Income Inequality, State Ownership, and the Pattern of Economic Growth – A Tale of the Kuznets Curve for China since 1978

Abstract

The lack of supposed trickle-down benefits for industrialization to reduce income inequality during China’s 30 years of post-reform economic growth appears to constitute an anomaly for the inverted U-shaped Kuznets curve hypothesis. Using an alternative inequality measure that depends on factor share and ownership, we show that in a transition economy with the state weight of capital less than its market counterpart, enhanced state ownership exacerbates inequality. Econometric evidence suggests that although the government attempts to balance the three goals of growth, equality, and state ownership in the short run, stubborn state ownership as well as lopsided growth patterns jeopardize equality in the long run and have therefore delayed the turning point in the inverted U-shaped Kuznets curve for China.

Appendix

Relationship between Inequality and State Ownership

In (6), taking derivative of Y _n /Y with respect to K _s /K yields

$$ \frac{\partial \left({Y}_n/Y\right)}{\partial \left({K}_s/K\right)}=\frac{\delta \left(2\frac{K_s}{K}-1\right)}{2\alpha \gamma \sqrt{\frac{\delta }{\alpha \gamma }{\left(\frac{K_s}{K}\right)}^2-\frac{\delta }{\alpha \gamma}\left(\frac{K_s}{K}\right)+\frac{Y}{\alpha {\gamma}^2}+\frac{1}{4}}}\ge \le 0,\ as\kern0.5em \frac{K_s}{K}\ge \le \frac{1}{2} $$

(A1)

To verify the result, consider the case in which ${K}_s=\frac{1}{2}K-\upkappa$ and ${K}_n=\frac{1}{2}K+\upkappa$ (κ > 0) so that (K _s /K) < 1/2. Using the production function definition for Y _n and Y _s given in the second section, we can express (Y _n /Y) as

$$ \frac{Y_n}{Y}=\frac{1}{1+\frac{A_s{\left(\frac{1}{2}K-\kappa \right)}^{\alpha }{\left({L}_s\right)}^{1-\alpha }}{A_n{\left(\frac{1}{2}K+\kappa \right)}^{\beta }{\left({L}_n\right)}^{1-\beta }}} $$

(A2)

In (A2), differentiating (Y _n /Y) with respect to κ can generate the equivalent result as (A1) when (K _s /K) < 1/2:

$$ \frac{\partial \left({Y}_n/Y\right)}{\partial \kappa }=\frac{\left(\frac{A_s{\left(\frac{1}{2}K-\kappa \right)}^{\alpha }{\left({L}_S\right)}^{1-\alpha }}{A_n{\left(\frac{1}{2}K+\kappa \right)}^{\beta }{\left({L}_n\right)}^{1-\beta }}\right)\left(\frac{\alpha }{\frac{1}{2}K-\kappa }+\frac{\beta }{\frac{1}{2}K+\kappa}\right)}{{\left[1+\frac{A_S{\left(\frac{1}{2}K-\kappa \right)}^{\alpha }{\left({L}_S\right)}^{1-\alpha }}{A_n{\left(\frac{1}{2}K+\kappa \right)}^{\beta }{\left({L}_n\right)}^{1-\beta }}\right]}^2}>0 $$

(A3)

Similarly, for the case of (K _s /K) > 1/2, we consider ${K}_s=\frac{1}{2}K+\upkappa$ and ${K}_n=\frac{1}{2}K-\upkappa$ (κ > 0), then we can show that

$$ \frac{\partial \left({Y}_n/Y\right)}{\partial \kappa }=-\frac{\left(\frac{A_s{\left(\frac{1}{2}K+\kappa \right)}^{\alpha }{\left({L}_S\right)}^{1-\alpha }}{A_n{\left(\frac{1}{2}K-\kappa \right)}^{\beta }{\left({L}_n\right)}^{1-\beta }}\right)\left(\frac{\alpha }{\frac{1}{2}K+\kappa }+\frac{\beta }{\frac{1}{2}K-\kappa}\right)}{{\left[1+\frac{A_S{\left(\frac{1}{2}K+\kappa \right)}^{\alpha }{\left({L}_S\right)}^{1-\alpha }}{A_n{\left(\frac{1}{2}K-\kappa \right)}^{\beta }{\left({L}_n\right)}^{1-\beta }}\right]}^2}<0 $$

(A4)

We have therefore shown that inequality tends to increase as state ownership in capital expands if and only if the ratio of state-owned capital to total capital is less than one half.