Inequality and growth in China

Abstract

We provide estimates of the effects that income inequality has on economic growth in China. Our empirical analysis is at the county level. Using data provided by the China Health and Nutrition Survey, we construct measures of inequality and the growth rates of household incomes per capita for 72 Chinese counties during the period 1989–2015. System-GMM estimates of panel models show that the within-county effect of inequality on economic growth is significantly decreasing in initial average income. For the relatively low levels of initial average incomes that were prevalent in China during the 1980s and 1990s, our model estimates imply that the increase in inequality that occurred in China during the 1980s and 1990s had a significant positive effect on economic growth. However, for current levels of average income, our panel model predicts that inequality has a negative effect on economic growth: a 1 percentage point increase in the Gini would reduce the per annum growth rate by around 1 percentage point.