Download An Empirical Study of the Relationship between Income Growth

An Empirical Study of the Relationship between Income Growth
of Rural Residents and Economic Development in China
Yu Ping, Shu Man
School of Economics, Wuhan University of Technology, P. R. China, 430070.
School of Economics, South-Center University for Nationalities, P. R. China, 430074.
Abstract: This article studies the relationship between the farmers’ income growth and economic
development on the basis of factual evidence. It has been discovered that there is a distinct relevant
connection between the farmers’ income growth and economic development through linear regression
analysis of income growth of both urban and rural residents, GDP increase and consumption increase
respectively, then the article makes a theoretical explanation. The conclusion is that increasing the
farmers’ income is the critical driving force to promote the economic growth, and increasing the
farmers’ wages is the main route to increase their income, offering institutional assurance in speeding up
transfer of the residual labor force in upgrading the rural industrial structure.
Key words: Consumption Tendency, Economic Development, Income Growth, the Rural Resident
1 Introduction
It is decided by our national conditions that the problem of agriculture, rural areas and farmers is
the most primary problem our socialist market economy faces. In a long run, it will still be the key
problem influencing our country’s reform and development. Presently this problem focuses on the
farmers’ income. Keeping increasing the farmer’s income steadily plays a significant role in completing
the tasks of our economy’s transfer and development, and it is also the important factor influencing the
sustained development of our national economy and stability of our society. However, during “the ninth
five-year plan”, the growing speed of the average pure income per farmer throughout the country
declined by 6 percent, compared with that during “the eighth five-year plan”, and there appears a
sustained decreasing trend[1]. The slow increase of the farmers’ income is related not only to the
development of agriculture and the stability of the rural areas, but also to the whole condition of our
national economy, which has attracted the extensive attention in all walks of life. It has become the core
mission of the agriculture and the rural economic work in the near future to try to increase farmers’
income
In the modern economics, consumption is one of the most important theoretical concepts, which is
regarded as one of three greatest factors (investment, consumption and export) to promote the economic
growth. And the research concerned reveals that of those three factors consumption is the first most
important one, for it contributes to GDP growth, generally, by more than 50%. The residents’
consumption in our country accounts for about 80%, i.e. it constitutes the overwhelming majority of the
total consumption. The residents’ consumption is a main force to promote economic growth[2].
Expanding the residents’ consumption contributes to the economic growth and their purchasing power
should be strengthened. Here are two choices, one is to raise the residents’ consumption tendency, and
the other is to increase the residents’ income. In the structure of “Dual Economy” of our country, the
residents can be divided into two categories, that is, the rural residents and the urban residents.
Numerous differences between them determine their different consumption tendencies Obviously, the
income growth of these two categories is surely different in promoting the economic development and
enlarging the domestic demand.
2 Comparative research of the relationship between the income growth of the
urban residents and that of the rural residents and the economic development
In order to compare the function of the income growth of the urban residents with that of the
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income growth of the rural residents in promoting the economic development and enlarging the
domestic demand, four economic indexes are established. The chain growth ratio (GY) of per capita
GDP is selected as the economic development index, for it is a comprehensive index to measure the
economic development level of one country. On the other hand, the chain growth ratio (PC) of the
residents’ consumption level index is selected as the consumption growth index, for it reflects the
growth conditions of the residents’ consumption level both in towns and in rural areas. The chain growth
ratio (RI) of per capita pure income in the rural areas is selected as the farmers’ income growth index.
Per capita pure income of the rural residents refers to the surplus and savings after deducting the
expenses in the operation of production and non-production, productive fixed asset depreciation and
taxes paid from the gross income, and handing over the money that is used to bear the collective load. It
can be directly used in productive and non-productive constructive investment and living consumption.
The chain ratio (UI) of per capita controllable income in the urban families is selected as the urban
residents’ income growth index, which refers to the actual income after the investigated urban families
pay their personal income tax. The data from 1986 to 2000 in this article are selected as a sample. The
main reason for selecting 1986 as the beginning is that we have considered the procurement of the data,
and we have considered in the early period of reforming and opening to the outside world the market
mechanism was not established and there were many uncertain factors in economy. All the original data
come from all the issues of CHINA STATISTICS YEAR BOOK 1985-2000.
With the help of TSP7.0 software, common minimum two multiplications are conducted to have a
linear regression of independent variable RI and UI with dependent variable GY and PC respectively.
The result is as follows in table 1.
RI
UI
0.7696
(2.8668)
Table 1 the linear regression of GY, PC and UI
GY
PC
0.7956
0.7469
(2.9413)
(2.6246)
0.1075
0.1543
0.1804
(0.5364)∗
(0.9656)∗
(0.8935)∗
0.0217
0.4315
0.3464
0.0579
0.7851
(2.8411)
0.2265
(1.3877)∗
0.4367
Judgment
0.3873
coefficient
Correlation
0.6224
0.1471∗
0.6569
0.5885
0.2405∗
0.6609
coefficient(r)
F testing
4.5541
4.6524
value
Note: The data in brackets are testing value, ∗ represents that it has not passed the related statistical test.
