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

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Author Info
Dwayne Benjamin
Loren Brandt
John Giles

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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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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-237.

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Date of creation: 19 Jun 2006
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Handle: RePEc:tor:tecipa:tecipa-237

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Keywords: Inequality; Growth; Rural China; Panel Data;

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Find related papers by JEL classification:
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hongbin Li & Yi Zhu, 2004. "Income, Income Inequality, and Health: Evidence from China," Discussion Papers 00006, Chinese University of Hong Kong, Department of Economics. [Downloadable!]
    Other versions:
  2. 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). [Downloadable!]
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