2. THE MACROECONOMIC CONTEXT

A. INTRODUCTION

　　Since the start of the reforms twenty years ago, China's economy has experienced rapid　growth and substantial structural change. These macroeconomic developments, and the reform　policies that underlie them, have influenced trends in poverty. Economists have long debated the　relationship between aggregate growth and poverty, and most now recognize that growth is an　important, but not sufficient, condition for poverty reduction. International experience has shown
that the impact of growth on poverty depends not only on the rate of growth, but also on the　composition of growth and on structural aspects of the economy that determine whether and how　growth reaches the poor (Bardhan, 1996; Islam, 1990; Lipton and Ravallion, 1995).
　　The evidence reviewed in this chapter confirms the importance of aggregate growth in　explaining China's record of success in poverty reduction since 1990. Both over time and across　provinces, growth in per capita GDP has been closely associated with the pace of poverty　reduction. The evidence also confirms that the impact of aggregate growth on poverty in China　has been substantially influenced by the regional and sectoral composition of that growth.　Slower-than-average growth in poor regions explains in part the increasing regional concentration
of poverty. In addition, uneven growth in agriculture, the main source of income for the rural　poor, has contributed to differences in the rate of poverty reduction. Poverty reduction has been　slower where agricultural growth has lagged, and faster where agricultural growth has more or　less kept pace with that in other sectors.
　　Trends in employment further highlight the importance of agriculture. Agriculture is　often viewed as a passive reservoir for China's surplus labor, and expansion of nonagricultural　activities is seen as the main route for absorbing this surplus labor. The evidence presented in this　chapter suggests a different interpretation of agriculture's role. Estimates of agricultural　employment show that in the 1990s labor use in agriculture has risen, and the evidence suggests
that agricultural employment responds actively to opportunities for diversification and to　increased relative prices. During the 1990s off-farm employment has also been a source of new　employment, with migration and private and individual enterprises playing a growing part in　generating jobs.
　　Recent weak aggregate demand and slowing growth raise concerns about whether
China's successful record of poverty reduction can be maintained in the future. A review of　China's past macroeconomic performance suggests that China has followed a pattern of cyclical　growth since the start of the reforms, and that the recent slowdown is a continuation of this　cyclical pattern. International experience has shown that most countries undergo cycles in　aggregate demand, and that poverty is sensitive to such cycles because of their impact on　unemployment, inflation, the terms of trade, and fiscal capacity (Helleiner, 1987;Kanbur, 1987;　Lipton and Ravallion, 1995). Indeed, macroeconomic fluctuations can have devastating and long-
term effects on the poor, as the poor typically have limited opportunities to insure against income　shocks.
　　For these reasons, the continued success of China's poverty reduction policies will　require increased attention to the effects of macroeconomic cycles and fluctuations on the poor.　Consolidation of China's past successes in poverty reduction will depend on efforts in this　direction, because many of those who have recently escaped poverty remain close to the poverty　line and economically vulnerable.

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