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Two Sides of the Same Coin? Rebalancing and Inclusive Growth in China

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  • Il Houng Lee
  • Murtaza H. Syed
  • Xin Wang
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    Abstract

    This paper uses the Shapley Value decomposition technique to assess the factors behind the rise of inequality in China. It finds that, in many ways, inequality may have been an inevitable by-product of China’s investment and export-led growth model. Between Chinese households, we find that the most important factors explaining income inequality are location, education, access to health insurance, and labor market variables, including the sector of employment and enterprise size. Across China’s provinces, divergences in per capita incomes are driven by the relative level of capital-intensity, public spending, financial access, privatization, and urbanization. In addition, excess liquidity may have exacerbated inequality in the last decade, by driving up property prices and the wealth gap. Based on these results, policies that could help broaden the benefits of growth in China include maintaining prudent monetary and credit policies, a more progressive fiscal tax and expenditure system, higher public spending on health and education, deregulation and reforms to increase competition, measures to raise labor incomes and assist vulnerable workers, and better access to finance for both households and SMEs, including in rural areas. Not surprisingly, given the argued nexus between China’s growth strategy and inequality, many of these reforms are the same ones that would help rebalance its economy toward consumption and household incomes.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/185.

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    Length: 24
    Date of creation: 27 Aug 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/185

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    Related research

    Keywords: Economic growth; China; Economic reforms; Income distribution; Poverty; Excess liquidity; Monetary policy; Economic models; Inclusive Growth; Inequality; Rebalancing; gini; gini index; measures of inequality; labor market; inequality measures; decomposition results; pro-poor; regional inequality; rising inequality; social security; social services; social welfare; theil index; urban income; dependent variable; wealth gap; overall inequality; consumption expenditure; inequality in incomes; coverage of health insurance; explaining inequality; social safety net; industrial sector; social spending; total inequality; unequal economies; distribution of income; growth with equity; rising income inequality; measure of inequality; impact on poverty; urban income inequality; urban income gap; labor policies; redistributive impact; human capital;

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    1. Wan, Guanghua & Lu, Ming & Chen, Zhao, 2006. "Globalization and Regional Income Inequality: Empirical evidence from within China," Working Paper Series RP2006/139, World Institute for Development Economic Research (UNU-WIDER).
    2. Wan, Guanghua & Zhou, Zhangyue, 2004. "Income Inequality in Rural China: Regression-based Decomposition Using Household Data," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    3. Chris Papageorgiou & Subir Lall & Florence Jaumotte, 2008. "Rising Income Inequality," IMF Working Papers 08/185, International Monetary Fund.
    4. Jun Zhang, 2008. "Estimation of China's provincial capital stock (1952-2004) with applications," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 6(2), pages 177-196.
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