| Abstract: |
This paper investigates the economic conditions of rural households in China.
Historical survey data indicate that over 80 per cent of rural households earn
less than 4,500 yuan in net disposable income each year, that for the vast
majority of rural households disposable income is insufficient to meet food
consumption needs, and that in terms of economic growth rural households are
receiving an ever decreasing percentage of China?s growing economy with rural
household incomes being only 31 per cent of urban household income in 2004. To
reduce vulnerability and food insecurity, this paper investigates the role of
microcredit in China. It is argued that in China the conventional wisdom is to
provide credit using traditional means, but we provide a model that shows how
a microcredit market based on trust can co-exist with a commercial
collateral-based market. This model is developed in detail and certain
propositions are supported using dominant strategies in a trust-honour game
based on the prisoner?s dilemma. The theoretical model is then applied to the
case of microlending in China. It explains why, in the absence of trust, rural
credit corporations do not make loans to the very poor. Furthermore, the model
explains how Central party policies on rural credit can actually crowd out
micro finance institution (MFI) and NGO microlending in China, and also
explains why moneylenders dominate in many of the poorer regions of the
country. From a policy point of view, the theoretical model indicates that
trust-based lending, coupled with certain incentives, can go far in supporting
growth opportunities in rural China. It is argued that Chinese policy should
be flexible enough to permit trust-based microlending to the poor, regardless
of how counterintuitive this must appear to the conventional wisdom. Indeed,
in the absence of flexible credit strategies, China?s rural poor will remain
in a persistent food-insecure poverty gap. |