Inequality and Growth Nexus in China: Roles of Surplus labor, Openness, Education & Technological Progress Furong Jin* and Keun Lee** *Research fellow, KIEP, Seoul **Professor, Seoul National University; Director, Center for Economic Catch-up

Introduction Remarkable achievements in economic growth and rising income inequality in China since the reform and open door policy - >Poses many intriguing questions -What is the relationship between growth and inquality? -If government policies are designed to foster growth, what is their impact on inequality? -What specific factors lie behind the noticeable increase in income inequality in post-reform China? > Open door policies, Education, Tech. Progress?

In view of the literature Starting point: Kuznetz Hypothesis in China: inverse-U shaped impact of growth on inequality 1)Simultaneous equation of growth and inequality Lundberg and Squire (2003) : Kaldor (1956) link from distribution to growth. 2)Considering Lewisian impacts of surplus labor: 3)Consider other reform-specific policy interventions: a) Open door policies (exports; FDI), b) Education, Tech. Progress, c) Urban-biased unbalanced growth strategy shown in government expenditure ?

Lewis turning point & Kuznetz Curve 4 China Korea Gini coefficients s 2020s China now 1997 financial crisis

% of Surplus labor in China: : Classical method (production function and workload )

Region Surplus labor Ratio Surplus labor Ratio Eastern mean Central mean Western mean National total Estimation of Surplus labor in China: : Classical method (production function and workload )

Urban-Rural Disparity in China

Difference in per capita GDP growth(unit: percent) : vs

Figure 1. Trend of the urban-rural income gap in China Source: Various issues of China Statistical Yearbook Urban disposable per capita / rural net income per capita Dividing the period

Figure 2. Disparity in the urban-rural income gap by region Source: Various issues of China Statistical Yearbook

Sources for Urban-Rural Income Inequality 1)Economic opening: China’s integration into the global market has mainly promoted the development of tradable sectors of manufacturing, related finance, and trade and services 2) Education and technology: Spread of education, but the impact differs according to the education level reached The hypothesis of skill-biased technological progress 3) Government policies for unbalanced growth: unfavorable treatment of the rural residents compared with the urban residents

Regression Models -Simultaneous system of equations Growth equation gdpgr=X’ α +Z’ β+ u it Urban-rural inequality equation urine=Y’ φ+Z’ γ+ε it -Gdpgr: per capita income growth -Urine: urban-rural gap = disposable income of urban residents/ rural net income in rural residents -X is a vector of the “economic growth” variables -Y is a vector of the “urban-rural income inequality” variables -Z is the variables common to both

The Bench Mark Model: = Growth and Inequality with Surplus Labor -inigdp: initial per capita GDP level in popgr: population growth rate -invt: investment rate -infl: inflation rate -soe: size of the state sector (share of labor in state sector) -gov: government expenditure /GDP -urbangr: urbanization (growth of urban population ratio) -center, west: regional dummies -surlab: surplus labor (estimated by 4 methods) -agr: share of fiscal expenditure on agriculture

4 Estimates of surplus labor (Jin 2010): -Measured as the proportion of surplus agricultural labor in the total provincial agricultural labor in 1988, estimated using the classical method * surlab1: estimated using the classical method ( actual workload from production function) * surlab2: international-standard-structure comparison method * surlab3: using the sown-land-to-labor-ratio method. * surlab4: using the arable-land-to-labor-ratio method.

Openness, Growth and Inequality -openness: * Exports = export/GDP * FDI = annual inflow/GDP

Education and Technological Progress in the Growth-Inequality Nexus - 4 edu/tech variables: * edu1: primary schooling = % of population graduated from: * edu2: junior secondary schooling * edu3: senior secondary and higher schooling * tech: technological progress = no. of patents -cesh: gov. expenditure on culture, education, science, and public health

Data: a panel dataset covering 29 provinces in China in the period Whole period Early Period: 1988 – 1997 Later period:

Basic model: Growth and Inequality with Surplus Labor

Earlier period

Later period

Benchmark GrowthInequality ' -07' ' -07' Inequality0 - Growth + - Surplus Labor1 + + Surplus Labor2 + + Surplus Labor3 + + Surplus Labor4 + + Urban growth +0 Gov expenditure - 00/+ + SOE0- +-/0 West + + Initial Income -0 Growth, Inequality, and Surplus Labor: Benchmark results

Table 3B. Openness, growth and urban-rural income inequality: Earlier period

Table 3C. Openness, growth and urban-rural income inequality: Later period

Table 4B. Education/Technology, growth and urban-rural income inequality: Earlier period

Table 4C. Education/Technology, growth and urban-rural income inequality: Later period

GrowthInequality ' -07' ' -07' Inequality0 -/0/+ Growth + - Surplus Labor + + Export FDI inflow Edu Edu Edu Technology urban growth +0 Gov expenditure - 0/-0/+ + SOE /0 West + + Initial Income -0 Openness, Education and Tech Progress: summary

** Changing Sources of Growth in China: Whole period: Investment driven growth Earlier : Convergence; Urbanization, and Openness (export; FDIinflow) no education and no tech. progress no evidence of inequality detrimental to growth Later: No convergence ; no urbanization impacts; yes privatization; Primary/Second/college Education and Tech. Progress; Yes Export but No F 야 Inequality positive to growth when middle/higher education controlled. ** Changing Sources of Inequality Whole period: Surplus labor, Western region Earlier: growth, Openness (Exports and FDIinflow); SOEs Later: growth reducing inequality; No impact of openness but Higher Education and tech. Progress government expenditure (urban bias)

Basic Summary: Lewis and Kuznets Economic growth increased inequality during the earlier period, but decreased it at later period -> some evidence for the Kuznets hypothesis. No impact of inequality on growth in early period; Some evidence of negative impact of inequality on growth at later period but not robust ( + with edu/tech controlled). Surplus agricultural labor was found to be positively and significantly related to the inequality in China, thus confirming Lewis’s dual-economy theory. -> reduction of surplus agricultural labor ( by allowing migration) is fundamental: in reducing inequality.

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