Defining new standards and policy objectives for a prosperous China

school level. Closing the gap will require investments in education, especially in rural areas. In addition, as most of the workforce is already out of school, reforms to promote adult education and retraining programs such as night-school diplomas and life-long learning to allow workers to upgrade their skills are also required.

It has been known since Adam Smith that what constitutes poverty is ultimately a function of the society a person lives in.1 The World Bank’s absolute poverty line of US$1.90 per day in purchasing power parity (PPP) terms is derived from the national poverty lines of the poorest countries in the world, representing the cost of a minimum daily calorific intake and the computed needs for basic shelter and clothing in these societies. The idea is that this line can be viewed as an absolute minimum threshold for defining poverty in all countries (World Bank 2018). As countries grow richer, however, this standard is no longer adequate for measuring poverty or determining appropriate levels of assistance. Accordingly, national poverty lines tend to increase with growing per capita income (Joliffe and Prydz 2016). China has adjusted its own poverty line three times over the past 40 years to the present level of US$2.30 per day. Globally, to take these shifts into account, the World Bank has since 2016 recommended the use of three different internationally comparable poverty lines that are typically found in low-income, lower-middle-income, and upper-middle-income countries. For the latter, the recommended internationally comparable poverty line is US$5.50 per person per day (in 2011 PPP).

In other words, China’s journey in poverty reduction did not end with the eradication of absolute poverty in 2020. With the adoption of a concept of poverty better suited to a moderately prosperous society, some 200 million people would still require support to realize improved living standards. A key policy decision will be how to set the new poverty standard. There is no unique way of doing this. Some countries use a higher absolute poverty line based on the cost of basic needs (the United States’ poverty line, for instance, is set at US$21.70 a day in 2011 PPP); others prefer relative poverty lines (most of the European countries set their minimum living standard as 50 percent or 60 percent of median disposable income), and some countries use multidimensional poverty measures (as in Mexico, combining monetary and nonmonetary dimensions).

The shift toward a higher poverty standard will have implications for the nature of government policies. First, with a higher threshold, the growth of employment opportunities and labor incomes is likely once again to become a key driver of poverty reduction. Indeed, between 2007 and 2018 almost one-third of poverty reduction, if measured at the higher line of US$5.50 per day, was due to increases in labor income. By contrast, for the extreme poor, labor income made an insignificant contribution to poverty reduction. Second, the inclusiveness of economic growth will matter significantly for the future path of poverty reduction. The first three decades of reform and opening up in China were accompanied by rapid increases in inequality. In the past decade, the trend toward rising inequality has begun to turn around (Kanbur, Wang, and Zhang 2021) as rural-urban wage gaps have declined, and poorer regions have grown faster, on average, than richer ones. However, this reversal has been earned at the cost of huge capital investment, not all of it productive (World Bank 2020), and inequality levels remain high for an aspiring high-income economy. Additional policy efforts may thus be needed to sustain the decline in inequality.

It should be noted that policies that address the root cause of the prevailing inequality can support not only poverty reduction but also economic growth. At the time Japan, the Republic of Korea, and the United States became high-income economies, the share of national income going to the top 10 percent was significantly lower than what it is now in