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Inequality and Growth in Rural China: Does Higher Inequality Impede Growth?

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  • Benjamin, Dwayne

    () (University of Toronto)

  • Brandt, Loren

    () (University of Toronto)

  • Giles, John T.

    () (World Bank)

Abstract

We explore the relationship between the level of village inequality in 1986, and the subsequent growth of household incomes from 1986 to 1999. Using a detailed household-level data set from rural China, we find robust evidence that initial inequality is negatively related to subsequent household income growth. We are able to address a number of econometric issues that affect the use of aggregate data for this exercise, especially measurement error and aggregation: Our results strongly suggest that village inequality has an external adverse impact on household-level income trajectories. However, once we account for possibly fixed village-level unobserved heterogeneity, we find no evidence that changes in inequality are correlated with household income growth: Whatever factor drives the inequality-growth relationship only operates in the “long run.” We explore several possible avenues by which initial inequality – or an unobserved variable correlated with it – affects household income growth. While we do not find the precise mechanism, our findings point toward a class of explanations based on collective choice (like the provision of public goods or determination of local taxes), and away from credit-market based explanations.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2344.

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Length: 49 pages
Date of creation: Sep 2006
Date of revision:
Publication status: published as 'Did Higher Inequality Impede Growth in Rural China?' in: Economic Journal, 2011, 121 (557), 1281-1309
Handle: RePEc:iza:izadps:dp2344

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Keywords: growth; panel data; rural China; inequality;

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Cited by:
  1. Daron Acemoglu & María Angélica Bautista & Pablo Querubín & James A. Robinson, 2007. "Economic and Political Inequality in Development: The Case of Cundinamarca, Colombia," NBER Working Papers 13208, National Bureau of Economic Research, Inc.
  2. Hongbin Li & Yi Zhu, 2004. "Income, Income Inequality, and Health: Evidence from China," Discussion Papers 00006, Chinese University of Hong Kong, Department of Economics.
  3. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
  4. Machiko Nissanke & Erik Thorbecke, 2010. "Channels and Policy Debate in the Globalization-Inequality-Poverty Nexus," Working Papers id:3224, eSocialSciences.
  5. Yamauchi, Futoshi & Nishiyama, Shinichi, 2005. "Community, inequality, and local public goods: Evidence from School Financing in South Africa," FCND discussion papers 201, International Food Policy Research Institute (IFPRI).
  6. Ming Lu & Hong Gao, 2010. "When Globalization Meets Urbanization: Labor Market Reform, Income Inequality, and Economic Growth in the People’s Republic of China," Working Papers id:3095, eSocialSciences.
  7. Javier Alejo, 2012. "Relación de Kuznets en América Latina. Explorando más allá de la media condicional," CEDLAS, Working Papers 0129, CEDLAS, Universidad Nacional de La Plata.
  8. Chen, Xi & Zhang, Xiaobo, 2009. "The Distribution of Income and Well-Being in Rural China: A Survey of Panel Data Sets, Studies and New Directions," MPRA Paper 20587, University Library of Munich, Germany.
  9. Nissanke, Machiko & Thorbecke, Erik, 2005. "Channels and Policy Debate in the Globalization-Inequality-Poverty Nexus," Working Papers DP2005/08, World Institute for Development Economic Research (UNU-WIDER).

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