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The Asian Development Bank and Poverty Reduction in China

Introduction

Vice Premier Wen, Vice Minister Hu, Director-General Gao, Vice President Karlsson, Ms. Lietner, Distinguished Guests. The Asian Development Bank, or ADB for short, is pleased to be cosponsoring this important conference on poverty reduction in China.

The Leading Group on Poverty Alleviation and Development, the Asian Development Bank, the World Bank, and the United Nations Development Program share many common goals and visions. As we enter the new millenium after a century of technological advances and scientific achievements, our shared goal is to eradicate poverty.

ADB and Poverty Reduction

How is ADB fighting poverty? Last November, ADB's Board of Directors approved a radical shift in the way that we do business. With the adoption of our new Poverty Reduction Strategy, ADB refocused its work on the single, overarching goal of eliminating poverty in Asia. The Strategy requires all ADB operations - lending, technical assistance grants, capacity building, economic and sector work, donor coordination, and policy dialogue - to contribute to poverty reduction.

The Strategy starts with a revised definition of poverty. In the past, we relied heavily on income levels to measure poverty. However, there is now general agreement that poverty goes beyond this traditional definition. I would like to quote from our Strategy paper. In ADB's view, "…poverty is a deprivation of essential assets and opportunities to which every human is entitled. Everyone should have access to basic education and primary health services. Poor households have the right to sustain themselves by their labor and be reasonably rewarded, as well as having some protection from external shocks. Beyond income and basic services, individuals and societies are also poor - and tend to remain so - if they are not empowered to participate in making the decisions that shape their lives.

Poverty is thus better measured in terms of basic education; health care; nutrition; water and sanitation; as well as income, employment, and wages. Such measures must also serve as a proxy for other important intangibles such as feelings of powerlessness and lack of freedom to participate."

The Leading Group may wish to consider whether ADB's broader definition of poverty would also be relevant for China.

The ADB's poverty reduction strategy is built on three pillars:

• First, pro-poor, sustainable economic growth. This is growth that creates opportunities and lifts people out of poverty and expands public revenues that can be used for basic education, health care, and infrastructure. Growth must be inclusive both to reduce poverty levels and to maintain social stability.

• Second, social development. Growth is necessary but not sufficient for poverty reduction. Social development enables the poor to make use of employment opportunities and improve their living standards. Key elements here are human capital development, population policy, social capital development, gender issues, and social protection. Social development must accompany economic growth to reduce poverty effectively.

• Third, good governance. This is critical to poverty reduction. Good governance benefits all, particularly the poor who are the least capable of coping with the consequences of poor governance. Sound, well-managed, well-governed economies foster growth and equity. Accountability, participation, predictability and transparency are essential to encourage private investment and to reduce corruption. Good governance facilitates participatory pro-poor policies, promotes the effective delivery of public services, and helps to establish the rule of law.

ADB has a broad view of poverty reduction. There are short, medium, and long-term poverty measures that can be used.

Short-term measures include providing goods and services directly to the most vulnerable members of society.

Medium-term measures include improving health, education and social protection systems, institutional reform, and capacity building.

Long-term measures include promoting sustained, pro-poor growth by improving infrastructure, creating jobs and protecting the environment in areas with a high incidence of poverty.

ADB has developed specific targets against which we can measure our progress in helping to reduce poverty. From 2001 onwards, at least 40 percent of our public sector lending will go to poverty reduction.

ADB has relevant and successful poverty reduction experiences in other countries that could be adapted to Chinese conditions. Let me give a few examples:

• first, providing small-scale infrastructure projects and employment opportunities for the poor in Indonesia;

• second, combining agriculture, infrastructure, and microfinance activities under area development programs for the poor in Bangladesh; and

• third, linking private banks, NGOs, Grameen Bank replications, and cooperatives to provide the poor access to microfinance in Nepal and the Philippines.

Poverty Reduction in China

Other countries also have much to learn from China. China's performance in reducing poverty is among the best in Asia. China can take pride in having reduced the number of absolute poor from 250 million in 1978 to around 34 million today. Minorities, the disabled, and people living in remote, resource-poor areas account for much of the remaining poor.

ADB would like to intensify its cooperation with China in the area of poverty reduction. The Leading Group is undertaking a very important task in developing China's poverty strategy for the next twenty years. This new strategy will provide a framework in which ADB and other international agencies can join forces to help China in its fight against poverty. I would like to highlight six issues that ADB thinks should be addressed in the Leading Group's new poverty reduction strategy.

First, China needs a new definition of poverty. The poverty lines used in the past focused attention on absolute poverty. China has won the war against absolute poverty. By the end of the year there will only be about 20 million people with incomes less than the Yuan 635 poverty line. It is now time to broaden the definition of poverty. For example the international norm of $1 per day, adjusted for purchasing power parity, could be used. Alternatively, we could take the income level of the bottom 10 percent of the rural population. Relative definitions of poverty are used in many developed countries. Both figures work out to around Y900 and Y1,000 per year.

The second issue relates to geographic targeting. The past system of designating poverty counties has served China well. However, now only about half of the absolute poor live in poverty counties. Some of the poverty counties have reached a stage of development where they are no longer poor and should graduate from their poverty status. ADB does not believe that the concept of poverty counties should be totally eliminated. However, it should be refined. Some type of geographic targeting is important. Various indicators such as income per capita, social development indicators, and physical infrastructure indicators could be used to classify counties in terms of the multiple dimensions of poverty. The Government should give some priority to these counties when planning its investments, particularly large infrastructure investments, that help to promote pro-poor economic growth. This will help the relatively poor and safeguard the people with incomes just above the poverty line from falling back into poverty. While poverty townships can be used to target smaller investments and job creation initiatives better, counties are more appropriate for planning and financing larger infrastructure investments. However, such a reclassification of poverty counties would not, by itself, be enough.

