1. 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

2. 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?

3. 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 ?

4. Lewis turning point & Kuznetz Curve 4 China Korea Gini coefficients 0.4 0.55 1970s 2020s China now 1997 financial crisis

5. % of Surplus labor in China: 1988 -2007: Classical method (production function and workload )

6. Region 1988 2007 Surplus labor Ratio Surplus labor Ratio Eastern mean198.418.6-34.2-3.1 Central mean322.725.5120.99.8 Western mean282.625.9142.314.9 National total 7670.423.02723.86.3 Estimation of Surplus labor in China: 1988 -2007: Classical method (production function and workload )

7. Urban-Rural Disparity in China

8. Difference in per capita GDP growth(unit: percent) : 1988-97 vs. 98-2007

9. 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

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

11. 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

12. 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

13. The Bench Mark Model: = Growth and Inequality with Surplus Labor -inigdp: initial per capita GDP level in 1988 -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

14. 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.

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

16. 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

17. Data: a panel dataset covering 29 provinces in China in the period 1988-2007 Whole period Early Period: 1988 – 1997 Later period: 1998-2007

18. Basic model: Growth and Inequality with Surplus Labor

19. Earlier period

20. Later period

21. Benchmark GrowthInequality 1988-8788' -07'1988-8788' -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

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

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

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

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

26. GrowthInequality 1988-9798' -07'1988-9798' -07' Inequality0 -/0/+ Growth + - Surplus Labor + + Export + + +0 FDI inflow +0 +0 Edu 10 +00 Edu 20 +0 + Edu 30 +0 + Technology0 +0 + urban growth +0 Gov expenditure - 0/-0/+ + SOE0 - + -/0 West + + Initial Income -0 Openness, Education and Tech Progress: summary

27. ** 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)

28. 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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