thegrowingincomeinequalityinchina.docVIP

The Growing Income Inequality in China: Evidence, Causes, and Policy Choices Baotai Wang Economics Program University of Northern BC 3333 University Way Prince George, BC Canada, V2N 4Z9 Email: wangb@unbc.ca Xiaofei Tian School of Economics Hebei University Baoding, Hebei Province, China Email: tianxiaofeimail@163.com Ajit Dayanandan Economics Program University of Northern BC 3333 University Way Prince George, BC Canada, V2N 4Z9 Email: dayanana@unbc.ca Abstract Income inequality has become an important issue for the China’s economic development in the recent years. The growing income inequality does not only lead to the economic and social instability, but also become an important obstacle for the future economic growth. This study investigates the impact of economic openness, as characterized by the international trade and foreign direct investment (FDI) flows, and GDP growth on income distribution in China. The empirical results show that economic globalization tends to improve income inequality in China. Thus, the worsening of income inequality in China must be caused by other factors. The possible factors responsible for income inequality are discussed and also some policy choices are proposed to deal this income inequality issue. Key Words: Globalization, Gini coefficient, Foreign Direct Investment, Unit Root Test, Cointegration JEL Classification: C22, D31, F15 1. Introduction Since 1978 when the economic reform and open-door policy were initiated, China has made great strides in promoting economic growth and reducing its poverty. The World Bank estimates that the poverty rate (head count ratio) in China fell dramatically from 84 percent in 1981 to 15.9 percent in 2005 (See, Chen and Ravallion, 2001, 2008). The impressive success of China in promoting economic growth and reducing poverty in the last three decades is eclipsed by the increase in income inequality during this period: the Gini