A Study On The Effect Of Credit Constraints On Rural Households’ Income And Its’ Alleviation

The Party and the government have been paying great attention to imorove the income of the farmers especially the poor farmers. The document of Certain Suggestions on Supporting Promotion and Development as of Former Central Soviet Areas as Southern Jiangxi, etc. by the State Council was released to piont out that in the central Soviet area especially in the Southern of Jiangxi, the economic development is still lag behind, the people’s livelihood is still outstanding and the problem of their poverty and backwardness needs to be changed fundamentally. So the report of the18th National Congress of the Communist Party of China stressed that it is needed to enforce the support to the revolutionary and poor areas and to gradually narrow the gap between urban and rural areas and to promote common prosperity of these areas. The core of the three problems is the problem of the farmers while the core of the problem of the farmers is to improve their income. The problem is not only affects the living standards of farmers and restricts the rural economic development, but also deeply relates to the great goal of building a moderately prosperous society. So the study on the farmers’ income is the realistic requirement and policy support of China’s current economic and social development. To promote farmer’ income is received extensive attention from government workers and the masses of the scholars.There are various factors that affect farmers’income. The opinion of the neoclassical growth theory is that capital growth is determined by the savings (or investment), and savings is determined by income, the capital is a deciding factor of income or output. There is an interdependent system formed by capital, income and investment as shown in the figure below.The picture shows that the capital’influence on the output can be described by the function of y=f(k). It means income is influenced by the stock capital,and the stock capital is affected by the change of the capital stock which is affected by the saving/investment. These factors are interactional:The income level of farmers affects the farmers’savings or investment. Then it will affect the change of the capital stock, and the farmer’s capital stock will directly affects the output of farmers.Under the policy guidance and internal requirement of "the integration of urban and rural development is the fundamental way to solve the three problems of ’agriculture, rural areas and farmers"’,Some questions are arised naturally based on the neo-classical growth theory, such as:Weather the credit capital stock is appropriate for the needs of the rural economic and social development in China? Is there any possibility of "pareto optimal" on the configuration of the credit resources between urban and rural areas. As the rural households are the basic component units of the rural society and their lives and product directly reflect the economic and social development. Is there any credit demand on formal financial institutes? Can they get any loan from banks? If not. Is their money enough for their life and product? Then how these farmers solve their shortage of money? Is their any farmers who have not solve this problem? After identifying credit constraints of the farmers, What is the direction and degree of the influence of credit constraint on farmers’income? Does credit constraint affects income directly or indirectly? After these problems are resulted, some other problems are followed:What are the real factors that affect farmers formal credit constraints? What are the policy recommendations for the relief of the farmers’credit constraint? By answering above questions some ways will be explored to alleviate farmer’credit constraints, thereby to increase farmers’income.Based on the above thinking, The paper’research object is the rural households who have the demand for formal credit. The total872samples were selected from34counties in the original central Soviet area in Jiangxi province. The purposes of the paper are judging whether the households need to borrow money from the financial institute, geteing the information about the amount, channels and purpose of their loans and why they didn’t borrow money from financial institutions.Then three most important contents were empirically analyzed by different methods. The first one is to explore the effect direction and degree of the credit resources to the rural households’ income both directly and indirectly. Using cross section data to analyze the direct impact of credit constraint on farmers’income by quantile regression. Using time series data to investigate the dynamic impact of agricultural loans on per farmer’pure income by state space model. In order to stress the importance of the credit resource, the indirect effect of the credit constraint on farmers’income was also empirically analyzed by stochastic frontier production function and instrumental variable model. The second important content is to analyze the factors that affect farmers’credit constraint by Probit model. The third content is to explore the policy recommendations for relieving the farmer’credit constraints by improving the farmers’financial awareness and farmers’health and by developing microfinance.The results of the paper are as follow:Firstly, the farmers have great demand for the formal credit, because85.5%of the sample farmers need loans from financial institutions.53.4%of the total sample households are credit constrained by the financial institutes. But the causes are different, The reason for40.3%of the households are credit constrained is from the perspective of the supply of the financial institutes, while the reason for59.7%of the households are credit constrained is from the perspective of the demand of themselves. Secondly, both land and labor are significantly positive to the farmers’ income which is revealed by the quantile regression. But the effect are different for different farmer according to their income level.Credit constraints has a significant negative effect on their income for the households which are on the1/10,1/4and9/10quantile level. However, the results show that the credit constraints has a negative effect on the households which are on the5/10and3/4quantile level. But the impact is not significant. Thirdly, the cointegration test reveals that there is a long-term stable positive relationship between the agricultural loan and per capita net income of farmers. Agricultural loans is a Granger cause of the increase of the per farmer’ net income, but the farmers’ income growth is not a Granger cause of the agriculture loan growth. It means that agricultural loans have a positive impact on the farmers’ income growth. The result of kalman filtering algorithm from state space model reveals that the elastic coefficient of agricultural loans to households’ income growth is positive, but the coefficient is rather small. Fourthly, On the statistic analysis of the farmers’ individual characteristics and the input and output of their production, the results show that the value of the production of the credit farmers is563.2yuan and the average value is190.0yuan less than that of the counterparts. The total sample is divided into two parts. One includes farmers who have been constrained by the formal credit while the other one has not. The empirical results of the stochastic frontier production function show that the agricultural production efficiency is not only affected by the labor and other factors, but also associated with the formal credit constraints of the farmers. The efficiency loss of the credit constraint farmers is17.8%higher than that of the unconstraint farmers. Fifthly, the marginal effect of the Probit model showed the influencing direction and degree of the various factors:the probability of the formal credit constrain will decrease0.46%once he is one more year old. The probability of the formal credit constrain will increase0.39%when the rural household’ health state deteriorate a level. Compared to others, those households whose family members are participated in political activities has a1.3%lower possibility to suffer credit constraint. The possibility will increase0.40%once the minimum distance from the living place to the location of the formal financial institution increase one kilometer. The model also showed that29.40%lower of the probability to credit constraints for those who use bank card and36.48%lower if a household increase one time of bank deposit per month. Lastly, Some policy recommendations are put foword to relieving the farmer’ credit constraints by improving the farmers’financial awareness and farmers’ health.The result of analysis on the improvement of rural finance service system also shows that the development of the microfinance can effectively alleviate farmer’credit constraint.There are theoretical and practical significance to study the influencing effects of the formal credit constraint on rural households’ income and the relief mechanism of the rural households’ formal credit constraints. The theoretical significance lies in that the paper will help to the improvement of the rural financial system to adapt to the socialist market economy. The practical significance of the study is that it provide a reference on the relief of the credit constraint. So it will help the farmer increase their income and help construct a new countryside and build a well-off society in China.