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

Dwayne Benjamin (), Loren Brandt () and John Giles ()

No 2344, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: growth; panel data; rural China; inequality (search for similar items in EconPapers)
JEL-codes: O12 O15 P20 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2006-09
New Economics Papers: this item is included in nep-agr, nep-cna, nep-dev, nep-sea and nep-tra
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Published - published as 'Did Higher Inequality Impede Growth in Rural China?' in: Economic Journal, 2011, 121 (557), 1281-1309

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Working Paper: Inequality and Growth in Rural China: Does Higher Inequality Impede Growth? (2006) Downloads
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