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【Jianjun LI】 The Effect of Financial Inclusion on Income Distribution and Poverty Alleviation:Policy Framework Selection for Efficiency and Equity

Published:2019-04-16  Views:

The  paper “The Effect of Financial Inclusion on Income Distribution and PovertyAlleviation: Policy Framework Selection for Efficiency and Equity”, coauthoredby Professor Jianjun LI of the School of Finance and doctorial student Xun HAN,was published in the 3rd issue of “Journal of Financial Research”.


Summary: The concept offinancial inclusion was formally proposed during the “International Year ofMicrocredit” in 2005, and focuses on broad inclusiveness and a commitment toprovide reasonably priced, convenient, and efficient financial services to allsocial strata. In theory, financial inclusion can alleviate the financialconstraints of the poor rural population and promote investment in production,operations, and human capital through providing savings, credit, and insurance,which are helpful in alleviating poverty. Can financial inclusion thereforeimprove the current situation of uneven income distribution and reduce theincidence of poverty? Is there a significant difference between traditional financeand information-based financial inclusion? This study addresses this question.


This focus of this study is the impact of financial inclusion on income distributionand poverty alleviation. Specifically, a theoretical model is first used toexplain the connotation of financial inclusion and construct a financial indexsystem for financial inclusion. The study then examines the impact of financialinclusion on income distribution and poverty alleviation at the country level,and also on regional heterogeneity in the concentrated and non-concentrateddestitute areas, the western and eastern regions. Second, it examines whyfinancial inclusion has failed to reduce the incidence of poverty via twomechanisms: capture of the rural credit market by the elite and lack offinancial knowledge. Third, it uses a difference-in-differences quasi-naturalexperiment to empirically analyze the influence of financial inclusion onincome distribution and poverty alleviation. Then, using the two dimensions ofbanking and insurance, it examines the role of the financial inclusionframework design in reducing the incidence of poverty, taking broad coverage,specific matching, and sustainability into account. Finally, it explores thepositive role of information-based financial inclusion compared with thetraditional financial system.


Based on the county level data of 2009 and 2015, this study empirically examines theimpact of financial inclusion on urban-rural income distribution and theper-capita disposable income of rural residents in concentrated andnon-concentrated areas. In addition, we select data for 31 provinces,municipalities, and autonomous regions from 2002 to 2015 to empirically analyzethe policy effects of financial inclusion. The county-level data are derivedfrom “The Yearbook of Socio-economic Statistics of County (City) in China from2000 to 2015,” the “China Statistical Yearbook for Regional Economy,” theCEInet Statistics Database, and manual collection. The provincial-level dataare derived from the 2015 “Report on China's Regional Financial Operation,” the“China Statistical Yearbook,” the website of the People's Bank of China, andthe Wind database.


The results show that in the initial stage, financial inclusion can narrow therural-urban income gap, but this effect is only significant in concentrateddestitute areas and the western region. Elite capture of the rural creditmarket and lack of financial knowledge are the reasons that financial inclusionhas not alleviated poverty. A policy framework needs to take account ofextensive inclusivity, specific ratios, and commercial sustainability torealize the dual goals of efficiency and fairness. Information-based financialinclusion can overcome the high thresholds, high service costs, and adverse selectionproblems of formal financial institutions, becoming the optimal framework forthe selection of Pareto efficiency to promote fair income distribution andalleviate poverty.


The contribution of this paper lies mainly in the following aspects. First, itovercomes the overlapping problem of financial inclusion and the FinancialExclusion Index, improving the design of the Inclusive Financial Index system.Second, it examines the effect of financial inclusion on income distributionand poverty reduction at the county and provincial level, answering thequestion of whether financial inclusion can improve the situation of unevendistribution and poverty, and further verifying the differential impact of theinstitutional environment on the economic consequences of financial inclusion.Third, it compares and analyzes the problems and advantages of traditionalfinancial institutions and information-based finance in the development offinancial inclusion, providing theoretical support and practical guidance forthe selection of a policy framework, and helping to improve the role offinancial inclusion in improving income distribution and alleviating poverty.


Keywords: FinancialInclusion; Income Distribution; Poverty Alleviation; Policy Framework

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