Financial inclusion and agricultural total factor productivity growth in China

Abstract

Although the literature shows that financial inclusion provides rural poor households and businesses with much needed credit to increase income, whether it achieves the goal through improving agricultural productivity remains unclear. This paper constructs a composite index of rural financial inclusion and investigates its effect on agricultural total factor productivity growth in China where a large population depends on limited arable land and thus productivity growth is crucial. Using provincial-level data from 2009 to 2018, we estimate that agricultural total factor productivity grew significantly. Accounting for reverse causality in a dynamic panel model, we find that financial inclusion is a significant driver of this growth and the effect exhibits geographic heterogeneity. Importantly, the effect of financial inclusion on total factor productivity growth occurs as a result of providing loans to support production transformation based on specialization and cooperation. Our results could help other developing countries address similar unbalanced development problems.