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Rural Income Volatility and Inequality in China

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  • John Whalley
  • Ximing Yue

Abstract

Current literature based on analyses of rural income volatility in China decompose poverty into chronic and transient components using longitudinal survey data and assesses the fraction of the Foster, Greer, and Thorbecke poverty gap attributable to mean income over time being below the poverty line. Resulting estimates of 40--50% transient poverty point to the policy conclusion that poverty may be a less serious social problem than it appears in annual data due to rural income volatility. Here, we instead use a direct method to adjust rural income for volatility using a certainty equivalent income measure and recomputed summary statistics for the distribution of volatility corrected incomes, including the urban--rural income gap on which much of current poverty debate in China focuses. Available data indicate a growing urban--rural income gap (the ratio of mean urban to rural incomes) with a significant increase from around 1.8 in the late-1980s to over three today. These estimates do not take into account the higher volatility of rural incomes in China. Since an uncertain income stream is worth less in utility terms than a certain income stream, we argue that heightened rural volatility increases the effective urban--rural income gap and intensifies not weakens poverty concerns. Using Chinese longitudinal rural survey data for which current decompositions can be replicated, we make adjustments for certainty equivalence of rural household income streams, which not only widen the urban--rural income gap in China but also increase other distributional summary statistics. Depending upon values used for the coefficient of relative risk aversion, the measured urban--rural income gap increases by 20--30% using a certainty equivalent measure to adjust rural incomes for volatility. We also conduct similar analysis using consumption data, for which similar (but slightly larger) increases occur. (JEL codes: D00, D31, D81,G11, N55, O12; O15; R20) Copyright The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • John Whalley & Ximing Yue, 2009. "Rural Income Volatility and Inequality in China," CESifo Economic Studies, CESifo, vol. 55(3-4), pages 648-668.
  • Handle: RePEc:oup:cesifo:v:55:y:2009:i:3-4:p:648-668
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    References listed on IDEAS

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    1. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-766, May.
    2. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, pages 1821-1834.
    3. Chen, Shaohua & Ravallion, Martin, 1996. "Data in transition: Assessing rural living standards in Southern China," China Economic Review, Elsevier, vol. 7(1), pages 23-56.
    4. Joan R. Rodgers & John L. Rodgers, 1993. "Chronic Poverty in the United States," Journal of Human Resources, University of Wisconsin Press, pages 25-54.
    5. Terry Sicular & Yue Ximing & Björn Gustafsson & Li Shi, 2007. "The Urban-Rural Income Gap And Inequality In China," Review of Income and Wealth, International Association for Research in Income and Wealth, pages 93-126.
    6. Ravallion, Martin, 1988. "Expected Poverty under Risk-Induced Welfare Variability," Economic Journal, Royal Economic Society, vol. 98(393), pages 1171-1182, December.
    7. Terry Sicular & Yue Ximing & Björn Gustafsson & Li Shi, 2007. "The Urban-Rural Income Gap And Inequality In China," Review of Income and Wealth, International Association for Research in Income and Wealth, pages 93-126.
    8. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, pages 1821-1834.
    9. Raj Chetty, 2006. "A Bound on Risk Aversion Using Labor Supply Elasticities," NBER Working Papers 12067, National Bureau of Economic Research, Inc.
    10. Morduch, Jonathan J. & Stern, Hal S., 1997. "Using mixture models to detect sex bias in health outcomes in Bangladesh," Journal of Econometrics, Elsevier, pages 259-276.
    11. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, pages 103-114.
    12. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, pages 103-114.
    13. Jalan, Jyotsna & Ravallion, Martin, 1998. "Transient Poverty in Postreform Rural China," Journal of Comparative Economics, Elsevier, pages 338-357.
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    Cited by:

    1. Hiroshi Goto & Keiya Minamimura, 2014. "Fertility, Regional Demographics, and Economic Integration," Discussion Papers 1405, Graduate School of Economics, Kobe University.
    2. Christian D. Mina & Katsushi S. Imai, 2017. "Estimation of Vulnerability to Poverty Using a Multilevel Longitudinal Model: Evidence from the Philippines," Journal of Development Studies, Taylor & Francis Journals, pages 2118-2144.
    3. 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.
    4. Zhao, Zhong, 2007. "Earnings Instability and Earnings Inequality in Urban China: 1989–2006," IZA Discussion Papers 3270, Institute for the Study of Labor (IZA).
    5. You, Jing & Imai, Katsushi S. & Gaiha, Raghav, 2016. "Declining Nutrient Intake in a Growing China: Does Household Heterogeneity Matter?," World Development, Elsevier, vol. 77(C), pages 171-191.
    6. Zhong Zhao, 2010. "Earnings Instability and Earnings Inequality in Urban China: 1989–2006," Working Papers id:2783, eSocialSciences.

    More about this item

    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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