Advertisement

Economic Change and Restructuring

, Volume 51, Issue 3, pp 221–247 | Cite as

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

  • Sin-Yu Ho
  • Bernard Njindan Iyke
Article

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.

Keywords

Financial development Economic growth Poverty reduction ARDL with structural breaks China 

JEL Classification

C32 E44 I32 

References

  1. Abosedra S, Shahbaz M, Nawaz K (2016) Modeling causality between financial deepening and poverty deduction in Egypt. Soc Indic Res 126:955–969CrossRefGoogle Scholar
  2. Allen F, Qian J, Qian M (2005) China’s financial system: past, present and future. In: Brandt L, Rawski T (eds) China’s great economic transformation. Cambridge University Press, CambridgeGoogle Scholar
  3. Anderson G, Ge Y (2004) Do economic reforms accelerate urban growth? The case of China. Urban Stud 41(11):2197–2210CrossRefGoogle Scholar
  4. Ang JB, McKibbin WJ (2007) Financial liberalization, financial sector development and growth: evidence from Malaysia. J Dev Econ 84(1):215–233CrossRefGoogle Scholar
  5. Ayyagari M, Demirgüç-Kunt A, Maksimovic V (2010) Formal vs. informal finance. Evidence from China. Rev Financ Stud 23:3048–3097CrossRefGoogle Scholar
  6. Aziz J, Duenwald C (2002) Growth-financial intermediation nexus in China. Discussion paper no. 02/194, International Monetary Fund, WashingtonGoogle Scholar
  7. Beck T, Levine R (2004) Stock markets, banks, and growth: panel evidence. J Bank Financ 28:423–442CrossRefGoogle Scholar
  8. Beck T, Demirgüç-Kunt A, Levine R (2007) Finance, inequality and the poor. J Econ Growth 12(1):27–49CrossRefGoogle Scholar
  9. Birdsall N, Londono J (1997) Asset inequality matters: an assessment of the World Bank’s approach to poverty reduction. Am Econ Rev 87(2):32–37Google Scholar
  10. Boyd H, Levine R, Smith BD (2001) The impact of inflation on financial sector performance. J Monet Econ 47(2):221–248CrossRefGoogle Scholar
  11. Boyreau-Debray G (2003) Financial Intermediation and Growth-Chinese Style. Working paper 3027, The World Bank, WashingtonGoogle Scholar
  12. Burgess, R, Pande R (2003) Do rural banks matter? Evidence from the Indian social banking experiment. BREAD Working Paper, WP No. 37Google Scholar
  13. Burgess R, Pande R (2005) Do rural banks matter? Evidence from the Indian social banking experiment. Am Econ Rev 95(3):780–795CrossRefGoogle Scholar
  14. Calderón C, Lin L (2003) The direction of causality between financial development and economic growth. J Dev Econ 72:321–334CrossRefGoogle Scholar
  15. Callan T, Nolan B, Whelan CT (1993) Resources, deprivation, and the measurement of poverty. J Soc Policy 22:141–172CrossRefGoogle Scholar
  16. Caner M, Kilian L (2001) Size distortion of tests of the null hypothesis of stationarity: evidence and implication for the PPP debate. J Int Money Financ 20:639–657CrossRefGoogle Scholar
  17. Carroll CD, Weil DN (1994) Saving and growth: a reinterpretation. In: Carnegie-Rochester conference series on public policy, vol 40, pp 133–192Google Scholar
  18. Chang P, Jia C, Wang A (2010) Bank fund reallocation and economic growth: evidence from China. J Bank Financ 34:2753–2766CrossRefGoogle Scholar
  19. Chen KC, Wu L, Wen J (2013) The relationship between finance and growth in China. Glob Financ J 24(1):1–12CrossRefGoogle Scholar
  20. Chow GC (2004) Economic reform and growth in China. Ann Econ Financ 5:127–152Google Scholar
  21. Claessens S, Feijen E (2006) Financial sector development and the millennium development goals. World bank working paper no. 89, World Bank, WashingtonGoogle Scholar
