Road development, economic growth, and poverty reduction in China

Type Working Paper - International Food Policy Research Institute
Title Road development, economic growth, and poverty reduction in China
Publication (Day/Month/Year) 2004
Since 1978, China has adopted a series of economic reforms leading to rapid
economic growth and poverty reduction. National Gross Domestic Product (GDP) grew
at about 9 percent per annum from 1978 to 2002, while per capita income increased by 8
percent per annum. The post-reform period was also characterized by an unprecedented
decline in poverty. However, income inequality has worsened between coastal and
interior provinces as well as between rural and urban areas. A number of factors
contributed to this widening disparity in regional development in China, including
differences in natural resources endowments, and infrastructure and human capital
When the policy reforms began in 1978, China was poorly endowed with
transportation infrastructure. With rapid economic growth, the demand for road transport
soared and consequently transportation shortages and congestion problems surfaced.
Since 1985, the government has given high priority to road development, particularly
development of high-quality roads such as highways connecting major industrial centers
in coastal areas. In the 1990s, investment in infrastructure became a national priority and
various policies were implemented to promote the rapid construction of highways. The
development of expressways has been particularly remarkable, increasing from 147
kilometers in 1988 to 25,130 kilometers in 2002, equivalent to an average annual growth
rate of 44%. In contrast, the length of low quality, mostly rural roads increased very
little, by only 3% per year over the same period.
The objective of this study is to assess the impact of public infrastructure on
growth and poverty reduction in China, paying a particular attention to the contribution of
roads. The beneficial impacts of roads on production and productivity, as well as on
poverty alleviation, are well recognized in the literature but some important gaps remain.
First, the impact of roads of different quality has received little attention. While the total
length or density of roads is a useful indicator of the road infrastructure available in a
country, it is important to account for quality differences because different types of roads vi
(e.g. rural vs. urban) can have very different economic returns and poverty impacts.
Second, most studies have only focused on rural poverty in China as urban poverty has
only recently emerged as an important and growing problem. To address these
limitations, this study disaggregates road infrastructure into different classes of roads to
account for quality. The study also estimates the impact of road investments on overall
economic growth, urban growth, and urban poverty reduction, in addition to agricultural
growth and rural poverty. To achieve these goals, an econometric model that captures the
different channels through which road investments impact on growth and poverty is
developed and estimated using provincial-level data for 1982-1999.
The most significant finding of this study is that low quality (mostly rural) roads
have benefit/cost ratios for national GDP that are about four times larger than the
benefit/cost ratios for high quality roads. Even in terms of urban GDP, the benefit/cost
ratios for low quality roads are much greater than those for high quality roads. As far as
agricultural GDP is concerned, high quality roads do not have a statistically significant
impact while low quality roads are not only significant but generate 1.57 yuan of
agricultural GDP for every yuan invested. Investment in low quality roads also generates
high returns in rural nonfarm GDP. Every yuan invested in low quality roads yields more
than 5 yuan of rural nonfarm GDP.
In terms of poverty reduction, low quality roads raise far more rural and urban
poor above the poverty line per yuan invested than do high quality roads.
Another significant finding of the study is the trade-off between growth and
poverty reduction when investing in different parts of China. Road investments yield
their highest economic returns in the eastern and central regions of China while their
contributions to poverty reduction are greatest in western China (especially the southwest
region). This implies different regional priorities depending on whether economic growth
or poverty reductions are the most important goals for the country.
The results of this study have important implications for future road project
investments. China has invested heavily in the past in building expressways and inter-vii
city highways. These investments were a major force in Chinaís economic
transformation during the 1980s and 1990s. However, as more and more investments are
being poured into these projects, the marginal returns are beginning to decline, although
they are still positive and economically sound. At the same time, low quality roads or
rural roads have received less attention than high quality roads and as a result their
marginal returns are much larger today than the returns to high quality roads. Low quality
roads also raise more poor people out of poverty per yuan invested than high quality
roads, making them a win-win strategy for growth and poverty alleviation. The
government should now consider giving greater priority to low quality and rural roads in
its future investment strategy.

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