Abstract
This paper relies on recent proprietary data from the People’s Republic of China’s (PRC) poor rural minority areas to examine the importance of credit constraints on internal labor migration. Specifically, a liquidity shock via the PRC’s minimum living standard assistance (MLSA) program is decomposed into its direct and indirect parts. The institutional features of the MLSA program permit an identification strategy that relies on a set of verifiable assumptions and an instrument variable framework. The results reveal that the direct effect on migration of MLSA is negative, although the net effect is positive driven by the large indirect effects, which are twice as large for ethnic minorities compared to the Han majority. Subsequent evidence further suggests that the main mechanism behind the indirect effect is informal interpersonal lending fostered by risk-sharing strategies. The findings imply that once liquidity is injected into a village it gets circulated in the community, stimulating migration particularly within credit-constrained minority communities.
Highlights
Internal migration has led to a significant reduction in rural poverty in the People’s Republic of China (PRC) (Ravallion and Chen 2007, Knight 2013) and across the developing world
A number of benefits exist for individuals and households that engage in migration
After including county-level fixed effects starting in Column (2), the estimated relationship becomes positive in all other models
Summary
Internal (rural-to-urban) migration has led to a significant reduction in rural poverty in the People’s Republic of China (PRC) (Ravallion and Chen 2007, Knight 2013) and across the developing world. The skills that migrants acquire in the destination and bring back to their rural origins are important, as return migrants are more likely to engage in higher profit-driven entrepreneurial activities (Démurger and Xu 2011). A number of recent studies test whether credit constraints exist by examining how a liquidity shock from some type of program intervention affects the migration decision (Bryan et al 2014, Angelucci 2015). In the PRC, a small but growing number of recent studies is understanding how migration is affected by the removal of credit constraints (Eggleston et al 2016, Cai 2015) and other migration barriers (Pan 2016, De Brauw and Giles 2017)
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