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«D I R E C T I O N S I N D E V E LO P M E N T Human Development Public Disclosure Authorized The Elderly and Old Age Support in Rural China Challenges ...»

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Chaudhuri, Shubham, and Gaurav Datt. 2009. From Poor Areas to Poor People:

China’s Evolving Poverty Agenda, an Assessment of Poverty and Inequality in China. Washington, DC: World Bank.

Cox, Donald. 1987. “Motives for Private Income Transfers.” Journal of Political Economy 95 (3): 509–46.

Cox, Donald, and Mark R. Rank. 1992. “Inter-Vivos Transfers and Intergenerational Exchange.” Review of Economics and Statistics 74 (2): 305–14.

Giles, John, and Ren Mu. 2007. “Elderly Parent Health and the Migration Decision of Adult Children: Evidence from Rural China.” Demography 44 (2): 265–88.

Giles, John, Dewen Wang, and Changbao Zhao. 2010. “Can China’s Rural Elderly Count on Support from Adult Children? Implications of Rural-to-Urban Migration.” Journal of Population Ageing 3 (3–4): 183–204.

Knodel, John, and Napaporn Chayovan. 1997. “Family Support and Living Arrangements of Thai Elderly.” Asia-Pacific Population Journal 12 (4): 51–68.

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McGarry, Kathleen. 1999. “Inter-Vivos Transfers and Intended Bequests.” Journal of Public Economics 73 (3): 321–25.

NBS (National Bureau of Statistics). 2006. 2005 One Percent Population Sample Data. Beijing: China Statistics Press.

Pang, Lihua, Alan de Brauw, and Scott Rozelle. 2004. “Working until You Drop:

The Elderly of Rural China.” China Journal 52: 73–96.

68 The Elderly and Old Age Support in Rural China RCRE (Research Center for Rural Economy). Various years. Rural Household Surveys for 1993–2003 from Anhui, Henan, Jiangsu, and Shanxi Provinces.

Beijing: Ministry of Agriculture, Research Center for the Rural Economy.

———. 2004. Supplemental Rural Household Social Network, Labor Allocation, and Land Use Survey. Beijing: Ministry of Agriculture, Research Center for the Rural Economy.

Selden, Mark. 1993. “Family Strategies and Structures in Rural North China.” In Chinese Families in the Post-Mao Era, ed. D. Davis and S. Harrell, 139–64.

Berkeley: University of California Press.

World Bank. Forthcoming. Social Assistance in Rural China: Tackling Poverty through Rural Dibao. Washington, DC: World Bank.

Yatchew, Adonis. 2003. Semiparametric Regression for the Applied Econometrician.

Cambridge: Cambridge University Press.

Zimmer, Zachary, and Sovan Kiry Kim. 2002. “Living Arrangements and SocioDemographic Conditions of Older Adults in Cambodia.” Policy Research Division Working Paper 157, Population Council, New York, NY.

Zimmer, Zachary, and Julia Kwong. 2003. “Family Size and Support of Older Adults in Urban and Rural China: Current Effects and Future Implications.” Demography 40 (1): 23–44.

CHAPTER 4

Saving Decisions in Rural China

This chapter examines the saving behavior of both working-age rural adults and the rural elderly. It first discusses China’s high saving rates and then reviews (a) descriptive evidence on saving behavior with an eye toward possible explanations for saving decisions and (b) differences in saving behavior of households with and without migrant family members and households with and without social security. The chapter finds that saving-rate patterns of rural households differ significantly over the age distribution, by migration status of family members and by social security coverage. Rural households without elderly members have higher saving rates; those with migrant members have higher saving rates than those without. As might be expected, saving rates decline with age after 55, but average saving rates always remain positive, even into advanced old age. Little comparable decline occurs in saving rates in elderly households with migrants, which likely reflects the perceived transitory nature of remittance income. The difference in saving behavior between rural households with and without social security benefits, however, is significant and consistent over time.

