Income inequality in China has risen rapidly in the past
decades across regions, between rural and urban sectors,
and within provinces. The dynamics of divergence across
these sub-national areas have taken the form of a “race to
the top”—meaning that all segments of the population,
including the poor with low education in lagging
inland rural areas, have experienced gains in average
income. The largest gains have been registered by those
with higher income and education in leading coastal
urban areas. Using the China Economic, Population,
Nutrition and Health Survey data of 1989 and 2004,
we show that the most important factors explaining
overall inequality are differential returns to schooling
and sector of employment. A decomposition analysis
based on household income determination shows that
the increase in returns to education explains two-thirds
This paper is a product of the Poverty Reduction and Economic Management Department, East Asia and Pacific Region.
Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted
at xluo@worldbank.org.
of income changes in urban areas and one-sixth in rural
areas. The widening income gaps are the consequence
of higher growth in leading urban and coastal areas and
that the skilled population has benefited more from the
economic reforms carried out during the last 25 years.
The authors argue that rising income inequality can be
part of a normal process of development at a certain
stage, and that the dynamics of spatial income divergence
in the form of "a race to the top" can be desirable to
some extent as it unleashes competitive pressure and
creates incentives for investment in skills. Continuing
to improve market efficiency and investing in people, in
particular improving education service in lagging areas
to poor people, are important for sustainable growth and
equitable distribution in the long run.