Urbanization forces driving rural urban income disparity: Evidence from metropolitan areas in China

Abstract

The rural urban income gap in China ranks as one of the largest in the world. This imbalanced rural urban relationship and the associated socioeconomic disparity have caused a weak and inefficient resource allocation, harmed the country's long-term economic development, and led to scores of socioeconomic problems. Concurrent with the widening rural urban income gap, China has been transformed by rapid urbanization. However, to date, there is limited understanding of the links between urbanization forces and this rural urban income disparity. This study uses the dynamic panel data model to investigate the influence of both economic and institutional urbanization forces and other socioeconomic factors on China's rural urban income disparity. Our results show that two economic urbanization factors—rural productivity and urban productivity—have contrasting effects on this income disparity. While rural productivity can significantly narrow the rural urban income disparity, urban productivity can positively contribute to widening the rural urban income disparity. We also find that the hukou openness policy negatively affects the rural urban income disparity with a one-year lag. Finally, consistent with the Kuznets theory, per capita GDP and urban population size both negatively correlate with the rural urban income disparity. Our findings provide insights into why rapid urbanization and the widening of the rural urban income gap coexist in China. Moreover, our results provide clear policy implications on how to mitigate the disparity. The most compelling suggestion is that sustainable agricultural productivity improvement is critical to achieving the goal of mitigating the income gap between rural and urban areas.