70 The Elderly and Old Age Support in Rural China

Why Is the Household Saving Rate So High in China?

The household saving rate in China has been increasing since the reform era started in 1978, although it has been more volatile over time in rural areas than in urban areas. Figure 4.1 shows the trends in household saving rates for rural and urban China over the reform period. From 1978 to 2008, the rural household saving rate was higher in most years than the urban rate, rising from 13.1 percent to 23.1 percent over the period and peaking at 28.6 percent in 1999. Reflecting the greater variability of income in rural areas, one also observes more volatility around the trend of the rural saving rate than for urban households. In the early reform period, the rural saving rate rose to 22.9 percent in 1984 after successful implementation of the household responsibility system, but it dropped sharply during the inflationary years of the late 1980s and the subsequent slowdown during the early 1990s. The saving rate again trended upward Figure 4.1 Trends of Household Saving Rates in Rural and Urban China saving rate (%)

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between 1995 and 1999, then leveled off at over 25 percent for the following four years before dropping from 2003 to 2006. The urban saving rate has fluctuated less around a consistent upward trend since the early 1990s and in recent years has been higher than the rural saving rate. The effect of the global financial crisis on saving rates is still unknown.

China’s high saving rate has received much interest and has raised concerns in both policy and research communities. The high saving rate of households, enterprises, and the government has facilitated the high investment rates that have fueled China’s rapid growth, but it has also aroused worries about the imbalance between investment and domestic consumption. Cross-country empirical comparisons suggest that China’s high saving rate is policy driven, because one would otherwise expect it to decline with industrialization and urbanization (Kuijs 2005, 2006).

Moreover, the macroeconomics literature suggests that reducing savings may be favorable for China’s sustained economic growth and may help realize balanced growth (Blanchard and Giavazzi 2006; Hofman and Kuijs 2007).

Macroeconomists have adapted life-cycle theories to explain high household saving rates in China. The life-cycle saving hypothesis predicts that saving rates will be higher when one is young than when one is old.

Therefore, a younger population age structure will lead to higher saving rates. China’s demographic transition is unique in its pace (see chapter 1).

China’s baby boom of the late 1950s and 1960s and the implementation of family planning policies in the 1970s have resulted in a population age structure favorable for high saving rates since the 1980s and have provided a “demographic dividend” (Cai and Wang 2005). Market-oriented reforms and development strategy adjustments have created an institutional environment favorable for harvesting the demographic dividend.

The rising saving rate is associated with a declining dependency ratio from the mid-1980s onward and can be expected to fall with the acceleration of population aging (Modigliani and Cao 2004).

Microeconomic studies have paid more attention to increasing risk and uncertainty facing households during economic transition, and they suggest that risk and uncertainty may have contributed to the rising saving rates of rural and urban households. Breaking the “iron rice bowl” through the reforms of the 1990s brought about unemployment risk and raised the uncertainty faced by urban households. To cope with potential layoff and dislocation, urban households increased their precautionary savings (Meng 2003). From 1995 to 2005, the average urban household saving rate in China rose by 7 percentage points, to about one-quarter of disposable 72 The Elderly and Old Age Support in Rural China income. The unusual age pattern of saving rates, in which younger and older households save more than middle-aged households, reflects the rising private burden of expenditures on housing, education, and health care, which may be felt more keenly as a result of credit constraints and financial underdevelopment (Chamon and Prasad 2010). In rural areas, only about 10 percent of savings of rural households can be attributed to precaution against natural risks, and migration has reduced exposure to this source of risk by providing an alternative source of income (Giles and Yoo 2007). Thus, precautionary saving against weather-related shocks in rural areas may have fallen even as saving rates continued to rise.1 The sharp decline in the rural saving rate in recent years may be driven by a reduction in two other motives for saving: (a) the cost of compulsory education and (b) the potential cost of health shocks. In recent years, the government introduced policies to provide free compulsory education to rural residents and to lower exposure to financial risk associated with health shocks by establishing the New Cooperative Medical System.

