Financial Development and Rural Transformation: Evidence from Counties in China
Xuerong Wang, Xinpeng Xu, Yu Sheng
Over the past four decades, China has made a great achievement in realizing the successful and inclusive rural transformation. By 2021, the median per capita disposable income of rural residents in China reached RMB 18,931 yuan which was around 25 times of that in 1990. Additionally, China has also achieved the millennium goal of reducing the rural poverty rate down to zero. Underlying rapid rural transformation, financial development in rural China proved to play an essential role in promoting agricultural productivity growth and facilitate capital investment in rural sector. However, little empirical evidence is available. This paper applied the staggered difference-in-difference approach to a balance panel data of 1,474 counties to investigate the impact of the reform of Postal Saving Bank of China (a major bank operating in rural China) in rural areas on agricultural labor productivity in China over the period of 1993- 2016. To identify the impact of financial development from other macroeconomic reforms, we addressed the potential econometric issues, such as the sample selection bias, the negative weight problem and the potential reverse causality. We show that increasing the penetration by establishing new branches in rural China did not significantly improve the county-level agricultural labor productivity. In contrast, financial institutions engaging in credit services could enhance agricultural labor productivity at the county level. Moreover, the positive productivity gain obtained come not only from its capital deepening effects, but also from it helping to enhance agricultural total factor productivity. In contrast to the situation in the 1990s when most financial institutions mainly attracted deposits without extending loans, our scenario, where financial institutions engage in lending activities, contributes to a 1.69% increase in agricultural labor productivity through 0.63% increase of capital deepening and 1% increase of agricultural productivity. Finally, we also find that financial development in rural China has imposed asymmetric impacts on the efficiency of physical capital investment and land use. Particularly, financial development likely to increase the efficiency of physical capital investment but decrease the efficiency of land use. Our findings provide some useful insights on policy making towards using financial development to further rural transformation in China as well as in other developing countries.
Event: World Bank Land Conference 2024 - Washington
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