Economic Growth, Income Inequality, and Poverty Reduction in People’s Republic of China

The paper proposes a poverty reduction index demonstrating that the selection of growth policies should be to maximize the sum of income and inequality effects. The empirical results indicate that economic growth in the People’s Republic of China (PRC) between 1985 and 2001 was effective in reducing poverty but rising inequality reduced the effectiveness of poverty reduction. The empirical results also indicate that initial level of inequality is important in determining growth policies for a country whose regions are in different development stages. A development stage with low initial inequality will achieve greater poverty reduction from growth, whereas a development stage with high initial inequality will require a deeper poverty focus. In the current stage of economic development in the PRC, economic growth is still effective in reducing poverty. Infrastructure projects that support economic growth will still lead to poverty reduction, even if the nonpoor might get more direct benefits from these projects. Well-designed infrastructure projects with a poverty focus will be more effective in poverty reduction.