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| The Effect of Financial Inclusion on Income Distribution and Poverty Alleviation:Policy Framework Selection for Efficiency and Equity |
| LI Jianjun, HAN Xun
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| Central University of Finance and Economics |
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Abstract The concept of financial inclusion was formally proposed during the “International Year of Microcredit” in 2005, and focuses on broad inclusiveness and a commitment to provide reasonably priced, convenient, and efficient financial services to all social strata. In theory, financial inclusion can alleviate the financial constraints of the poor rural population and promote investment in production, operations, and human capital through providing savings, credit, and insurance, which are helpful in alleviating poverty. Can financial inclusion therefore improve the current situation of uneven income distribution and reduce the incidence of poverty？ Is there a significant difference between traditional finance and information-based financial inclusion？ This study addresses this question.
This focus of this study is the impact of financial inclusion on income distribution and poverty alleviation. Specifically, a theoretical model is first used to explain the connotation of financial inclusion and construct a financial index system for financial inclusion. The study then examines the impact of financial inclusion on income distribution and poverty alleviation at the country level, and also on regional heterogeneity in the concentrated and non-concentrated destitute areas, the western and eastern regions. Second, it examines why financial inclusion has failed to reduce the incidence of poverty via two mechanisms: capture of the rural credit market by the elite and lack of financial knowledge. Third, it uses a difference-in-differences quasi-natural experiment to empirically analyze the influence of financial inclusion on income distribution and poverty alleviation. Then, using the two dimensions of banking and insurance, it examines the role of the financial inclusion framework design in reducing the incidence of poverty, taking broad coverage, specific matching, and sustainability into account. Finally, it explores the positive role of information-based financial inclusion compared with the traditional financial system.
Based on the county level data of 2009 and 2015, this study empirically examines the impact of financial inclusion on urban-rural income distribution and the per-capita disposable income of rural residents in concentrated and non-concentrated areas. In addition, we select data for 31 provinces, municipalities, and autonomous regions from 2002 to 2015 to empirically analyze the policy effects of financial inclusion. The county-level data are derived from “The Yearbook of Socio-economic Statistics of County (City) in China from 2000 to 2015,” the “China Statistical Yearbook for Regional Economy,” the CEInet Statistics Database, and manual collection. The provincial-level data are derived from the 2015 “Report on China's Regional Financial Operation,” the “China Statistical Yearbook,” the website of the People's Bank of China, and the Wind database.
The results show that in the initial stage, financial inclusion can narrow the rural-urban income gap, but this effect is only significant in concentrated destitute areas and the western region. Elite capture of the rural credit market and lack of financial knowledge are the reasons that financial inclusion has not alleviated poverty. A policy framework needs to take account of extensive inclusivity, specific ratios, and commercial sustainability to realize the dual goals of efficiency and fairness. Information-based financial inclusion can overcome the high thresholds, high service costs, and adverse selection problems of formal financial institutions, becoming the optimal framework for the selection of Pareto efficiency to promote fair income distribution and alleviate poverty.
The contribution of this paper lies mainly in the following aspects. First, it overcomes the overlapping problem of financial inclusion and the Financial Exclusion Index, improving the design of the Inclusive Financial Index system. Second, it examines the effect of financial inclusion on income distribution and poverty reduction at the county and provincial level, answering the question of whether financial inclusion can improve the situation of uneven distribution and poverty, and further verifying the differential impact of the institutional environment on the economic consequences of financial inclusion. Third, it compares and analyzes the problems and advantages of traditional financial institutions and information-based finance in the development of financial inclusion, providing theoretical support and practical guidance for the selection of a policy framework, and helping to improve the role of financial inclusion in improving income distribution and alleviating poverty.
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Received: 13 December 2017
Published: 12 April 2019
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