Rural poverty in India and China has declined substantially in recent decades. This welcome development has come about largely because governments in both countries have invested in agricultural research, education, infrastructure, and other areas important to the rural poor. But what kinds of investments have reduced poverty the most? A clear answer to this question can help policymakers invest limited resources in ways that most benefit the poor. Recent studies by IFPRIand collaborators in India and China show that different kinds of rural public investment pay a range of dividends. Developing countries can significantly reduce rural poverty, stimulate agricultural growth, and move toward food security if they recognize that public investments are indispensable tools for achieving these ends and if they make the right investments.The research also reveals, in stark contrast to conventional thinking, that investments in low-potential lands can bring equal, if not greater, returns to investments in high-potential lands.

IFPRI

English

Research Papers in Economics

INTERNATIONAL FOOD 
POLICY RESEARCH INSTITUTE
sustainable options for ending hunger and poverty
SOUND CHOICES FOR DEVELOPMENT
The Impact of Public Investments in Rural India and ChinaKEY INVESTMENTS
I
FPRI and its collaborators looked at the impact of seven kinds
of rural investments in India and China, ranging from poverty
loans to spending on roads. Government expenditures that
contributed the most to increasing agricultural productivity and
lowering poverty levels were those that helped farmers grow
more food, gain better access to markets, and improve literacy.
The biggest payoffs for reducing rural poverty and increasing
agricultural growth came specifically from investments in agri-
cultural research and development (R&D), education, and rural
infrastructure, particularly roads.
AGRICULTURAL R&D
Government expenditure on agricultural R&D increased agri-
cultural growth in both India and China more than any of the
other investment categories analyzed (Table 1). R&D’s impact
was roughly two and a half times greater than that of the sec-
ond most significant investment: roads in India and education in
China.
But when it came to reducing poverty, agricultural R&D expen-
ditures ranked second in both India and China (Table 2). R&D
brought substantial indirect gains through greater agricultural
yields, which generated higher incomes for farmers, declines in
food prices for consumers, and improved wages in nonfarm
activities.
EDUCATION
In China, spending on education brought the greatest number
of people out of poverty. Education developed the skills of
rural residents, enabling them to earn higher wages in nonfarm 
employment and to adopt new farm and nonfarm production
methods and technologies. It had the second-largest effect on
agricultural growth, after R&D.
In India, spending on education helped the poor, but it did not
increase growth and reduce poverty as robustly as did spending
on R&D and roads.
The different allocation of educational investments in India and
China accounted in part for the divergence in education’s rank-
ing in the two countries. China directed educational spending
at rural areas, whereas India directed these investments largely
to institutions of higher learning in the cities.
ROADS
The Indian government’s expenditure on road construction con-
tributed more to poverty reduction than did the other invest-
ments. Roads helped farmers transport their goods to markets,
gave them better access to higher-wage employment opportuni-
ties in the rural nonfarm sector, and increased consumers’s
access to food markets. Investment in infrastructure in general
(roads, electricity, and communications) also reduced poverty by
enhancing agricultural productivity growth, thus increasing farm
incomes and expanding the nonagricultural sector. But road net-
works ranked second in influence on agricultural growth.
Road construction ranked third in poverty reduction in China,
closely behind R&D.Rural telecommunications also had a substan-
tial impact on poverty.Like education,infrastructure increased
growth in the nonagricultural rural sector and decreased regional
inequality more than did R&D.Roads played the most significant
role in the nonfarm economy’s contribution to GDP growth and
also generated the second largest investment return—only 
slightly less than R&D—for the rural economy as a whole.
R
ural poverty in India and China has declined substantially in recent decades.This welcome
development has come about largely because governments in both countries have invested in
agricultural research, education, infrastructure, and other areas important to the rural poor.
But what kinds of investments have reduced poverty the most? A clear answer to this ques-
tion can help policymakers invest limited resources in ways that most benefit the poor.
Recent studies by IFPRI
® and collaborators in India and China show that different kinds of rural public
investment pay a range of dividends. Developing countries can significantly reduce rural poverty, stimu-
late agricultural growth, and move toward food security if they recognize that public investments are
indispensable tools for achieving these ends and if they make the right investments.The research also
reveals, in stark contrast to conventional thinking, that investments in low-potential lands can bring
equal, if not greater, returns to investments in high-potential lands.
LESSONS FROM RURAL INDIA AND CHINAI
nvestments in poverty alleviation schemes, health programs,
and irrigation are important for improving the lives of the
poor and boosting agricultural production. But research has
found that these are not the best routes for achieving poverty
and food security goals in the long run.
Investments in programs designed specifically to assist the poor
generated either the smallest gain or a relatively low gain in
poverty reduction. In China, loan programs intended to improve
the conditions of the poor actually had the least impact on
poverty.The results for India were similar. Rural development
and soil and water conservation schemes, created for the pur-
pose of providing nonagricultural wage employment for rural
laborers, brought only minor reductions in the number of poor.
Research confirms that promoting the income-generating capac-
ities of the poor reduces poverty more effectively than direct
income transfers.Although programs directed specifically at the
poor do not constitute a long-term strategy for reducing pover-
ty, they are an effective way to alleviate poverty in the short
term, especially during droughts and recessions.
Public spending on health contributed little to the lessening of
poverty and had no positive effect on productivity growth. One
