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

  • Benjamin, Dwayne

    ()

    (University of Toronto)

  • Brandt, Loren

    ()

    (University of Toronto)

  • Giles, John T.

    ()

    (World Bank)

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 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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