The third issue relates to client-based targeting that is not restricted by geographic targeting. Ways must be found to target the poor, no matter where they live, whether in poor or non-poor geographic areas. Mechanisms must be developed to target programs more directly on the poor. Some programs should be targeted based on the characteristics of the individuals concerned, regardless of where they live. This would involve defining the poor in terms of both income and non-income criteria such as education, health, and housing indicators.

Fourth, China must place more emphasis on fighting urban poverty. In the past, poverty was largely a rural problem. However, urban poverty is becoming an increasingly important social problem. Good labor market policies, urban microcredit, and better pensions, unemployment and health insurance systems, are the keys to urban poverty reduction. Urban poverty lines need to be defined according to local minimum living standards. These vary widely by location but are often two to three times those of rural areas. Until better information is available, ADB is using a figure of $2 per day in smaller cities and $3 per day in larger cities along the East Coast to define urban poverty.

Fifth, ADB's experience in other countries has shown that market interest rate-based micro credit loans can be a powerful weapon in the fight against poverty. However, for credit schemes to be effective the interest rates must be sufficient to make the schemes sustainable. Based on ADB's experience, it is more important to provide the poor with access to credit than to subsidize the interest rate. Subsidized credit does not always reach the poor. For micro credit to be a useful tool in China, an appropriate, market-based legal and regulatory regime for micro credit must be adopted by the People's Bank of China. Commercial banks should not be asked to provide micro credit on non-commercial terms. Micro finance should not be viewed as a social welfare tool. Micro credit projects must be commercially viable for both the borrower and the lender. Good access to markets, training and measures to improve the productivity of the poor help to make micro credit projects successful. China has some experience with micofinance in rural areas. ADB believes that greater attention should be given to using micro credit in urban areas.

Sixth, carefully defined guidelines should be developed for voluntary resettlement. This should be used as a poverty reduction tool only as a last resort. The remaining 20 million rural poor live mostly in very remote, resource poor areas. Voluntary resettlement is used in China as one option to help them escape poverty. But voluntary resettlement often comes with high social and cultural costs. Voluntary resettlement is considered to be quite controversial by many NGOs and international organizations. If the Leading Group hopes to get the support of the international community for voluntary resettlement efforts, we must reach broad agreement on appropriate policies, procedures, and mechanisms that would satisfy the concerns of all parties. The risks and challenges must be carefully analyzed when considering voluntary resettlement.

How ADB and China can Cooperate

I would like to end my remarks by talking about what ADB can do to help China fight poverty. I would like to mention four initiatives that I hope the Leading Group can support.

First, ADB believes that our hard money can be used to help China fight poverty. Later this morning my colleague, David Sobel, will present the findings of a study that ADB is undertaking with the Leading Group on this topic. The economic case for investing in poverty reduction projects is clear. ADB will shift two thirds of its lending to the poorer central and western provinces. Adequate infrastructure is essential to create the conditions necessary to reduce poverty. We will broaden the focus of infrastructure investments to make them more pro-poor. For example, feeder roads to poor villages can help to spread the benefits of traditional road projects by ensuring that poor farmers can more easily market their produce and have better access to inputs and social services.

Lifeline tariffs can be incorporated in water and power projects to offset some of the impact of cost recovery policies on the poor. Agriculture projects and micro credit projects can be designed to create jobs for the poor. Environmental projects can be designed to improve natural resource management and reduce pollution to benefit the poor. ADB plans to work closely with the Leading Group, the State Development Planning Commission, and the Ministry of Finance to identify practical ways to make our lending to China more pro-poor. We will actively seek to mobilize concessional cofinancing from bilateral donors or sources like the Global Environment Facility to soften the total financing cost for ADB's pro-poor projects.

Second, ADB is trying to develop special mechanisms to allow us to work more closely with China in the area of poverty reduction. Next week, ADB's Board of Directors will approve the $90 million Japan Fund for Poverty Reduction. This fund will support innovative poverty reduction activities as part of ADB projects by providing grants of about $3 to $5 million. Activities can include basic infrastructure, social development funds, and NGO programs.

Third, ADB will make a technical assistance grant available for China called Reflecting the Voices of the Poor in the Country Poverty Analysis. This will support participatory poverty assessments in selected rural and urban areas and a policy workshop that will bring together the poor, Government officials, NGOs, private sector and other donors. This will be part of a process that will lead to a poverty partnership agreement that will provide a strategic framework for ADB's poverty reduction activities in China.

Fourth, ADB has initiated discussions with the Leading Group and Harvard University on the idea of establishing a joint rural poverty reduction research center in Guizhou. This center would allow international and domestic experts to learn from, and expand on, an ongoing ADB funded pilot project and engage in other priority research needs on rural poverty in the China. The idea is for NGOs and private sector businesses to "adopt" poor villages in the project area and contribute operating funds for the research center. The Leading Group, ADB, and Harvard would then solicit and evaluate research proposals with prospects for practical applications in combating poverty and provide grants to fund the research.

Vice Premier Wen, let me conclude by stating that Asia and China can be free of poverty. ADB has a clear vision of a poverty-free Asia: a vibrant society of healthy, educated, and productive people living in a clean environment. China has the same vision. Pro-poor public policy and targeted action can change the face of poverty. ADB is ready to join forces with China and with other donors in the fight against poverty.

Thank you.