When Economic Reform is Faster than Statistical Reform: Measuring and Explaining Inequality in Rural China

Abstract

Household survey data show income inequality increasing in post-reform rural China - but this may reflect methods used to process data rather than the real effect of structural changes on China's rural economy. Official tabulations from household survey data suggest rising income inequality in post-reform rural China, a trend of public concern. But the structural changes in China's rural economy have not been properly reflected in the methods used to process raw survey data. Using micro data for four provinces, Ravallion and Chen find that two-thirds of the conventionally measured increase in inequality in 1985-90 vanishes when market-based valuation methods are used and allowances are made for regional cost-of-living differences. The data revisions also suggest somewhat different explanations for rising inequality. Nonfarm income was secondary to grain production. While access to farm land was relatively equal, higher returns to land over time were inequality-increasing. But holding other factors constant, lower returns to physical capital reduced inequality over time, as did private transfers. This paper - a product of the Development Research Group - is part of a larger effort in the group to improve data on poverty and inequality in developing countries. The study was funded by the Bank's Research Support Budget under the research project Dynamics of Poverty in Rural China.