Does Financial Development Lead to Poverty Reduction in China? Time Series Evidence
Abstract
The impact of financial development on poverty reduction has received attention in the literature recently. While the connection between financial development and poverty may appear straight forward in theory, in empirics it may be much complicated. This study attempted at empirically assessing the causal links between financial development and poverty reduction in China for the period 1985–2014. The study used the Toda-Yamamoto causality test to avoid pretesting bias that has featured majority of the existing studies. The study utilized two standard proxies for financial development, namely: the domestic private credit by banks as percentage of GDP, and money supply (M2) as percentage of GDP; and a standard proxy for poverty reduction namely: the household final consumption expenditure per capita growth (annual percentage). The study found a bidirectional causal flow between financial development and poverty reduction, implying that the causal flow between these important variables is independent of the proxy for financial development. This means that financial sector reforms and poverty reduction programs are more of “win-win†strategies in the case of China. Therefore policymakers in China should continue to implement robust financial sector reforms and poverty reduction strategies.
Downloads
References
Allen, F., Qian J. & Qian, M. (2005). China’s financial system: past, present and future, China’s Great Economic Transformation, edited by Loren Brandt and Thomas Rawski, Cambridge University Press.
Beck, T., Demirgüç-Kunt, A. & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12(1), 27-49.
Birdsall, N. & Londono, J. (1997). Asset inequality matters: an assessment of the World Bank's approach to poverty reduction. American Economic Review, 87(2), 32-37.
Boyd, H., Levine, R. & Smith, B. D. (2001). The impact of inflation on financial sector Performance. Journal of Monetary Economics, 47(2), 221-248.
Burgess, R. & Pande, R. (2005). Do rural banks matter? Evidence from the Indian social banking experiment. American Economic Review, 95(3), 780-95.
Calderón, C. & Lin, L. (2003). The direction of causality between financial development and economic growth. Journal of Development Economics, 72, 321-334.
Callan, T., Nolan, B. & Whelan, C. T. (1993). Resources, deprivation, and the measurement of poverty. Journal of Social Policy, 22, 141-172.
Caner, M. & Kilian, L. (2001). Size distortion of tests of the null hypothesis of stationarity: Evidence and implication for the PPP debate. Journal of International Money and Finance, 20, 639-657.
Claessens, S. & Feijen, E. (2006). Financial sector development and the millennium development goals. World Bank Working Paper No. 89, World Bank, Washington, DC.
Datt, G. & Ravallion, M. (1992). Growth and distribution components of changes in poverty measures. Journal of Development Economics, 38(3), 275-295.
Ding, Z., Tan, L. & Zhao, J. (2011). The effect of rural financial development on poverty reduction. Issues in Agricultural Economy, 2(11), 1-13.
Dollar, D. & Kraay, A. (2002). Growth is good for the poor. Journal of Economic Growth, 7(3), 195-225.
Elliot, G., Rothenberg, T. & Stock, J. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64, 813-836
Galbraith, J. (1958). The affluent society. Boston: Houghton-Mifflin.
Geda, A., Shimeles, A. & Zerfu, D. (2006). Finance and poverty in Ethiopia, UNU-WIDER Research Paper No. 2006/51, United Nations University, Helsinki, Finland.
Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37(3), 424-438.
Hamori, S. & Hashiguchi, Y. (2012). The effect of financial deepening on inequality: Some international evidence. Journal of Asian Economics, 23(4), 353-359.
Hao, C. (2006). Development of financial intermediation and economic growth: the Chinese experience. China Economic Review, 17, 347-362.
Hasan, I. & Zhou, M. (2006). Financial sector development and growth: the Chinese Experience, UNU-WIDER Research Paper No. 2006/85, United Nations University, Helsinki, Finland.
He, Z. & Maekawa, K. (1999). On spurious Granger causality. Economic Letters, 73(3), 307-313.
Ho, S. Y. & Odhiambo, M. N. (2011). Finance and poverty reduction in China: an empirical investigation. International of Business and Economic Research Journal, 10, 103-114.
Honohan, P. (2004). Financial development, growth and poverty: How close are the links, in C. Goodhart (ed.), Financial Development and Economic Growth: Explaining the Links, Busingstoke: Palgrave Macmillan.
Hsueh, S. J., Hu, Y. H. & Tu, C. H. (2013). Economic growth and financial development in Asian countries: a bootstrap panel Granger causality analysis. Economic Modeling, 32, 294-301.
Husain, I. (2004). Financial sector reforms and pro-poor growth: Case study of Pakistan, Presidential Address at the Annual General Meeting of the Institute of Bankers Pakistan, Karachi, 21st February, 2004.
Inoue, T. & Hamori, S. (2012). How has financial deepening affected poverty reduction in India: Empirical analysis using state-level panel data. Applied Financial Economics, 22(5), 395-403.
Jalilian, H. & Kirkpatrick, C. (2002). Financial development and poverty reduction in developing countries. International Journal of Finance and Economics, 7(2), 97-108.
