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Abstract
The paper examines the complex interrelationship between economic growth and the urban–rural income inequality in China by estimating a simultaneous equation system. This study uses a panel data-set that covers 29 provinces from 1988 to 2007, and compares the earlier period with the later period. It finds a robust and positive impact of the rural surplus labor on urban–rural inequality, which is consistent with Lewis’ dual economy theory. Economic growth is found to aggravate the urban–rural inequality in the earlier period, but there is no hard evidence in the later period. This implies that China has not yet, or at least by 2007, entered the second stage of the Kuznets curve. We also find no robust evidence on the impact of the inequality on growth in either period, but find robust evidence on the impact of both foreign direct investment and exports on the increasing inequality during the earlier period, whereas no significant impact in the later period is found. Finally, the spread of education reduced the inequality in the earlier period, but no such impact is robust in the later period.
Acknowledgments
The authors acknowledge comments by the editor, two anonymous referees, as well as Josef Brada, Xiaobo Zhang, Shi Li, Fang Cai, and Guanghua Wan.
Notes
† Earlier versions of this paper were presented at several conference, such as one on Inequality, Growth and the Middle-Income Trap in China, held in Peking University, July 2013.
1. This reflects the structural uniqueness of the Chinese economy following the line of new structural economics (Lin, Sun, and Jiang Citation2013).
2. The growth equation uses only one dummy (center) to control location effects, due to the high correlation between the west dummy and urban–rural income inequality variable.