It might look like a “Kuznets curve,” but appearances can be deceptive: Income inequality in China since 1980

There has been a tendency to declare a “Kuznets curve” whenever we see an “inverted U” in how some social, economic, political or environmental variable evolves with economic development. Yet the turning point in the inverted U may have little or nothing to do with the process of economic growth through modern-sector enlargement that was postulated in the classic development models of Simon Kuznets and Arthur Lewis (as reviewed in EOP, Chapter 8).

The implications (including for policy) may depend crucially on why we see such a turning point.

Inequality has become a prominent concern in China, both in its own right, and as a possible threat to future growth prospects, to the extent that high inequality restricts investment by relatively poor people (including investment in human capital) and possibly undermines growth-promoting policy reforms, which get blocked by the new, economically and politically powerful, elites.

In this context, it is now widely believed that, around 2008-9, China reached its Kuznets-Lewis turning point for income inequality. Since then, inequality has trended downwards. This is good news, but we need to understand better why it happened.

My new paper with Shaohua Chen assesses whether the claimed “Kuznets curve” for China has anything to do with Kuznets (Ravallion and Chen 2021). We confirm that our new measures look like a “Kuznets curve,” at least since the mid-1990s. When we go back further in time, to 1981, it starts to look more like an upward sloping roller coaster ride than the famous “inverted U,” as can be seen from the following graph, plotting our new estimates of two popular inequality indices for China.

A deeper analysis of the data indicates that the country’s turning points for inequality have rather little to do with the Kuznets model of economic growth through urbanizing structural transformation, as formalized in development economics. We show that the Kuznets Hypothesis would not have generated anything like the path for inequality measures seen in China. Key assumptions of that model simply do not hold. The Kuznets-type growth process alone would only have delivered a very flat Kuznets curve, with virtually no long-run increase in inequality, and a trend decline since around 2000 (Ravallion and Chen 2021).

Nor do the data for China support the view that the urbanization process has been driving up urban-rural disparities in mean incomes, or inequalities within either urban or rural areas; if anything it is the opposite.

We need to look elsewhere to understand why we have seen such a large long-term increase in inequality in China, with multiple turning points. There has been a long-term pattern (going back to the early Maoist period) of “urban bias” in China’s development policies. Economic and human development policies have systematically favored urban areas. This has been reinforced by internal impediments to migration and administrative controls of agricultural land assignments, making it harder and more risky to migrate.

The pattern in the inequality data over time is very consistent with the various date-specific reversals in the longer-term pattern of divergence between urban and rural mean incomes. Indeed, once we control for the ratio of the urban mean to the rural mean–keeping this ratio at its initial, 1981, value–we find no sign of a trend increase (or decrease) in income inequality in China since the mid-1990s. The counterfactual Gini index would have actually seen a trend decline!

Causal attribution is difficult of course, but our paper points to specific policy changes that helped the rural sector, and coincided closely with all three periods of declining inequality in China’s economic history since 1980, including the two (known) inverted-U turning points.

Just as China’s first turning point for inequality was short lived (see the graph above), we cannot be complacent about the latest turning point, which has received so much (hopeful) attention in China. These inequality trends and reversals in the direction of change are not the realizations of some more-or-less inevitable, theoretically grounded, process in economic development through urbanizing structural transformation. In large part, for China, the turning points in inequality appear to reflect policies.

Unless there is a continuing commitment to redistributive effort—which (as in most developing countries) includes the prioritization given to agriculture and rural development—China could well return to its upward trajectory for overall inequality.