Evolution of Income and Fiscal Disparity in Rural China

This paper's goal is to increase the understanding of the income and fiscal inequality trends in rural China. Using a comprehensive county-level panel dataset between 1993 and 2002, we describe the dynamic changes in national, regional and provincial inequality measures for income, fiscal spending and local revenues respectively. We examine how the coastal-inland gap, the inter-province gap, and the gap between poor and non-poor counties contribute to the growth of inequality, and devise a decomposition approach to investigate the order of inter-group inequality's contribution to the overall inequality in a multi-tier hierarchical economy. Our major finding reveals that after a turning point, 1998, most income and fiscal inequality trends started to grow together, yet at different rates. The pattern of fiscal inequality changes over time indicates that the budget constraint was not hardened after the 1994 fiscal reform. Strong evidence suggests that the inland gap between poor and non-poor counties contributed to the overall income inequality more than the coastal gap, but both decreased its contribution continuously in recent years. The order of their contributions to the overall fiscal spending inequality was reversed, implying that fiscal equalization policies, though in favor of inland areas, didn't work well in reducing the inland gap between poor and nonpoor counties.