The statistical tests of the regression result are as follows:
(1)The relative test (r-test). The sample capacity--n is 5. When the distinct level is equal to 0.05,
the critical value r is 0.514 by checking the related coefficient form. Whether RI enters the regression
model separately or together with UI, it can pass the related test, but UI cannot pass the related test
when it enters the regression model.
(2)The parameter marked test (t-test). As to the monistic regression model RI or UI enters
separately, t is 2.160 by checking critical table of t value. RI coefficient has passed the marked test,
while UI hasn’t. As to the dual regression RI and UI enter together, t is 2.179 by checking critical table
of t value. Similarly, RI coefficient has passed the marked test, while UI hasn’t.
(3) The marked regression equation test (F-test). Since the t-test in the monistic regression model is
consistent with F-test, we only test the dual regression. F is 3.98 by checking the critical table of F value
and the regression equation is obviously established.
From the summary of the above testing results, we can find that RI has dependent marked linear
relationships with GY and PC. UI, however, hasn’t distinct dependent linear relationships with GY and
PC, and UI has little influence on GY and PC. So it can be further explained that in the respect of
promoting economic growth and expanding domestic demand, the function of increasing farmers’
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income is more obvious than that of increasing the urban residents’ income, and farmers’ income growth
can powerfully promote the economic development and expand the domestic demand.
3 The theoretical explanation of differences between the consumption tendency of
the rural residents and that of the urban residents
From the above substantial analysis, the farmers’ income growth contributes to the economic
development and expansion of domestic demand much more than that of the urban residents. The
residents’ income growth can promote the economic development by expanding consumption. However,
in the, case where the income growth of both farmers and urban residents is the same, the increment of
the amount of consumption mainly depends on the consumption tendency. As for the comparison of the
consumption tendencies of the rural and urban areas, now, there are two quite different opinions in our
country. One is held by Jianguo Liu who thinks that the instability of farmers’ income makes them have
more mobile boundary than the urban residents who have stable income, so the urban residents have a
greater consumption tendency than the farmers[3][4]. On the contrary, Jiangui Wang thinks that with the
deepening of the economic reform, more uncertain factors the urban residents face will result in
increasing preventive savings, so the rural residents have greater consumption tendency than the urban
residents[5]. Both of them illustrate relative data to testify their opinions and give the theoretical
explanations as well. By means of this article’s substantial analysis, the result supports the latter’s
opinion. The rural residents have greater consuming tendency than the urban residents. That is to say,
when the income growths of the both are the same, the rural residents will put more income on the
consumption. This point can be also testified by the gap of the income and the savings between the rural
residents and the urban residents. See Table 2. In order to give the substantial analysis a firm theoretical
ground, the article will make its explanations from four aspects.
Table 2 Comparison of the gap of the income and savings between the rural and the urban residents
year
1986
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Y1/Y2
2.67
2.90
2.94
3.10
3.23
3.12
3.00
3.00
2.96
2.88
2.65
2.79
S1/S2
2.06
3.40
3.35
3.40
4.16
4.10
4.90
5.00
4.96
4.93
5.01
5.05
Note: Y1 is the actual controllable income of the urban residents; Y2 is the per capita pure income of the rural residents. S1
and S2 represent the savings of the rural and urban residents in those years respectively, which calculated by the remaining sum of
the saving in the end of the current year deducting those in the end of the last year.
3.1 The explanation according to Keynes’ hypothesis of absolute income
In the light of the hypothesis of Keynes’ absolute income, when the income increases, generally,
people will expand their consumption. However, the increment of the consumption is less than the
increment of the income. Because our country’s industry strategy gives priority to the economic
development and there exists price scissors difference between the industrial and the agricultural
products over a long period of time, the rural areas lack new economic increment point, and the income
increases slowly, which results in the farmers’ low income. The rural residents’ consumption still
focuses on the basic living consumption such as food, clothes etc. Moreover, these needs are far from
being satisfied. In fact, for the income elasticity of the living necessities is smaller than that of other
goods, and due to the low income, the proportion of the consumption on the necessities by farmers is
higher than that by the urban residents, the farmers will spend most of their income on consumption.
This point can also be reflected in the gap of Engel’s coefficient between the rural and the urban
residents. The Engel’s coefficient of the rural residents’ families in 2000 is 50.13%, which is 11.95%
higher than that of the urban residents’ families, that is 38.1%[6].
