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Household income dynamics in rural China

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  • Jalan, Jyotsna
  • Ravallion, Martin

Abstract

Theoretical work has shown that nonlinear dynamics in household incomes can yield poverty traps and distribution-dependent growth. If this is true, the potential implications for policy are dramatic: effective social protection from transient poverty would be an investment with lasting benefits, and pro-poor redistribution would promote aggregate economic growth. The authors test for nonlinearity in the dynamics of household incomes and expenditures using panel data for 6,000 households over six years in rural southwest China. While they find evidence of nonlinearity in the income and expenditure dynamics, there is no sign of a dynamic poverty trap. The authors argue that existing private and social arrangements in this setting protect vulnerable households from the risk of destitution. However, their findings imply that the speed of recovery from an income shock is appreciably slower for the poor than for others. They also find that current inequality reducesfuture growth in mean incomes, though the"growth cost"of inequality appears to be small. The maximum contribution of inequality is estimated to be 4-7 percent of mean income and 2 percent of mean consumption.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2706.

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Date of creation: 30 Nov 2001
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Handle: RePEc:wbk:wbrwps:2706

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Keywords: Economic Theory&Research; Labor Policies; Health Economics&Finance; Environmental Economics&Policies; Payment Systems&Infrastructure; Environmental Economics&Policies; Inequality; Economic Theory&Research; Health Economics&Finance; Rural Poverty Reduction;

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  1. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 96(384), pages 1011-34, December.
  2. Banerjee, Abhijit V & Duflo, Esther, 2003. " Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, Springer, vol. 8(3), pages 267-99, September.
  3. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  4. Jalan, Jyotsna & Ravallion, Martin, 1998. "Behavioral responses to risk in rural China," Policy Research Working Paper Series 1978, The World Bank.
  5. Martin Ravallion, 1997. "Famines and Economics," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1205-1242, September.
  6. Lokshin Michael & Ravallion Martin, 2004. "Household Income Dynamics in Two Transition Economies," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 8(3), pages 1-33, September.
  7. Stiglitz, Joseph E, 1976. "The Efficiency Wage Hypothesis, Surplus Labour, and the Distribution of Income in L.D.C.s," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 185-207, July.
  8. Banerjee, Abhijit V & Newman, Andrew F, 1994. "Poverty, Incentives, and Development," American Economic Review, American Economic Association, American Economic Association, vol. 84(2), pages 211-15, May.
  9. Ravallion, Martin, 1998. "Does aggregation hide the harmful effects of inequality on growth?," Economics Letters, Elsevier, Elsevier, vol. 61(1), pages 73-77, October.
  10. Chaudhuri, Shubham & Ravallion, Martin, 1994. "How well do static indicators identify the chronically poor?," Journal of Public Economics, Elsevier, Elsevier, vol. 53(3), pages 367-394, March.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Medio,Alfredo & Lines,Marji, 2001. "Nonlinear Dynamics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521551861.
  13. Jalan, Jyotsna & Ravallion, Martin, 1999. "Are the poor less well insured? Evidence on vulnerability to income risk in rural China," Journal of Development Economics, Elsevier, Elsevier, vol. 58(1), pages 61-81, February.
  14. Benabou, R., 1996. "Inequality and Growth," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-22, C.V. Starr Center for Applied Economics, New York University.
  15. Aghion, Philippe & Caroli, Eve & García-Peñalosa, Cecilia, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Scholarly Articles 12502063, Harvard University Department of Economics.
  16. Medio,Alfredo & Lines,Marji, 2001. "Nonlinear Dynamics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521558747.
  17. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, Elsevier, vol. 40(1), pages 1-24, February.
  18. Chen, Shaohua & Ravallion, Martin, 1996. "Data in transition: Assessing rural living standards in Southern China," China Economic Review, Elsevier, Elsevier, vol. 7(1), pages 23-56.
  19. Chang, W W & Smyth, David J, 1971. "The Existence and Persistence of Cycles in a Non-linear Model: Kaldor's 1940 Model Re-examined," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 37-44, January.
  20. Varian, Hal R, 1979. "Catastrophe Theory and the Business Cycle," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 17(1), pages 14-28, January.
  21. Jyotsna Jalan & Martin Ravallion, 1998. "Geographic Poverty Traps?," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 86, Boston University, Institute for Economic Development.
  22. Jalan, Jyotsna & Ravallion, Martin, 1998. "Transient Poverty in Postreform Rural China," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 338-357, June.
  23. Day, R H, 1992. "Complex Economic Dynamics: Obvious in History, Generic in Theory, Elusive in Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(S), pages S9-23, Suppl. De.
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