Fiscal incentives, financial support for agriculture, and urban-rural inequality

Urban-rural inequality is a significant social problem for developing countries in the process of economic development. Using regional-level panel data from 2004 to 2018, this paper estimates the effect of financial support for agriculture on the urban-rural income gap in China via a staggered difference-in-difference method. In 2009, the finance department issued a Notice on Launching the Pilot Work of Incremental Reward for Agricultural Loans by County Financial Institutions (IRAL) and established an incentive mechanism to leverage financial funds to guide and motivate county financial institutions to increase their investment in agriculture-related credit and support agricultural development. The results show that, through fiscal incentives, financial institutions have more incentives to increase agricultural loans and urban-rural income inequality significantly declined throughout the study data period, particularly in underdeveloped areas. We propose that this policy reduces urban-rural income inequality via three mechanisms: financial availability, shift of labor, and human capital. Furthermore, we also examined the effect of IRAL on the urban-rural consumption inequality, although no significant relationship was found.

Automated summary

This study examines the impact of financial support for agriculture on urban-rural income inequality in China using regional-level panel data from 2004 to 2018. The results show that fiscal incentives provided to financial institutions have led to an increase in agricultural loans and a significant reduction in urban-rural income inequality, particularly in underdeveloped areas. The policy works through enhancing financial availability, promoting labor migration, and fostering human capital accumulation to reduce the income gap between urban and rural areas.