3.2 The explanation according to Friedman’s hypothesis of perpetual income
According to Friedman’s hypothesis, consumption mainly depends on perpetual income. It is just
the stable relationship between consumption and perpetual income that determines the stable
relationship between consumption and controllable income. Perpetual income can be regarded as the
average value of the spot income and future income. On the condition of fixed spot income, perpetual
income is mainly determined by future income. And the anticipation of future income is mainly through
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the judgment of future economic situation by consumers. As for the urban residents, reforming of
medical and housing systems, downsizing of staff and workers for efficiency in state enterprises and
competing for post in public undertakings, and personnel distribution intensify the uncertain factors in
the economic life. On the condition of intensifying uncertainty, the pessimistic anticipation of the urban
residents results in the low ratio of their perpetual income to their gross income. However, as for the
rural residents, they are entitled to using land, have their own houses, so their life is relatively stable. In
addition, the government’s economic reforms have less influence on them than on the urban residents
and their anticipation of their future income is relatively stable. Since the rural and the urban residents
show their different anticipation of the future, it leads to the different ratio of perpetual income to gross
income. The rural residents’ consumption tendency is eventually higher than that of the urban residents.
3.3 The explanation according to Dushenbery’s hypothesis of relative income
Dushenbery’s hypothesis also discloses that man’s consumer behavior has strong tendency of
“simulating” and pursuing higher living standards. The proportion of the family income used in
consumption depends on the relative level of his income and income of his neighbors or the same social
class. In the rural areas, the narrow living circle, strong jealousy of each other, and some new consuming
notions brought back by those who are working outside make some farmers enlarge consumption out of
their vanity even when their actual income does not increase or only increases a little. But for the urban
residents, they have higher cultural quality and stronger faculty of economic reasoning than the rural
residents. Because farmers have a stronger character of self-sufficient consumption, so the income of
this part is comparatively stable. However, if an urban resident is laid off, it means that his basic life
can’t be guaranteed. So when they decide the proportion of consumption in their current income, they
depend more on the anticipation of the future, but not on current blindly jealousy.
3.4 The explanation of the mobile boundary theory and the preventive savings theory
The mobile boundary theory and the preventive saving theory can also explain the differences
between the rural and the urban residents’ consuming tendencies. The perpetual income theory is based
on the two-period model, in which the consumer can balance the income of two periods by means of
loans or savings. However, in reality, it is common that one cannot obtain any loans even with a good
expectation of his future income. This is called mobile boundary by the economists after Friedman. The
mobile boundary can be defined that some persons have no abilities to get loans by using their future
income as guarantee, perhaps this is because the accommodators think that they cannot reimburse their
loans[7]. The preventive savings theory reveals that consumers will take some cautious actions in the
uncertain conditions. When the third derivative of utility function is bigger than zero, the marginal
utility of expectation of future consumption in uncertain conditions is bigger than that in certain
conditions. The higher the future risk is, the bigger the actual utility of expectation of future
consumption is. Hence, it can attract more consumers to save and transfer more wealth and consume in
the future [8]. As for the urban residents, due to the limitation of job and fixed wages, all sorts of
consumption loans are just beginning, and their future consumption faces mobile boundary. The urban
residents should increase the preventive savings when facing future consumption such as their children’s
tuition for colleges and purchase of apartments etc. However, as for the rural residents, they have
stronger economic decision-making power to face their future consumption such as their children’s
marriage and construction of houses. They always take some measures to improve their current income
such as enlarging planting areas and working outside etc. In addition, it is very common to consume by
credit lending in the rural market. So the rural residents are influenced less by the mobile boundary, and
they have higher consumption tendency.
4 Conclusions
ⅰ
In summarizing up the above result of evident analysis, we can get the following conclusions.
) Compared with the urban residents’ income, the rural residents’ income shows a strong
correlation with the economic development when promoting the economic development and expanding
the domestic needs. So increasing the rural residents’ income is the important power to promote the
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ⅱ
economic development and expand the domestic needs.
) The main reason for the strong relationship of rural residents’ income with the economic
development is that the rural residents have higher consumption tendency. Compared with the urban
residents, the rural residents have low income and weak economic rationale. These determine their
higher consumption tendency.
References
．
[1]Ruijie Guan, The Analysis of the Farmers’ Income in Current Stage in China[DB] The Information
Net of State Council Development Research Center,2002-06-13
[2]Mengkui Wang The Review and Expectation of Chinese Economy Development[M] Beijing
China Financial Economy Publishing House,1999
[3]Jianguo Liu The Analysis of The Reason for the Farmers’ Lower Consuming Tendency in China
[J] Economy Research,1999,(3), pp.52-59
[4]Jianguo Liu The Comparison of Urban Residents’ Consuming Tendency with That of The Rural
Residents and Urbanization Strategy [J] Shanghai Economy Research,2002,(10), pp.54-60
[5]Jiangui Wang, Changquan Lin, Jiahua Liao The Comparative Research of Consuming Tendency of
the Rural and Urban Areas [J] Shanghai Economy Research,2000,(2), pp.13-18
[6]The State Statistic Bureau Extracts from China Statistics 2001[M] Beijing China Statistics
Publishing House,2001,90
[7]Shaopei Xia, The Enlightenment of the Explanation for Lacking Effective Needs by Sustaining
Income Theory[J] Journal of Shanghai Financial University, 2000,(1), pp.26-30
[8]Caballero R.J. Consumption Puzzles and Precautionary Savings[J].Journal of Monetary
Economics,1990,(25), pp.113-136
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