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

49 Pages Posted: 17 Oct 2006

See all articles by Dwayne Benjamin

Dwayne Benjamin

University of Toronto

Loren Brandt

University of Toronto - Department of Economics; IZA Institute of Labor Economics

John Giles

World Bank; IZA Institute of Labor Economics; World Bank - Development Research Group (DECRG)

Date Written: September 2006

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: inequality, growth, rural China, panel data

JEL Classification: O12, O15, P20

Suggested Citation

Benjamin, Dwayne and Brandt, Loren and Giles, John, Inequality and Growth in Rural China: Does Higher Inequality Impede Growth? (September 2006). Available at SSRN: https://ssrn.com/abstract=937877 or http://dx.doi.org/10.2139/ssrn.937877

Dwayne Benjamin (Contact Author)

University of Toronto ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
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Loren Brandt

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4442 (Phone)
416-978-6713 (Fax)

IZA Institute of Labor Economics ( email )

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Germany

John Giles

World Bank ( email )

Washington DC
United States

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

World Bank - Development Research Group (DECRG)

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Washington, DC 20433
United States

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