Industrial clustering, income and inequality in rural China

This study provides evidence that links industrial clusters and rural income in China. Based on a pooled cross-sectional dataset composed of rural households from 109, 121 and 313 counties in 1995, 2002 and 2007, respectively, as well as a unique density-based index measuring the existence of industrial clusters calculated from firm-level data, we identify the mechanisms by which industrial clusters simultaneously increase rural income and reduce income inequality among rural households in China. Furthermore, we provide systematic evidence that specialization, urbanization and industrialization, measured in standard ways, do not have such effects on rural household income or inequality. Our evidence suggests that in China's context, industrial clusters developed under joint efforts of entrepreneurs and local governments have lessened institutional constraints and provided relatively equal opportunities for rural residents to participate in nonfarm activities. As a result, in those areas, rural household income is increased, and income inequality is reduced. The findings of this study have important policy implications for reducing poverty and inequality, and, smoothing income gaps between socioeconomic groups in economic transitions.