Industrial development and economic growth: Implications for poverty reduction and income

5. Industrialization, economic growth, poverty and inequality:
Country examples 
5.1 China
After World War II, China adopted a development strategy that included
deliberate insulation from the world economy, industrialization and eco-
nomic dominance of the state. As the country was falling far behind Western
countries, however, it began reforming its closed and centrally planned econ-
omy in 1978. Since reforms, growth has accelerated and in the 1980s and
1990s GDP growth rates were the highest in the world, 9.9 per cent and
10.3 per cent respectively, up from 6 per cent in the 1970s (World Bank,
2004a). Growth has been especially high in industry, the compound annual
growth rates being 11.3 per cent between 1980 and 2002, with services also
growing fast (10.4 per cent). The share of industry in GDP has increased
from 35 per cent in 1965 to 46 per cent in 2004 (World Bank 2006), where-

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as the share of agriculture has declined from 38 per cent to 13 per cent
(Figure 1). At the same time, the ratio of exports of goods and services to
GDP has increased from 3 per cent in 1970 to 34 per cent in 2004 (World
Bank, 2006). Despite remarkable decline in the share of agricultural value
added in GDP, the decline in agriculture’s employment share has been much
more modest. In 2002, 44 per cent of the labour force still worked in agri-
culture (World Bank, 2006). Compared with employment profiles of mature
industrialized countries, China is still very much dependent on its agricultur-
al sector (Dutta, 2005). 
Between 1980 and 2001, the share of machinery and transport equip-
ment in manufacturing value added has somewhat increased, from 22 per
cent to 32 per cent (World Bank, 2006). The share of textiles and clothing
has been declining, and while the sector produced 18 per cent of manufac-
turing value added in 1980, it produced 12 per cent in 2001. While exports
of light industry manufactures like textiles are large and growing (Figure 2),
their relative importance has declined somewhat and that of more skill-
demanding manufactures has increased. In general, the volume of Chinese
exports significantly expanded during the 1990s, and the share of manufac-
tures in total merchandise exports also increased, exceeding 90 per cent in
2004 (World Bank, 2006). 
In its reforms, China has followed a model similar to that of other suc-
cessful East Asian countries. Growth has been based on rapid industrializa-
tion, increased trade openness and exports, and gradual liberalization of
financial markets. Growth has been import-export led: technology and
know-how have been imported from abroad and adapted to the domestic
resources, in particular to the abundant labour force (Dutta, 2005). This has
made the extensive production of export goods possible. The high domestic
savings rate coupled with large foreign direct investment inflows have made
massive investments in infrastructure possible. In addition, labour markets
have been increasingly deregulated, facilitating labour mobility. 
China’s reforms started in the late 1970s and early 1980s with agricul-
tural reform, which de-collectivized agricultural land and privatized land-use
rights. Investments in rural infrastructure were increased, mandatory deliv-
ery of output to the state by farmers was reduced, and farmers were enabled
to have a more market-oriented output mix (Ahya and Xie, 2004). Due to
reforms, agricultural growth averaged almost 10 per cent per year during
1980-1984 and 6.2 per cent per year in the 1980s as a whole (Ahya and Xie,
2004), decreasing poverty in rural areas. Successful reform in the agricultur-
al sector contributed substantially to reform and expansion of the manufac-
turing sector. Due to increased productivity in agriculture, surplus labour
became available to migrate to the manufacturing sector. Furthermore, due
to increased income, farmers were able to increase their expenditure on goods
and services produced by the domestic manufacturing sector (Dutta, 2005).
Industrial reforms started after agricultural reform with the opening up to

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foreign investment and the establishment of township and village enterpris-
es. 
In the late 1980s and early 1990s, reforms focused on creating a pricing
system and market institutions, and also on reducing the state’s role in
resource allocation. Since then, the focus has been on banking sector reform
and state enterprise reform, which has included closing many unprofitable
state-owned factories.
Due to high economic growth, the share of people living in absolute
poverty has declined steeply during recent decades in China. The role of agri-
cultural growth has been very important in poverty reduction, far more
important during the 1980s and 1990s than growth in the secondary or ter-
tiary sectors (Ravallion and Chen, 2004). According to Ravallion and Chen
(2004), in the 20-year period after 1981, the proportion of population liv-
ing under the poverty line fell from 53 per cent to 8 per cent. World Bank
estimates, using one dollar a-day consumption as a measure of poverty, sug-
gest that between 1990 and 2000 the poverty rate fell from 33 per cent to 16
per cent. Poverty reduction has not, however, been smooth and half of the
decline took place in the early 1980s (Ravallion and Chen, 2004). Poverty
reduction has also been more difficult in provinces that started the reform
period with high inequality (Ravallion and Chen, 2004). Furthermore,
despite poverty reduction at the national level, income inequality between
regions and between rural and urban areas is still high. 
After agricultural reform in the early 1980s, incomes tended to become
more equal across the country. In the mid-1980s, however, economic reform
favoured coastal cities with the development of special economic zones,
which increased inequality between regions. While eastern China has attract-
ed a remarkable amount of foreign direct investment and generated large
export flows (see e.g. Wan et al. 2004), the inland and western regions, dis-
advantaged by scarce skills, low agglomeration economies and expensive
transport, have fallen behind. Also, rural industrialization has been concen-
trated in eastern regions, which has increased inequality between rural areas.
Rural industrialization has also widened income disparities within rural areas
as labourers have become wealthier relative to those who have relied only on
the land. According to Ravallion and Chen (2004), inequality in general has
been increasing within rural and urban areas, and absolute inequality
between urban and rural areas has increased appreciably.
China’s fast growth has been based on rapid industrialization, high sav-
ings, massive investment in infrastructure and productive capacity, an
increasingly deregulated labour market and an internationally open and
competitive economy. The huge labour supply has made labour-intensive
production possible, which in turn has increased average income and
reduced poverty. While the investment rate has been remarkable in China,
the efficiency with which capital is used is still low (Wolf, 2005). 

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