  22. Datt G, Ravallion M (1992) Growth and distribution components of changes in poverty measures. J Dev Econ 38(3):275–295CrossRefGoogle Scholar
  23. Ding Z, Tan L, Zhao J (2011) The effect of rural financial development on poverty reduction. Issues Agric Econ 2011(11):1–13Google Scholar
  24. Dollar D, Kraay A (2002) Growth is good for the poor. J Econ Growth 7(3):195–225CrossRefGoogle Scholar
  25. Elliott G, Rothenberg T, Stock J (1996) Efficient tests for an autoregressive unit root. Econometrica 64(4):813–836CrossRefGoogle Scholar
  26. Gaffeo E, Garalova P (2014) On the finance-growth nexus: additional evidence from Central and Eastern Europe countries. Econ Change Restruct 47(2):89–115CrossRefGoogle Scholar
  27. Galbraith J (1958) The affluent society. Houghton-Mifflin, BostonGoogle Scholar
  28. Gao T (2002) The impact of foreign trade and investment reform on industry location: the case of China. J Int Trade Econ Dev 11(4):367–386CrossRefGoogle Scholar
  29. Geda A, Shimeles A, Zerfu D (2006) Finance and poverty in Ethiopia. UNU-WIDER research paper no. 2006/51, United Nations University, HelsinkiGoogle Scholar
  30. Guariglia A, Poncet S (2008) Could financial distortions be no impediment to economic growth after all? Evidence from China. J Comp Econ 36(4):633–657CrossRefGoogle Scholar
  31. Hamori S, Hashiguchi Y (2012) The effect of financial deepening on inequality: some international evidence. J Asian Econ 23(4):353–359CrossRefGoogle Scholar
  32. Hao C (2006) Development of financial intermediation and economic growth: the Chinese experience. China Econ Rev 17:347–362CrossRefGoogle Scholar
  33. Hasan I, Zhou M (2006) Financial sector development and growth: the Chinese experience. UNU-WIDER research paper no. 2006/85, United Nations University, HelsinkiGoogle Scholar
  34. Hasan I, Wachtel P, Zhou M (2009) Institutional development, financial deepening and economic growth: evidence from China. J Bank Financ 33(1):157–170CrossRefGoogle Scholar
  35. He X, Cao Y (2007) Understanding high saving rate in China. China World Econ 15(1):1–13CrossRefGoogle Scholar
  36. Honohan P (2004) Financial development, growth and poverty: how close are the links. In: Goodhart C (ed) Financial development and economic growth: explaining the links. Palgrave Macmillan, BusingstokeGoogle Scholar
  37. Hsueh SJ, Hu YH, Tu CH (2013) Economic growth and financial development in Asian countries: a bootstrap panel Granger causality analysis. Econ Model 32(294):301Google Scholar
  38. Husain I (2004) Financial sector reforms and pro-poor growth: case study of Pakistan. Presidential address at the annual general meeting of the institute of bankers Pakistan, Karachi, 21 Feb 2004Google Scholar
  39. Inoue T, Hamori S (2012) How has financial deepening affected poverty reduction in India: empirical analysis using state-level panel data. App Financ Econ 22(5):395–403CrossRefGoogle Scholar
  40. Iyke BN, Antwi-Asare TO, Gockel AF, Abbey EN (2016) The linkages between financial deepening, trade openness, and economic growth in the West African Economic and Monetary Union (WAEMU). Afr Financ J 18(2):93–116Google Scholar
  41. Jalilian H, Kirkpatrick C (2002) Financial development and poverty reduction in developing countries. Int J Financ Econ 7(2):97–108CrossRefGoogle Scholar
  42. Jalilian H, Kirkpatrick C (2005) Does financial development contribute to poverty reduction? J Dev Stud 41(4):636–656CrossRefGoogle Scholar
  43. Jeanneney SG, Kpodar K (2008) Financial development and poverty reduction: can there be a benefit without a cost. IMF working paper no. WP/08/62, International Monetary Fund, WashingtonGoogle Scholar
