Working Papers

Abstract

China’s record in reducing rural poverty has been nothing short of spectacular and should be a source of
lessons for other countries. Rural poverty reduction is generally sought in the role of agriculture in
contributing to farm incomes. However, non-farm employment in rural areas can also be a major
contributor. Using detailed household survey data from Hubei province, we simulate the counterfactual of
what rural households’ incomes, poverty, and inequality would be in the absence of access to non-farm
sources of income. Results show that, without non-farm employment, rural poverty would be much higher
and deeper, and that income inequality would be higher as well. We find that education, proximity to
town, neighborhood effects, and village effects are crucial in helping particular households gain access to
these opportunities. We also find that those who stay as pure farmers have non-observable characteristics
that make them much more productive in agriculture, implying positive selection on these characteristics.
Moreover, participation in non-farm activities has a positive spillover effect on household farm
production.

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