These policy measures may reduce burdens on rural households and reduce the precautionary motive for saving associated with the potential for high health care costs. Changes in the composition of rural consumption show that education expenditures dropped from 12.1 percent in 2003 to 8.6 percent in 2008, but that health and medical expenditures increased from 6.0 percent to 6.7 percent over the same period. The proportion of food expenditures dropped from 45.6 percent in 2003 to

43.7 percent in 2008, but the proportion of other expenditures, including clothing, housing, durable goods, communications, and transportation, increased over that period.

In rural areas, high saving rates are positively correlated with high income. Figure 4.2 shows average saving rates of rural households by income quintile for 2003 and 2007. In 2007, rural households in the highest income group saved 40 percent of their capita income, whereas those in the lowest income group dissaved at a rate of −37.4 percent, presumably to smooth their consumption. The difference in saving rates across the second, third, and fourth income groups is about 10 percent for each. Saving rates for each income quintile decreased by 2007 compared with those of 2003, but the magnitude of the decrease was greatest for the lowest quintile. These patterns for saving are consistent with predictions of the permanent income hypothesis in an environment in which household incomes vary considerably (Deaton 1990; Paxson 1992). In years with large positive shocks to income, saving rates would be high; in years with sharp negative shocks, one would expect significant dissaving.

Saving Decisions in Rural China 73 Figure 4.2 Rural Saving Rates, by Income Quintile Sources: NBS 2005b, 2008.

Note: Savings = disposable income (or net income) − consumption expenditure.

Saving Behavior and Migration This section uses a recent subsample of the Research Center for Rural Economy (RCRE) panel to examine how saving patterns vary with the presence of migrant family members.2 First, two definitions of household savings suggested by Paxson (1992) are compared. In the first, savings equals net income minus consumption expenditure, whereas the second treats expenditures on durable goods and housing as a form of savings.

These two definitions produce different rural saving rates, although they have very similar trends. Figure 4.3 shows that the saving rate of rural households was 34.4 percent in 2003 and rose to 40.6 percent in 2005.

It then dropped to 37.3 percent in 2006. If one compares saving rates from RCRE households with National Bureau of Statistics data, the 74 The Elderly and Old Age Support in Rural China Figure 4.3 Rural Household Saving Rates, 2003–06 Source: Research Center for Rural Economy (RCRE), Ministry of Agriculture (MOA), Repeated Household Data (various years).

Note: Definition one = net income − consumption expenditure; definition two = definition one + housing expenditure + durable goods expenditure.

former are higher by 8.5 to 19.1 percentage points. The following analysis uses the first definition of savings to examine the saving profile of rural households over the age distribution, by migration status of family members and by social security coverage.

Households without elderly members have had higher saving rates than those with them, although the gap appears to have narrowed in recent years. Figure 4.4 compares the saving rates of rural households with and without elderly members. From 2003 to 2006, rural households without elderly saved more than those with elderly. In 2003, the saving rate of rural households without elderly was 36.3 percent, whereas it was 29.8 percent for those with elderly, a difference of 6.5 percentage points. In 2006, the saving rates of rural households with and without elderly were

35.7 percent and 38.2 percent, respectively, dropping by 2.4 percentage Saving Decisions in Rural China 75 Figure 4.4 Saving Rates of Rural Households with and without Elderly, 2003–06 saving rate (%) Source: RCRE, MOA, Repeated Household Data (various years).

Note: Savings = net income − consumption expenditure.

points. These descriptive statistics are consistent with a prediction from life-cycle theory that families with a higher number of elderly members are likely to save less than those with younger adults.

Higher average saving rates among households with migrants might be expected for three reasons. First, households with migrants have more insurance against negative income shocks and thus will tend to dissave less than households without migrants when hit by such shocks.



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