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Public investment and poverty reduction: Lessons from China and India
24 February 2007
Sukhadeo Thorat, Shenggen Fan

Acknowledgements: FANRPAN acknowledges the EPW website as the source of this report:

Growth in agricultural productivity, the rural non-farm sector and rural wages, which are the main sources of poverty reduction in both China and India, have been made possible by public investments in R&D, infrastructure (such as roads, power, irrigation, communication and education) and anti-poverty programmes. However, returns on these public investments, reckoned in terms of poverty reduction, vary drastically across different types of investment. The trade-off between agricultural growth and poverty reduction is generally small among different types of investments and between regions. Agricultural research, education, and infrastructure development have a significant growth impact as well as a large poverty reduction impact.

Both China and India have achieved great successes in reducing poverty dramatically over the last several decades. With more than 500 million people lifted above the poverty line, these two countries have contributed to a major share of the global decline in poverty incidence [Chen S and M Ravillion 2004]. This achievement can be attributed to many factors including policy and institutional reforms, and trade selective and suitable market liberalisation. Public investments, particularly those in human and physical capital, science and technology, have also been used by the governments as an instrument to stimulate economic growth and to promote poverty reduction. Without these investments, rapid growth and poverty reduction would have not been possible. These investments in rural areas, where the majority of the poor reside, played a particularly important role in reducing rural poverty. However, there are still a large number of poor and the governments have committed themselves to allocating more resources to eliminate the remaining poverty. But how to target these public resources in order to maximise its impact is still a very much debated subject. For this purpose, information on relative returns to various types of public expenditures can help government better target their limited resources to achieve the twin goals of economic growth and poverty alleviation.

The objective of this paper is to review and compare the evidence on the effects of public investment on agricultural growth and poverty reduction, and to draw lessons on how the Chinese and Indian governments can use public investment as an instrument to achieve their stated social objectives.

These two nations share some common features but also differ in other respects. Both are large countries and, coincidentally, underwent substantial political and economic changes at about the same time – in the late 1940s and early 1950s. India gained its independence in 1947 and initiated the experiment of planned economic development with the first Five-Year Plan in 1951. Following the 1949 communist revolution, China embarked on a new economic development path at the beginning of the 1950s. Thus, both countries experienced profound political and economic reforms in the past 50 years.

There are, however, at least three crucial differences that need to be recognised. First, following independence, India adopted a mixed economic system characterised by the presence of both the public and private sectors. Agriculture, which employs a major portion of the workforce and the population, is based on the principle of land belonging to the private domain. Similarly, a large portion of the industrial sector except for basic and key industrial activities has been in private hands. Thus, only a few critical industries along with a large part of primary services like education, health, and infrastructure such as irrigation, road and power are under the responsibility of the state. China, on the other hand, embarked on an economic development path with a socialist economic framework characterised at least until recently by a much larger ownership and control by the state over the agricultural and industrial resources.

Second, while the Indian state has pursued economic development and public investment policies within the framework and limitations of political democracy, China operated in a political framework, which gives the state relatively more freedom in deciding its investment priorities. Thus, compared to India, China has been functioning with a reasonable degree of control in terms of raising and allocating financial resources for public investment.

Third, China initiated the process of economic development with greater equality than India in terms of people’s access to income sources (land and non-land capital assets) and social needs (education and health). In these critical areas, the Indian population could derive relatively limited benefits from these measures, resulting in greater inequality relative to their Chinese compatriots with regard to access to land and non-land capital assets, as well as to basic services like education and health. All these similarities and disparities have had different impacts on the patterns of government spending, and therefore have led to different growth paths and poverty reduction outcomes.

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