Inequality and economic growth in China
| Date | 15 June 2012 |
| Published date | 15 June 2012 |
| DOI | https://doi.org/10.1108/17544401211233453 |
| Pages | 80-90 |
| Author | W. Adrián Risso,Edgar J. Sánchez Carrera |
| Subject Matter | Economics |
Inequality and economic growth
in China
W. Adria
´n Risso and Edgar J. Sa
´nchez Carrera
Department of Economics, University of Siena, Siena, Italy
Abstract
Purpose – The purpose of this paper is to study the long-run relationship between economic growth
and income inequality in China during the pre-reform (1952-1978) and post-reform (1979-2007) periods,
this will be done via cointegration analysis.
Design/methodology/approach – The aim of this paper is to offer a proper answer to the issue of
the inequality-growth nexus by using a cointegrated VAR-setting approach, in this way, the study can
cope and avoid the problems of parameter heterogeneneity, omitted variable bias and endogeneity,
from which the model of macroeconometric analysis suffers.
Findings – The cointegration analysis shows that, for both periods the relationship is positive and
the inequality-growth elasticity has grown in the second period. In addition, a more robust test of
Granger-causality suggested by Toda and Yamamoto indicates that whereas in the first period there is
unidirectional causality from inequality to growth, there is no directional causality in the second
period.
Practical implications – The pre-reform period going from 1952 to 1978 is characterized by the
adoption and implementation of a Soviet-type economy. The economy showed a modest annual
economic growth rate of 2.33 percent and very low levels of inequality, with an average Gini coefficient
of 0.27. The post-reform period tried to combine central planning with market-oriented reforms to
increase productivity. In fact, the economy has grown at an annual growth rate of 7.07 percent since
1979 and also the inequality with an average Gini coefficient of 0.33.
Originality/value – The paper studies the relationship between income inequality and economic
growth in China during the pre and post reform periods. A significant and positive long-run
relationship between inequality and economicgrowthinbothperiodswasfound.The
inequality-growth elasticity is greater in the post-reform than the pre-reform period. Using a more
robust Granger causality test the authors find a unidirectional predetermination between the variables
for the whole period and for the pre-reform period. However, there is not causality in the post-reform
period. Except the urban-rural disparity which explains the unidirectional causality from inequality to
growth, pre-reform China was basically an egalitarian society. In the pre-reform period, the low
inequality was identified as a strain on economic growth. However, the reform period has seen
remarkable growth. Although regional inequality and the rural-urban gap declined from the late 1970s
to the mid-1980s, both have increased rather dramatically since the mid-1980s.
Keywords Cointegration,Chinese economy, Economic growth,Gini coefficient, China, Economics
Paper type Research paper
1. Introduction
The relationship between economic growth and income inequality has been widely
studied and still is an interesting topic of present and future research. For instance,
among others, there are early contributions in the last decade showed that higher
inequality at the beginning of a longer-term period was linked to poorer growth
performances Alesina and Rodrik (1994), Perotti (1994, 1996) and Persson and Tabellini
(1994), that is, the relationship between inequality and growth results to be negativ e.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
JEL classification – C4, E62, N10, O11, O15, O40, R12
JCEFTS
5,2
80
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 5 No. 2, 2012
pp. 80-90
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401211233453
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