Determinants of Transient and Chronic Poverty: Evidence from Rural China

Abstract

Are the determinants of chronic and transient poverty different? Do policies that reduce transient poverty also reduce chronic poverty? The authors decompose measures of household poverty into chronic and transient components and use censored conditional quantile estimators to investigate the household and geographic determinants of both chronic and transient poverty, taking panel data for post-reform rural China. They find that a household's average wealth holding is an important determinant for both transient and chronic poverty. Although household demographics, levels of education, and the health status of members of the households are important for chronic poverty, they are not significant determinants of transient poverty. Both chronic and transient poverty are reduced by greater command over physical capital, and life-cycle effects for the two types of poverty are similar. But there the similarities end. Smaller and better-educated households have less chronic poverty, but household size and level of education matters little for transient poverty. Living in an area where health and education are better reduces chronic poverty but appears to be irrelevant to transient poverty. Nor are higher foodgrain yields a significant determinant of transient poverty, although they are highly significant in reducing chronic poverty. These findings suggest that China's poor-area development program may be appropriate for reducing chronic poverty but is likely to help reduce variations in consumption that households typically face in poor areas -- the exposure to uninsured income risk that underlies transient poverty will probably persist. Other policy instruments may be needed to deal with transient poverty, including seasonal public works, credit schemes, buffer stocks, and insurance options for the poor.