Distributional welfare effects of agricultural subsidy reform in rural China using macro-micro simulation

Abstract This study evaluates the distributional welfare effects of agricultural subsidy reforms in rural China using an integrated macro-micro simulation approach. By combining a computable general equilibrium (CGE) model with an arithmetic microsimulation model based on household survey data, we analyze the impacts of different subsidy policies on rural household welfare. Using data from multiple sources, including the China Household Income Project (CHIP) survey, we simulate three policy scenarios: a baseline scenario maintaining the current system, a reform scenario shifting from input subsidies to direct subsidies, and a targeted scenario prioritizing support for low-income and smallholder farmers. The results show that the current subsidy system has a progressive distribution effect but can be improved through reforms. The targeted scenario achieves the greatest welfare gains for vulnerable groups (defined as low-income households and smallholder farmers), with the poorest households experiencing 50% higher net welfare effects compared to the baseline. Our findings suggest that shifting towards direct income support and prioritizing vulnerable groups can enhance the equity and effectiveness of China’s agricultural subsidy policy while promoting inclusive rural development and poverty reduction.