  44. Jefferson Gary H, Rawski Thomas G (1994) Enterprise reform in Chinese industry. J Econ Perspect 8(2):47–70CrossRefGoogle Scholar
  45. Johnson DG (1988) Economic reforms in the People’s Republic of China. Econ Dev Cult Change 36(3):225–245CrossRefGoogle Scholar
  46. Kumbhakar SC, Wang D (2007) Economic reforms, efficiency and productivity in Chinese banking. J Regul Econ 32(2):105–129CrossRefGoogle Scholar
  47. Levine R (2004) Finance and growth: theory and evidence. NBER working paper no. 10766Google Scholar
  48. Levine R, Zervos S (1996) Stock market development and long-run growth. World Bank Econ Rev 10(2):323–340CrossRefGoogle Scholar
  49. Levine R, Zervos S (1998) Stock markets, banks, and economic growth. Am Econ Rev 88(3):537–558Google Scholar
  50. Levine R, Loayza N, Beck T (2000) Financial intermediation and growth: causality and causes. J Monet Econ 46(1):31–77CrossRefGoogle Scholar
  51. Liang Q, Teng JZ (2006) Financial development and economic growth: evidence from China. China Econ Rev 17:395–411CrossRefGoogle Scholar
  52. Lin JY (1992) Rural reforms and agricultural growth in China. Am Econ Rev 82(March):34–51Google Scholar
  53. Lin JY, Liu Z (2000) Fiscal decentralization and economic growth in China. Econ Dev Cult Change 49(1):1–21CrossRefGoogle Scholar
  54. Lin JY, Sun X, Wu HX (2015) Banking structure and industrial growth: evidence from China. J Bank Financ 58:131–143CrossRefGoogle Scholar
  55. Mack J, Lansley S (1985) Poor Britain. Allen & Unwin Limited, LondonGoogle Scholar
  56. Meng X (2003) Unemployment, consumption smoothing, and precautionary saving in Urban China. J Comp Econ 31(3):465–485CrossRefGoogle Scholar
  57. Modigliani F, Cao SL (2004) The Chinese saving puzzle and the life-cycle hypothesis. J Econ Lit 42(1):145–170CrossRefGoogle Scholar
  58. Mood C, Jonsson JO (2016) The social consequences of poverty: an empirical test on longitudinal data. Soc Indic Res 127(2):633–652CrossRefGoogle Scholar
  59. Nain MZ, Kamaiah B (2014) Financial development and economic growth in India: some evidence from non-linear causality analysis. Econ Change Restruct 47(4):299–319CrossRefGoogle Scholar
  60. Park A, Ren C, Wang S (2004) Micro-finance, poverty alleviation, and financial reform in China. In: Rural Finance and credit infrastructure in China, OECD 2004, pp 256–270Google Scholar
  61. Perkins D (1994) Completing China’s move to the market. J Econ Perspect 8(2):23–46CrossRefGoogle Scholar
  62. Perron P (1997) Further evidence on breaking trend functions in macroeconomic variables. J Econom 80(2):355–385CrossRefGoogle Scholar
  63. Pesaran MH, Shin Y (1999) An autoregressive distributed lag modeling approach to cointegration analysis, Chapter 11. In: Strom S (ed) Econometrics and economic theory in the 20th century: the ragnar frisch centennial symposium. Cambridge University Press, CambridgeGoogle Scholar
  64. Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econom 16(3):289–326CrossRefGoogle Scholar
  65. Quartey P (2005) Financial sector development, savings mobilisation and poverty reduction in Ghana. UNU-WIDER research paper no. 2005/71, United Nations University, HelsinkiGoogle Scholar
  66. Ravallion M, Datt G (2002) Why has economic growth been more pro-poor in some states of India than others. J Dev Econ 68(2):381–400CrossRefGoogle Scholar
  67. Sala-i-Martin X (2006) The world distribution of income: falling poverty and … convergence, period. Quart J Econ 121(2):351–397CrossRefGoogle Scholar
  68. Schwert W (1986) Test for unit roots: a Monte Carlo investigation. J Bus Econ Stat 7:147–159Google Scholar
