NCPA - National Center for Policy Analysis

How Globalization Reduces Inequality in China

July 12, 2002

Does globalization worsen income inequality or reduce it? This simple yet stubborn question has spawned countless studies examining the link between economic openness and income gaps. In one, researchers studied data from about 100 Chinese cities between 1988 and 1993, focusing on the gap between urban and rural incomes as a measure of income inequality.

China is a good case study, first because it offers "a quasi-natural experiment on the consequences of embracing globalism."

  • Because of Deng Xiao-Ping's 1978 decision to open the Chinese economy to the rest of the world, the country's overall trade as a percentage of Gross Domestic Product (GDP) skyrocketed from 8.5 percent in 1977 to 36.5 percent 22 years later.
  • Second, China's size allowed researchers to amass more comprehensive results than they could have on Argentina, Bangladesh or Costa Rica, three countries that also have increased their openness dramatically in the last two decades.
  • In addition to economic factors, China has geographic features that provide a methodological advantage -- for example, the fact that China is semi-landlocked with a coast on its Eastern and Southeastern sides.
  • Thus, the differences in Chinese cities' participation in international trade are to a large extent attributable to their varying distance from a major seaport.

Researchers believe China's trade openness has helped narrow the income gap between rural and urban residents by increasing opportunities for industry. Industrial firms in rural areas of China (often referred to as "township-and-village enterprises," or TVEs) have a better chance to emerge, expand and succeed in more open areas. As a consequence, the residents in these areas catch up with their urban counterparts faster.

Source: Carlos Lozada, "Globalization Reduces Inequality in China," NBER Digest, March 2002; based on Shang-Jin Wei and Yi Wu , "In Globalization and Inequality: Evidence from Within China," NBER Working Paper No. 8611, November 2001, National Bureau of Economic Research.

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