Did Higher Inequality Impede Growth in Rural China?

This paper estimates the relationship
between initial village inequality and subsequent household
income growth for a large sample of households in rural
China. Using a rich longitudinal survey spanning the years
1987-2002, and controlling for an array of household and
village characteristics, the paper finds that households
located in higher inequality villages experienced
significantly lower income growth through the 1990s.
However, local inequality s predictive power and effects are
significantly diminished by the end of the sample. The paper
exploits several advantages of the household-level data to
explore hypotheses that shed light on the channels by which
inequality affects growth. Biases due to aggregation and
heterogeneity of returns to own-resources, previously
suggested as candidate explanations for the relationship,
are both ruled out. Instead, the evidence points to
unobserved village institutions at the time of economic
reforms that were associated with household access to higher
income activities as the source of the link between
inequality and growth. The empirical analysis addresses a
number of pertinent econometric issues including measurement
error and attrition, but underscores others that are likely
to be intractable for all investigations of the
inequality-growth relationship.