Beijing: Du Runsheng, architect of China’s post-1978 rural reforms, loves to tell the tale of a confrontation between a farmer from a commune and a party comrade driving his car. Exasperated with his circumstances, the farmer said: “How come you have the money to buy a car which is faster than a tractor, and I don’t have the money to buy even a tractor?"

Reaping benefits: A Chinese farmer picks cauliflowers at a farm in Shenyang, north-eastern China’s Liaoning province. The country has managed to grow more and cheaper food, bringing down prices and raising farmers’ incomes.

This battle of the haves and the have-nots is still playing out in China, despite 28 years of successful reforms that have spurred the economy at an average rate of 9.7% and per capita income at 7% per ­annum.

As a result, at the mid-point of the time frame to meet the UN Millennium Development Goals, China has managed the sharpest decline in global poverty, improving on the target for East Asia. The poverty ratio declined from 33% in 1990 to less than 10% in 2004. In contrast, poverty in India declined from 28% to 22% in the same period.

The absolute number of poor in rural areas declined by 91% in the last three decades, dropping from 250 million in 1977 to 21.5 million in 2006.

Add another 35.5 million rural people with very low income, and 6% of the rural population is poor. Together with the 22 million in urban areas who would be “poor" if not for a minimum living allowance from the government, the total number of poor people, in contrast to the 250 million in India, is less than 80 million.

Yet, the same period has also witnessed growing regional and income inequalities, especially between coastal and interior China. In 2006, the income of urban residents was 3.28 times that of their rural counterparts. China’s Gini coefficient, a measure of income disparity, is 0.44 (the closer the coefficient is to one, the higher the inequality) against the 0.10 prevailing before 1978. In contrast, India has a Gini coefficient of less than 0.30.

This has already engaged the Chinese leadership, with Hu Jintao, recently re-elected president for a second term, speaking about “scientific development the Chinese way".

Interviews with several experts and Chinese government officials indicate that the decline in poverty numbers is because of organized effort, careful targeting, and evaluation and monitoring of poverty programmes.

China’s agricultural reforms contributed significantly to poverty reduction in the villages. Zhai Huqu, president, Chinese Academy of Agricultural Sciences, says: “Since 1978, the average annual growth rate of farm GDP (gross domestic product) is more than 4%, and the contribution of productivity growth in this is about 71%, against 5% before reforms."

With a 50% average rate of return on investment, compared with 40% among developing countries, China managed to grow more and cheaper food, bringing down prices and raising farmers’ incomes.

According to Fan Xiaojian, minister/director, State Council of the Leading Group Office of Poverty Alleviation and Development (LGOPAD), “This was accompanied by a household contract responsibility system with incentives (as opposed to collective farming earlier) and market-oriented reform of farm prices and rural distribution system." The LGOPAD is a super-ministerial body made up of top officials from different ministries.

In addition, town and village enterprises were developed to help absorb excess rural labour. Justin Yifu Lemin, director, China Center for Economic Research, Peking University, says: “The second important reason is the shift in the emphasis, pre-reforms, from heavy industries to labour-intensive manufacturing. These industries have grown very fast, were consistent with our comparative advantages and ­created many jobs."

As incomes grew more in the coastal areas, which prospered from export-oriented industrial development and trade growth, the government was forced to define poverty standards and take up specific policies, such as food for work, special development funds for backward regions and cheaper credit.

The government poverty programmes, which Lemin considers the third most important factor, are geared to help poor farmers acquire skills, jobs and education.

From 2001 onwards, the government has remained focused on the 592 poorest counties, most of which are in the western provinces, home to ethnic minorities and suffering from hostile weather and severe land degradation.

Under a China Rural Poverty Programme (2001-10), the government gives, among other things, disaster relief, “five guarantees" and subsistence allowance. To tackle rising urban poverty, the government started the “minimum livelihood guarantee scheme" in cities to compensate less well-off workers; this poverty line varies across cities. And recently, the government has also reduced the tax burden on ­farmers.

“The government of China," says Fan, “clearly recognized that the market cannot benefit all the people automatically, while the economic growth and the general preferential policy measures cannot solve all the poverty-related problems. The core of this programme is government leadership along with public and NGO participation. We have now adopted a people-first governance policy."

The major difference between China’s way to tackle poverty and countries that have been less successful is the dole approach of the latter, says Lemin.

“They only focus on alleviation, and not on development... Alleviation is only a one-time measure. Also, there are a lot of leakages in the process. If you provide jobs and incentives, you help the people develop themselves," Lemin adds.

Over 1986-2006, the Chinese government spent 340 billion yuan ($45 billion, or Rs1.8 trillion) on poverty programmes, 60% of it on interest-subsidized loans. According to Chu Liming, deputy minister, department of agriculture, ministry of finance, the central government will spend 8.5 billion yuan and provincial governments 21 billion yuan on the current 10-year plan.

Chu also says better targeting was made possible because the provincial authorities were involved in identifying the projects and managing the funds. The programmes are monitored by many local agencies as well as the ministry of finance, the national and state development and reform commissions (similar to India’s Planning Commission and state planning boards), state ethnic affairs commission, LGOPAD, ministry of agriculture, ministry of forests, and so on. “A totally decentralized administration helps to monitor the responses of the people to the policy measures," says Lemin.

Chu adds that the government was now trying to develop an incentive mechanism to improve disbursement of funds as well as decentralizing responsibility, management and decision to county levels.

At the recent 17th National Congress of the Communist Party of China, Hu promised to reform the income distribution system: “We will increase transfer payments, intensify the regulation of incomes through taxation, raise the income of low-income groups, gradually increase poverty alleviation aid and the minimum wage, and set up a mechanism of regular pay increases for enterprise employees."

However, the recent health sector reforms withdrawing subsidized health care would be a setback to the poverty alleviation efforts.

Studies by Indian economist Surjit Bhalla, president, Oxus Research, show that despite its top-down, authoritarian model, China achieved the sharpest decline in poverty in the last two decades of the 20th century, mainly by moving towards market reforms. “This is certain to have reduced inequalities in the non-industrialized world," Bhalla argues.

Some critics have questioned the definition of the poverty line adopted by the Chinese government and thereby the decline in poverty estimates. At 683 yuan a year, the Chinese poverty line is lower than the $1-a-day international criterion. Even the recent China Development Report 2007 agreed this might automatically imply a lower standard of living for a vast majority. But using the $1 line, says Fan, would yield more than 100 million of rural poor or, according to Lemin, “60% of the rural population would be poor".

Defending the government-defined poverty line, Lemin argued that “poverty is also a measurement of the local expectations and circumstances and thus every country can have a poverty line that suits its realities."

Some believe the imperatives of growing income inequalities require a course correction. According to a study led by Jikun Huang, director, Center for Chinese Agricultural Policy, Chinese Academy of Sciences, the rise in per capita income was the overwhelming cause of poverty reduction in the past 28 years, making inequality perhaps a given.

“The government needs to broadbase its scorching pace of growth," says Huang.