would expect improved health status to alleviate poverty by
increasing the productivity of the poor, thus bringing wage
increases and greater nonfarm employment opportunities.
However, health ranked sixth among the types of investments
analyzed. Moreover, health spending did not affect agricultural
growth at all, despite the assumption that it would increase
labor productivity.
Investments in irrigation had only a modest impact on agricul-
tural productivity growth and even less influence on poverty
reduction. In both countries, much of the agricultural land was
already well irrigated by the early part of the period under
study. Additional investments in this sector generated only low
productivity returns overall, but the returns for mid-potential
lands were greater than for high-potential ones.
IMPACT OF OTHER INVESTMENTS
Table 1—Ranking of rural public investments that increase
agricultural productivity the most, in descending order*
INDIA CHINA
1.Agricultural R&D  1.Agricultural R&D  
2. Roads 2. Education   
3. Education   3. Roads 
* SOURCE: Shenggen Fan, Peter Hazell, and Sukhadeo Thorat,“Government Spending, Growth and Poverty in Rural India,” American Journal of Agricultural
Economics 82 (No. 4, 2000): 1038-1051; Shenggen Fan, Linxiu Zhang, and Xiaobo Zhang,“Growth, Inequality, and Poverty in Rural China:The Role of Public
Investments,” IFPRI Research Report 125 (Washington, D.C., forthcoming).
Table 2—Rural public investments that decrease poverty the most*
Number of poor Number of poor
lifted out of poverty lifted out of poverty
per Rs 1 million per 10,000 yuan
INDIA (1993 prices) CHINA (1997 prices) 
Roads Education
Agricultural R&D  Agricultural R&D 
Education   Roads 
Rural development  Electricity 
Soil and water conservation  Telephone 
Health Irrigation  1
Irrigation Poverty  loan
NOTE: Figures are rounded to whole numbers.
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3INTERNATIONAL FOOD POLICY 
RESEARCH INSTITUTE
2033 K Street, NW
Washington, DC 20006-1002 USA
Copyright © 2002 International Food Policy Research Institute.All rights reserved. Sections of this document may be reproduced
without the express permission of but with acknowledgment to the International Food Policy Research Institute.
Telephone: +1-202-862-5600  •  Fax: +1-202-467-4439
Email: ifpri@cgiar.org  •  Web: www.ifpri.org
A
ccording to conventional wisdom, investments should be
directed to areas with the highest agricultural productivity
returns, to those most agriculturally developed, or to those with
the best agro-ecological conditions. This strategy, it is argued,
would reduce poverty at the national level as well. Food prices
would decrease and employment opportunities rise, while the
poor in low-potential areas would migrate to high-potential
lands. However, the rationale for neglecting less-favored lands is
being increasingly challenged by various findings, three in partic-
ular: (1) past patterns of agricultural growth in high-potential
lands have failed to address effectively the problem of poverty
and food insecurity in many less-favored areas; (2) evidence
increasingly points to stagnating levels of productivity growth in
many high-potential lands; and (3) evidence is emerging that the
right kinds of investments in many less-favored areas can pro-
duce high returns in agricultural productivity.
Investments in less-favored lands in India and China made a
stronger contribution to reducing poverty than spending in
developed areas. In both countries, for every investment type,
the poverty reduction effects were greater in low- and mid-
potential areas than in high-potential lands. In China’s low-
potential western region, where the poor are concentrated,
investments in R&D, infrastructure, and education had especially
notable impacts.
Contrary to conventional wisdom, investments in low-potential
lands generally produced higher returns for agricultural pro-
ductivity growth than those in high-potential lands. In India, for
every investment sector, the returns from non-irrigated rainfed
lands were higher than those from irrigated ones. In the case of
China, mid-potential areas experienced the greatest productivi-
ty growth as a result of investments. Hence, a trade-off may
exist in China between poverty reduction and productivity
growth, depending on the land area (low- or mid-potential) to
which investments are directed.
Investments in less-favored areas may actually give higher
aggregate social returns to a developing country than invest-
ments in high-potential areas. In fact, rather than sacrificing
growth, spending on less-favored areas might offer “win-win-
win” possibilities, in terms of growth, poverty reduction, and
regional equality.
WINNING WITH LESS-FAVORED AREAS
F
irst, China and India should increase spending on rural infra-
structure, particularly roads, and on education and R&D, to
achieve further rounds of poverty reduction and agricultural
growth. Especially important is the need to increase invest-
ments in R&D, since these investments are often only a small
percentage of agricultural GDP.
Second, research in other developing countries on the impact
of different types of public investment should be conducted.
Given the pressure that macroeconomic reforms have placed
on governments to limit their budgets, the results from such
research could assist policymakers in targeting their resources
more effectively.
The following are additional policy-related suggestions:
• Counter the urban and industrial bias in development poli-
cies, and increase overall investments in rural areas, given
their higher populations and large, if not dominant, contribu-
tion to national GDP. These investments will provide a long-
term solution to the problem of food security and poverty.
• Improve the targeting of programs designed specifically for
poverty alleviation, or use the funds for investments that pro-
mote long-term solutions.
• Use funds for rural development and soil and water conser-
vation to improve the productive capacity of soil and water
resources, as well as to build roads.
• Give priority to R&D, education, and roads, which yield the
largest poverty and productivity impacts.
• Channel additional investments to less-developed areas, while
maintaining expenditure levels for developed areas. Less-
favored lands offer favorable returns on many investments
and have a big impact on poverty. However, it would be dan-
gerous to extrapolate the results of these studies beyond
Asia, since many poorer countries, especially in Africa, have
not yet invested sufficiently in their high-potential lands to
reach the point of diminishing returns in those areas.
POLICY RECOMMENDATIONS
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