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Finance-growth-poverty nexus: a re-assessment of the trickle-down hypothesis in China

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Abstract

Poverty has remained one of the prominent challenges of humanity. Different solutions have been suggested to curb poverty. Economic growth and financial development are two such crucial tools for overcoming poverty, as frequently pointed out by economists. These tools work through the so-called trickle-down hypothesis, which contends that a well-functioning financial system would enhance poverty reduction by promoting economic growth. One country that appears to have manifested this hypothesis is China. However, the empirical test of the trickle-down hypothesis for China is scant. In addition, most of the existing studies have failed to account for regime-shift in parameters or structural breaks. This paper attempts to fill this void by testing the trickle-down hypothesis for China during the period 1985–2014. We utilized two standard proxies for financial development, namely: the domestic credit to private sector by banks as percentage of GDP, and money and quasi money as percentage of GDP; annual percentage change in real GDP per capita to proxy economic growth; and a standard proxy for poverty reduction namely: the household final consumption expenditure per capita growth. By accounting for structural breaks in our empirical specifications, we found overwhelming support for the trickle-down hypothesis at the national level. That is, we found financial development to cause economic growth, which in turn causes poverty reduction in China at the national level. This has important policy implications.

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Fig. 1

Source World Development Indicators (WDI 2016)

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Notes

  1. Note that very recent data is not available to us from reliable sources. Hence post-2007 figures have been left out.

  2. The data is available up to year 2010 according to WDI (2016).

  3. Panel here refers to studies that investigated the issue using several countries in either time series, cross-sectional, or panel data setting.

  4. There are also studies which have examined the links between finance and growth in countries undertaking economic reforms similar to the Chinese experience. Two of such studies are Gaffeo and Garalova (2014), and Nain and Kamaiah (2014). The former found finance to spur growth in thirteen Central and Eastern Europe countries, while the latter found no causal relationship between finance and growth in India.

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Authors and Affiliations

  1. Department of Economics, University of South Africa, UNISA, P. O. Box 392, Pretoria, 0003, South Africa

    Sin-Yu Ho

  2. Department of Finance, Deakin Business School, Deakin University, 221 Burwood Highway, Melbourne Burwood Campus, Burwood, VIC, 3125, Australia

    Bernard Njindan Iyke

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  1. Sin-Yu Ho
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Correspondence to Bernard Njindan Iyke.

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Ho, SY., Iyke, B.N. Finance-growth-poverty nexus: a re-assessment of the trickle-down hypothesis in China. Econ Change Restruct 51, 221–247 (2018). https://doi.org/10.1007/s10644-017-9203-8

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