Jalilian, H. & Kirkpatrick, C. (2005). Does financial development contribute to poverty reduction? Journal of Development Studies, 41(4), 636-656.
Jeanneney, S. G. & Kpodar, K. (2008). Financial development and poverty reduction: can there be a benefit without a cost, IMF Working Paper No. WP/08/62, International Monetary Fund, Washington, DC.
Levine, R. (2004). Finance and growth: theory and evidence. NBER Working Paper No. 10766.
Levine, R., Loayza, N. & Beck, T. (2000). Financial intermediation and growth: causality and causes. Journal of Monetary Economics, 46(1), 31-77.
Lin, J. Y., Sun, X. & Wu, H. X. (2015). Banking structure and industrial growth: Evidence from China. Journal of Banking and Finance, 58, 131-143.
Lin, J. Y. (1992). Rural Reforms and Agricultural Growth in China. American Economic Review, 82, 34-51.
Mack, J. & Lansley, S. (1985). Poor Britain. London: Allen & Unwin Limited.
Mood, C. & Jonsson, J. O. (2016). The social consequences of poverty: an empirical test on longitudinal data. Social Indicators Research, 127(2), 633-652.
Park, A., Ren, C. & Wang, S. (2004). Micro-finance, poverty alleviation, and financial reform in China. Rural Finance and credit infrastructure in China, OECD, 256-270.
Quartey, P. (2005). Financial sector development, savings mobilization and poverty reduction in Ghana, UNU-WIDER Research Paper No. 2005/71, United Nations University, Helsinki, Finland.
Ravallion, M. & Datt, G. (2002). Why has economic growth been more pro-poor in some states of India than others? Journal of Development Economics, 68(2), 381-400.
Schwert, W. (1986). Test for unit roots: a Monte Carlo investigation. Journal of Business and Economic Statistics, 7, 147-159.
Seetanah, B. (2008). Financial development and economic growth: An ARDL approach for the case of the small island state of Mauritius. Applied Economics Letters, 15, 809-813.
Sehrawat, M. & Giri, A. K. (2016a). Financial development and poverty reduction in India: an empirical investigation. International Journal of Social Economics, 43(2), 106-122.
Sehrawat, M. & Giri, A. K. (2016b). Financial development and poverty reduction: panel data analysis of South Asian countries. International Journal of Social Economics, 43(4), 400-416.
Sen, A. (1983). Poor, relatively speaking. Oxford Economic Papers, 35, 153-169.
Siddiki, J. U. (2002). Trade and financial liberalization and endogenous growth in Bangladesh. International Economic Journal, 16(3), 23-37
Stiglitz, J. (1998). The role of the state in financial markets, Proceedings of the World Bank Annual Conference on Development Economic, 19-52.
Takumah, W. & Iyke, B. N. (2017). The Links between economic growth and tax revenue in Ghana: an empirical investigation. International Journal of Sustainable Economy, 9(1), 34-55.
Toda, H. Y. & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225-250.
Turner, G., Tan, N. & Sadeghian, D. (2012). The Chinese banking system, Reserve Bank of Australia Bulletin, September, 53-64.
Uddin, G. S., Shahbaz, M., Arouri, M. & Teulon, F. (2014). Financial development and poverty reduction nexus: A cointegration and causality analysis in Bangladesh. Economic Modelling, 36, 405-412.
United Nations Development Programme. (2008). China Human Development Report. 2007-2008: Basic public services benefiting 1.3 billion Chinese people. United Nations Development Programme.
World Bank. (2001). World Development Report 2000/2001, Oxford University Press, New York.
Wang, S., Li, Z. & Ren, Y. (2004). The 8-7 National Poverty Reduction Program in China – The National Strategy and Its Impact. Washington, DC: World Bank.
Wen, T., Ran, G. & Xiong, D. (2005). Financial development and the income growth of farmer in China. Economic Research Journal, 5(9).
World Bank. (1990). World Development Report 1990: Poverty, Oxford University Press, New York.
World Bank. (1995). Bangladesh: From Counting the Poor to Making the Poor Count. Poverty Reduction and Economic Management Network, South Asia Division. World Bank, Washington.
World Bank. (2009). From poor areas to poor people: China’s evolving poverty reduction Agenda. An Assessment of Poverty and Inequality in China. The World Bank, East Asia and Pacific Region.
World Bank. (2014). Global Financial Development Report 2014. [Online] Available at < http://worldbank.org/financialdevelopment >, accessed on 1 July 2016.
World Development Indicators. (2016). [Online] Available at
Yamada, H. (1998). A note on the causality between exports and productivity: an empirical reexamination. Economics Letters, 61, 111-4.
Zhang, J., Wang, L. & Wang, S. (2012). Financial Development and Economic Growth: Recent Evidence from China. Journal of Comparative Economics, 40(3), 393-412.
Copyright (c) 2017 Journal of Economics and Behavioral Studies
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of a revised paper in the light of suggestions of the reviewers, editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
