Rural financial development, spatial spillover, and poverty reduction: evidence from China

Abstract

Rural financial development is deemed essential for eliminating poverty. In China, successive governments have initiated a series of financial development plans to reduce poverty since the launch of economic reform in the late 1970s. However, there is a rising concern about whether financial development can reduce poverty in China. This study uses a panel dataset of 30 provinces (out of 31) in mainland China from 1997 to 2015 to examine the effect of rural financial development on poverty reduction. We employ a spatial panel model to investigate whether rural financial development has a positive spatial spillover effect. Moreover, we use the instrumental variable method to address the possible bidirectional causal effect between rural financial development and poverty reduction. Our study confirms that rural financial development does reduce poverty and simultaneously widen the urban-rural income gap. We further find that rural financial development has a positive spatial spillover effect on poverty alleviation and that the conventional panel model (e.g., fixed effects method) may underestimate the effect of rural financial development, as it ignores the spatial spillover effect.