The Impact of Remittances on Rural Poverty and Inequality in China

Large numbers of agricultural labor
moved from the countryside to cities after the economic
reforms in China. Migration and remittances play an
important role in transforming the structure of rural
household income. This paper examines the impact of
rural-to-urban migration on rural poverty and inequality in
the case of Hubei province using the data of a 2002
household survey. Since remittances are a potential
substitute for farm income, the paper presents
counterfactual scenarios of what rural income, poverty, and
inequality would have been in the absence of migration. The
results show that, by providing alternatives to households
with lower marginal labor productivity in agriculture,
migration leads to an increase in rural income. In contrast
to many studies that suggest the increasing share of
non-farm income in total income widens inequality, this
paper offers support for the hypothesis that migration tends
to have egalitarian effects on rural income for three
reasons: (i) migration is rational self-selection - farmers
with higher agricultural productivities choose to remain in
local agricultural production while those with higher
expected return in urban non-farm sectors migrate; (ii)
poorer households facing binding constraints of land
shortage are more likely to migrate; and (iii) the poorest
poor benefit disproportionately from remittances.