When Economic Reform is Faster than Statistical Reform: Measuring and Explaining Income Inequality in Rural China

Official tabulations from household survey data suggest rising income inequality in post-reform rural China, and this trend has been of public concern. However, the structural changes in the Chinese rural economy had not been properly reflected in the methods used for processing the raw survey data. Using micro data for four provinces, we find that two-thirds of the conventionally measured increase in inequality 1985-90 vanishes when market-based valuation methods are used and allowances are made for regional cost-of-living differences. The data revisions also suggest somewhat different explanations for rising inequality. Non-farm income was secondary to grain production. Higher returns to farm land over time were inequality-increasing while lower returns to physical capital reduced inequality, as did private transfers. 1 The authors are with the Development Research Group of the World Bank. This paper was prepared as a background paper for “China 2020: Sharing Rising Income” produced by the World Bank’s East Asia region. The authors are grateful to the report’s manager, Tamar Maluelyan, for encouraging them to investigate these issues, and for her comments on this paper. Their thanks also go to the Bulletin’s two referees for their helpful comments. The cooperation of China’s State Statistical Bureau has been invaluable. These are the views of the authors, and should not be attributed to the World Bank. 2