Vulnerability, Trust and Microcredit: The Case of China?s Rural Poor
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.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.wider.unu.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kandel, E. & Lazear, E.P., 1990.
"Peer Pressure and Partnerships,"
90-07, Rochester, Business - Managerial Economics Research Center.
- Matthew Rabin., 1992.
"Incorporating Fairness into Game Theory and Economics,"
Economics Working Papers
92-199, University of California at Berkeley.
- Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
- M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
- 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.
- 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.
- Harvey James, 2002. "The Trust Paradox: A Survey of Economic Inquiries Into the Nature of Trust and Trustworthiness," Microeconomics 0202001, EconWPA.
- 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.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:unu:wpaper:rp2008-52. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruck Tadesse)
If references are entirely missing, you can add them using this form.