The rise and fall of income inequality in post-reform China: an empirical analysis of the development and determinants of income inequality in China in the period 1985-2015

Abstract

Over the last couple of decades, there has been progressive commitment and remarkable achievements by the international community in lifting people out of poverty across the world. At the same time, elevated levels of inequality in income persists as a global phenomenon – threatening long-term social and economic development, but also undermining individuals’ self-worth and sense of fulfillment by putting certain people at a persistent disadvantage. In this, China is no exception. Following the economic reforms in the late 70s and early 80s, the country embarked upon one of the greatest economic expansions in modern history. An unprecedented development that has brought the nation to the verge of eradicating poverty. In spite of these achievements, the economic gains from the growth miracle has been far from equally distributed. Before integrated into the world market, the income distribution in China was considered egalitarian in all aspects, with inequality comparable to the Nordic countries. This changed dramatically over the following decades with the level of inequality rising at one of the fastest rates ever recorded, rendering China among the world’s most unequal nations. In the interest of understanding this development, the purpose of this dissertation is to explain how the aggregate disparity in income distribution has evolved in China in the period between 1985 and 2015, but also to shed light on some of the most significant drivers of this evolution. From the descriptive analysis pertaining to the former, there is clear consensus among previous empirical work in that income inequality increased markedly in the years following the economic reforms up until the late 00s. From 1978 to 2010, the top 10% income earners increased its share of national income by 16%, while the share assumed by the bottom 40% of the distribution decreased by 13% in the period. Around 2010, there is a reversal in the trend, as the relative disparity between top and bottom earners declined by 7% up until 2015. The findings from the empirical analysis suggest that trade liberalization has had a significant positive impact on the level of disparity between the top 10% and bottom 40% income earners in post-reform China. At the same time, the regression results find that increased efficiency of redistributive policies has significantly contributed to reduce aggregate income inequality in the period. The analysis is unable to find evidence to support the hypotheses of Kuznets and Milanovic related to determinants of the development. However, given the limitations of the study, more data and dynamic models is needed to conclusively validate these findings.