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Vulnerability, Trust and Microcredit: The Case of China?s Rural Poor

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  • Turvey, Calum G.
  • Kong, Rong
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    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.

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    File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-52.pdf
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    Bibliographic Info

    Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/52.

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    Length: 24 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:unu:wpaper:rp2008-52

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    Keywords: equilibrium; game theory; rural; credit; China;

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    References

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    1. Richard L. Meyer & Geetha Nagarajan, 2006. "Microfinance in developing countries: accomplishments, debates, and future directions," Agricultural Finance Review, Emerald Group Publishing, vol. 66(2), pages 167-193, September.
    2. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
    3. Valentina M. Hartarska & Martin Holtmann, 2006. "An overview of recent developments in the microfinance literature," Agricultural Finance Review, Emerald Group Publishing, vol. 66(2), pages 147-165, September.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Sjoerd Beugelsdijk & Henri L.F. de Groot & Anton B.T.M. van Schaik, 2004. "Trust and economic growth: a robustness analysis," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 118-134, January.
    6. James Jr., Harvey S., 2002. "The trust paradox: a survey of economic inquiries into the nature of trust and trustworthiness," Journal of Economic Behavior & Organization, Elsevier, vol. 47(3), pages 291-307, March.
    7. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers 92-199, University of California at Berkeley.
    8. Manfred Zeller, 2006. "A comparative review of major types of rural microfinance institutions in developing countries," Agricultural Finance Review, Emerald Group Publishing, vol. 66(2), pages 195-213, September.
    9. Harvey James, 2002. "The Trust Paradox: A Survey of Economic Inquiries Into the Nature of Trust and Trustworthiness," Microeconomics 0202001, EconWPA.
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    Cited by:
    1. Turvey, Calum G. & Kong, Rong, 2010. "Informal lending amongst friends and relatives: Can microcredit compete in rural China?," China Economic Review, Elsevier, vol. 21(4), pages 544-556, December.

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