AEA PAPERS AND PROCEEDINGS MAY 1999 TABLE 2--URBAN POVERTY IN CHINA, 1988 AND 1995 dence of poverty fell only 2. 4 percent between 1988 and 1995, or from 8.2 percent to 8.0 per BASED OFFICIAL CPI) cent of the urban population. Moreover the ur Proportionate ban population itself grew rapidly. As a result, count poverty gap poverty the total number of urban poor rose by 19.6 Poverty 198819951988199519881995 percent during the period, or from 23.5 million in 1988 to 28.1 million people in 1995 The estimates of urban poverty in Table 2 2.7 4.1 0.4 0.9 0.104 are surprising, but the numerical indicators may actually be too comforting. There are rea- Notes: The poverty line is based on the cost of 2, 100 kilo- sons to believe that the consumer price index, alories per person per day with an adjustment for nonfood which we used to estimate the growth in real purchases, broadly consistent with the preference of lo income, understates the increase in the cost of 291 yuan per person The extreme poverty threshold is living of the poor because its weights are based on the expenditure of an average consumer rather than a poor consumer. Average consum- ers spend a smaller proportion of the eir incon on food grains than do the poor, and the price of food grains rose much more rapidly than and almost certainly lower than the rate of average prices. If the price index used to cal- owth of per capita urban GDP. This indi- culate changes in real incomes of the poor cates that the household share in GDP fell and were adjusted to take this bias into accout e that the combined share of government and the head-count index would show a signific increase in poverty between 1988 and 1995 Be that as it may, the growth in household The conclusion thus is inescapable: economic income was very high. Had there been no in- reform in China has not succeeded in reducing crease in inequality, such a rapid increase in urban poverty, and by most measures urban pov average incomes would have sufficed virtually erty has increased, Moreover, our sample does eradicate urban poverty. The rise in inequal- not include thefloating population"in urban however, offset the rise in per capita in- areas (i.e, people who have migrated to the cit come, and as a result the estimated effect on ies but have not been given the status of legal the incidence of poverty ranges from an insig- urban resident or the entitlements enjoyed by le nificant improvement to a significant deterio- gal residents ) Yet the available evidence sug- ation, depending on the poverty indicator gests that these migrants are poorer than the used and the cost-of-living index chosen to ad- official urban population. The estimates of urban just the poverty income threshold poverty, and perhaps inequality as well, would The data in Table 2 indicate that, while the have been higher if the floating population had head-count measure of urban poverty declined been included. While this does not detract from slightly between 1988 and 1995, the propor- Chinas achievement of a moderate reduction in tionate poverty gap and the weighted povert rural poverty(not reported here), it does chal gap measures both increased. That is, the lenge the claim that"a rising tide lifts all boats. gregate income gap of the urban poor in creased, as did inequality in the distribution of Ill. "Disequalizing"'Policies income among the urban poor. If one defines extreme poverty as incor ivalent to 80 In 1988, the structure of wages was highly percent or less of the poverty income thresh- compressed( the concentration ratio for wage in old, the two surveys indicate there was a rise come was only 0. 178), and this had a number in extreme poverty as measured by all three of adverse incentive effects: it reduced the in- indicators centive to work hard within the firm, it provided While the head-count measure of urban only weak signals to improve the allocation of poverty reported in Table 2 is very low labor among firms, and it reduced the incentive pared to other developing countries, the inci- of workers to acquire skills and invest in their