that the reforms started in the rural economy. From about 1980 onwards, China undertook a series of pro-market economic reforms, starting with the Household Responsibility System (HRS) and supported by other reforms to liberalize markets for farm outputs and inputs.<sup>14</sup> The scale of this reform is nothing short of amazing. The collectives were dismantled and virtually all of the farmland of the world’s most populous country was allocated to individual farmers, and the allocation of land within communes appears to have been relatively equitable.<sup>15</sup> Farmhouseholds were then responsible for providing contracted output quotas to the state, but were free to keep (and sell) everything in excess of their quota. This system had much better incentives for individual production, since farmers kept the marginal product of their labor. These reforms to incentives and associated steps toward freeing up markets for farm outputs were clearly the main reason for the dramatic reduction in poverty in China in the early 1980s.

Growth in the rural economy accounted for the majority of China’s success since 1980 (Ravallion and Chen, 2007). Looking back over the period since 1981, one finds that rural economic growth in China had a far higher poverty impact than urban economic growth. Similarly, growth in the primary sector (mainly agriculture) did more to reduce poverty than growth in either the secondary (mainly manufacturing) or tertiary (mainly services) sectors. Indeed, judged by the impact on poverty nationally, China’s primary-sector growth had about four times the impact of growth in either the secondary or tertiary sectors (Ravallion and Chen, 2007).<sup>16</sup> The provincial panel data analysis by Montalvo and Ravallion (2009) suggests that virtually all of the growth impacts on poverty worked through the primary sector.

The sectoral pattern of China’s growth has slowed the pace of poverty reduction. Both mean income and long-run growth rates have also been lower in rural areas, yielding economic divergence between China’s cities and their rural hinterland. This has been particularly strong

> 14 On the importance of these reforms in stimulating agricultural growth at the early stages of China’s transition see Fan (1991) and Lin (1992). For a recent overview of the history of economic policies see Brandt and Rawski (2008). 15

The forces for and against this outcome were clearly similar to Vietnam, as studied by Ravallion and van de Walle (2008), who find that the process there resulted in a relatively equitable allocation of land. Unlike China, Vietnam also took the further step of creating a market in land-use rights; the results of Ravallion and van de Walle (2008) suggest that this increased the inequality of landholdings over time, but was nonetheless a poverty-reducing policy reform. In the case of China, agricultural land remained subject to non-market (administrative) re-allocation. 16 These results are based on regressions of the proportionate rate of poverty reduction over time on the growth rates by sector, weighted by their shares of output. If the composition of growth did not matter then the coefficients on the share-weighted growth rates would be equal across different sectors. Instead, one finds large and significant differences. For details see Ravallion and Chen (2007) (using national time series data) and Montalvo and Ravallion (2009) using provincial panel data.

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