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

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  • Dwayne Benjamin
  • Loren Brandt
  • John Giles

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

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Length: pages
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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Citations

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Cited by:
  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.
  2. 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.
  3. 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).
  4. 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.
  5. Nissanke, Machiko & Thorbecke, Erik, 2005. "Channels and Policy Debate in the Globalization-Inequality-Poverty Nexus," Working Paper Series DP2005/08, World Institute for Development Economic Research (UNU-WIDER).
  6. Machiko Nissanke & Erik Thorbecke, 2010. "Channels and Policy Debate in the Globalization-Inequality-Poverty Nexus," Working Papers id:3224, eSocialSciences.
  7. Javier Alejo, 2013. "Relación de Kuznets en América Latina. Explorando más allá de la media condicional," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 59, pages 3-55, January-D.
  8. Yi Wen, 2011. "Making sense of China’s astronomical foreign reserves," Working Papers 2011-018, Federal Reserve Bank of St. Louis.
  9. 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.
  10. 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.

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