  69. Seetanah B (2008) Financial development and economic growth: an ARDL approach for the case of the small island state of Mauritius. Appl Econ Lett 15:809–813CrossRefGoogle Scholar
  70. Sehrawat M, Giri AK (2016a) Financial development and poverty reduction in India: an empirical investigation. Int J Soc Econ 43(2):106–122CrossRefGoogle Scholar
  71. Sehrawat M, Giri AK (2016b) Financial development and poverty reduction: panel data analysis of South Asian countries. Int J Soc Econ 43(4):400–416CrossRefGoogle Scholar
  72. Sen A (1983) Poor, relatively speaking. Oxf Econ Pap 35:153–169CrossRefGoogle Scholar
  73. Siddiki JU (2002) Trade and financial liberalisation and endogenous growth in Bangladesh. Int Econ J 16(3):23–37CrossRefGoogle Scholar
  74. Söderlund B, Tingvall PG (2016) Captial freedom, financial development and provincial economic growth in China. World Econ. doi: 10.1111/twec.12391 Google Scholar
  75. Stiglitz J (1998) The role of the state in financial markets. In: Proceedings of the world bank annual conference on development economic, pp 19–52Google Scholar
  76. Turner G, Tan N, Sadeghian D (2012) The Chinese banking system. Reserve Bank Aust Bull 2012:53–64Google Scholar
  77. Uddin GS, Shahbaz M, Arouri M, Teulon F (2014) Financial development and poverty reduction nexus: a cointegration and causality analysis in Bangladesh. Econ Model 36:405–412CrossRefGoogle Scholar
  78. United Nations Development Programme (2008) China human development report. 2007–2008: basic public services benefiting 1.3 billion Chinese people. United Nations Development Programme, New YorkGoogle Scholar
  79. Wang S, Li Z, Ren Y (2004) The 8–7 national poverty reduction program in China—the national strategy and its impact. World Bank, WashingtonGoogle Scholar
  80. Wen T, Ran G, Xiong D (2005) Financial development and the income growth of farmers in China. Econ Res J 2005(09):30–43Google Scholar
  81. World Bank (1990) World development report 1990: poverty. Oxford University Press, New YorkCrossRefGoogle Scholar
  82. World Bank (1995) Bangladesh: from counting the poor to making the poor count. Poverty Reduction and Economic Management Network, South Asia Division, World Bank, WashingtonCrossRefGoogle Scholar
  83. World Bank (2001) World development report 2000/2001. Oxford University Press, New YorkGoogle Scholar
  84. World Bank (2009) From poor areas to poor people: China’s evolving poverty reduction agenda. An assessment of poverty and inequality in China. The World Bank, East Asia and Pacific RegionGoogle Scholar
  85. World Bank (2014). Global Financial Development Report 2014. http://worldbank.org/financialdevelopment. Accessed 1 July 2016
  86. World Development Indicators (2016). http://data.worldbank.org/products/wdi. Accessed 6 July 2016
  87. Yang DT, Zhang J, Zhou S (2012) Why are saving rates so high in China? In: Capitalizing China. University of Chicago Press, Chicago, USA, pp 249–278Google Scholar
  88. Yao S (1999) Economic growth, income inequality and poverty in China under economic reforms. J Dev Stud 35(6):104–130CrossRefGoogle Scholar
  89. Ye Q, Xu Z, Fang D (2012) Market structure, performance, and efficiency of the Chinese banking sector. Econ Change Restruct 45(4):337–358CrossRefGoogle Scholar
  90. Zhang J, Wang L, Wang S (2012) Financial development and economic growth: recent evidence from China. J Comp Econ 40(3):393–412CrossRefGoogle Scholar
  91. Zou D (1996) The open door policy and urban development in China. Habitat Int 20(4):525–529CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of South Africa, UNISAPretoriaSouth Africa
  2. 2.Department of Finance, Deakin Business SchoolDeakin UniversityBurwoodAustralia

Personalised recommendations