Rural urban income gap and critical point of institutional change

Abstract

By employing an analytical framework based on institutional economics, this paper intends to investigate the rural urban income gap and its critical points for change. The level of rural urban income gap in 1978 broke the institutional equilibrium on which the traditional rural urban relationship relied, leading to overall reform in rural China. In the post-reform period, utilizing their superior influence on policy-making, urban residents have so far succeeded in maintaining urban biased government policies, deterring rural labor from migrating to cities permanently. The urban residents’ major lobbying mechanism is through their “vote” and “voice”, something in which their rural counterparts are lacking. However, farmers have a way to “get around” the urban biased policies which are unfavorable to them. This “voting with their feet” eventually will drive the policy change. When the rural urban income gap increases to the level of 1978, a critical point for institutional change will have been reached. The timing and conditions will be ripe for reform of the whole policy package on which the present rural urban divide has been built.