When Economic Reform is Faster Then Statistical Reform: Measuring and Explaining Income Inequality in Rural China
| Author | Martin Ravallion,Shaohua Chen |
| Date | 01 February 1999 |
| DOI | http://doi.org/10.1111/1468-0084.00115 |
| Published date | 01 February 1999 |
WHEN ECONOMIC REFORM IS FASTER THEN
STATISTICAL REFORM: MEASURING AND
EXPLAINING INCOME INEQUALITY IN RURAL
CHINA
Martin Ravallion and Shaohua Chen
I. INTRODUCTION
There is a widespread view that transition from a socialist economic system
to a market economy will entail rising inequality, and there is support for
that view in recent compilations of distributional data for the 1980s and `90s
(Milanovic, 1996; Ravallion and Chen, 1997). However, these complications
are typically based on the tabulations of distributional data (drawn from
household surveys) that are made available by of®cial sources. While
economic reforms often have important implications for the methods used in
measuring economic welfare and inequality, government statistical agencies
may not be adjusting as rapidly as one would like to the structural changes
going on in the economy. And users of the of®cial data rarely probe into the
raw micro data underlying the distributional comparisons being made, either
because of lack of access to the data or lack of resources for doing so.
Could lags in reforming statistical methods entail substantial biases in
assessments of how inequality is changing during the transition? The
structural changes going on are not necessarily inequality-increasing. A
common element of socialist economic planning was the suppression of
food-staple prices, to help ®nance industrialization.1Through market
liberalization, the transition typically entails higher food staple prices. To
the extent that food-staple producers are concentrated among the poor, the
transition will put downward pressure on inequality. If all incomes were
derived from market exchange then these effects should be seen quickly in
of®cial data on distribution drawing on household surveys. However, a large
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 61, 1 (1999)
0305-9049
33
#Blackwell Publishers Ltd, 1999. Published by Blackwell Publishers, 108 Cowley Road, Oxford
OX4 1JF,UK and 350 Main Street, Malden, MA 02148, USA.
yThis paper was prepared as a background paper for `China 2020: Sharing Rising Income'
produced by the World Bank's East Asia region. The authors are grateful to the report's manager,
Tamar Maiuelyan Atinc for encouraging them to investigatethese issues, and for her comments on
this paper. Their thanks also go to the Bulletin's two referees for their helpful comments. The
cooperation of China's State Statistical Bureau has been invaluable. Support from the World
Bank's Research Committee (under RPO 678±69) is also gratefully acknowledged. These are the
views of the authors, and should not be attributed to the WorldBank.
1This was often referred to as the `price scissors' and there is a large literature on the practice;
for a recent analysis and references see Sah and Stiglitz (1992).
share of income in poor rural economies takes the form of direct consump-
tion of own production. Valuations must be imputed for this and other
income sources which were not acquired through exchange. When prices
are controlled by administrative ®at, the same prices are naturally used for
valuation. But there can be no assurance that old administrative prices will
be replaced by market prices as the transition proceeds. Unless statistical
agencies are quick enough to adapt to such changes, biases can enter
survey-based analyses of (among other things) income inequality.
The transition can have many other implications for measurement. The
level of prices may rise faster in some regions of the economy than others
after reforms (re¯ecting nontraded goods, or less than perfect spatial market
integration, due for instance to poorly developed transportation). If it were
the initially better-off regions which saw higher growth and higher in¯ation
(due to higher aggregate demand locally) than assessments of income
distribution which ignored geographic differences in prices could over-
estimate the rate at which inequality was increasing.
There is no good a priori reason to assume that there will be a bias, or
that (when there is) it could go only one way. For example, the share of
income from undervalued components may be no different between the rich
and poor, or the rate of in¯ation may be higher in poorer regions. These are
empirical questions, although they can be dif®cult to answer since they
require access to, and reprocessing of, the raw data underlying of®cial
tabulations.
This paper addresses these concerns in the context of post-reform rural
China. Beginning with Premier Deng's reforms in 1978, China's rural
economy became market-oriented; prices were freed and the farm-house-
hold replaced the commune as the decision-making unit. These reforms
brought about changes to data collection, including greater reliance on
household surveys. The scope and collection methods of such surveys
improved signi®cantly during the 1980s, starting with the Rural Household
Survey (RHS) introduced in 1984. This has been the main source of data for
distributional analysis on rural China.
Tabulations of results from the RHS in China's Statistical Yearbooks have
suggested rising income inequality since the mid-1980s. This has been
widely reported and attracted much attention.2However, there are reasons
to be cautious in interpreting the available evidence on income inequality in
rural China. A number of potential problems have been identi®ed in recent
literature, including the undervaluation of income in kind from the con-
sumption of own-farm products due to continuing reliance on planning
prices for valuation purposes.3
We examine how the problems in of®cial tabulations from the household
2See, for example, the front page article in The New York Times, December 27, 1995.
3Discussions of the problems can be found in World Bank (1992), Khan et al. (1993) and Chen
and Ravallion (1996).
34 BULLETIN
#Blackwell Publishers 1999
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