's not surprising given the Chinese path for poverty reduction described above.