Household Income Dynamics in Rural China

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 reduces future 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.