In the past many developing country governments encouraged development policies that favoured the urban sector at the expense of rural areas. Correcting these distortions should allow resources to move more freely and reduce both rural and urban poverty.

Research by the International Food Policy Research Institute examines rural and urban dynamics of poverty based on evidence from China and India. The researchers argue that redressing biased policies is crucial to strengthening and encouraging greater cooperation between the two sectors. The study also analyses and compares the wider impact of growth in rural and urban areas respectively.

In both China and India, most of the population still lives in the countryside where poverty rates are significantly higher than in cities. In the early 1950s both countries implemented heavy industrialisation policies in favour of urban areas. Various interventions included state pricing and purchasing of agricultural products, fiscal transfers and investment, and restrictions of labour movement.

It was not until the 1970s to the early 1990s that the governments of China and India began reforms leading to some correction of the bias. In China the government raised agricultural prices, abolished the procurement system and lifted restrictions on labour movements. In India the terms of trade for agriculture improved significantly. Subsequently, agricultural growth accelerated and rural poverty declined.  Despite these reforms, several distortions remain which are, to a certain extent, politically motivated.

Analysing economic data for both countries the authors highlight the following policy issues:

• Investment in rural infrastructure, agricultural research and education yields larger economic returns compared with urban areas.
• In China, agricultural growth has contributed to poverty reduction in both rural and urban areas, whereas urban growth solely benefited the cities.
• Cost-benefit analysis shows a return on investment that is about four times higher for rural roads than for urban roads.
• Remittances sent home partially or fully compensate for the loss of rural labour due to migration.
• Good transportation and communication greatly improves rural-urban linkages as it improves access to markets, employment and services.

The authors argue that policies which increase growth in agriculture and promote rural-urban linkages have a greater potential to reduce overall poverty. Recommendations for governments include:

• Invest in more rural areas, particularly in areas such as education, infrastructure, and agricultural research.
• Reduce restrictions on rural-urban migration to make mobility of productive factors, including labour, easier.
• Develop the rural non-farm sector to provide poor rural households opportunities to diversify their sources of income.
• Develop small rural towns that ease the pressure on bigger cities, while contributing to the growth of the national economy.

Source(s):
‘Rural and Urban Dynamics and Poverty: Evidence from China and India’, International Food Policy Research Institute, Discussion Paper 23, by Shenggen Fan, Connie Chan-Kang, and Anit Mukherjee, August 2005 Full document.

Funded by: UK Department for International Development

id21 Research Highlight: 10 February 2006

Further Information:
Shenggen Fan
International Food Policy Research Institute
2033 K Street, NW
Washington, DC 20006-1002
USA

Tel: +1 202 862 5600
Fax: +1 202 467 4439
Contact the contributor: ifpri@cgiar.org

International Food Policy Research Institute

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