School of Economics and Finance

No. 548: Income Disparity and Economic Growth: Evidence from China

Duo Qin , Queen Mary, University of London
Marie Anne Cagas , Asian Development Bank
Geoffrey Ducanes , Asian Development Bank
Xinhua He , Chinese Academy of Social Sciences
Rui Liu , Chinese Academy of Social Sciences
Shiguo Liu , Chinese Academy of Social Sciences

November 1, 2005

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This paper carries out a pilot empirical study on how income inequality affects growth and the macro economy by means of incorporating panel data information into a macro-econometric model. China is used as the pilot field. Provincial urban and rural household data are used to construct inequality measures, which are then used to augment household consumption equations in the ADB China model. Model simulations are performed to study the effect of inequality on GDP growth and its sectoral components. Results show that inequality is a robust explanatory variable of consumption and that the way inequality develops over time carries certain negative consequences on GDP and sectoral growth.

J.E.L classification codes: R11, E21, D3, C5, C2

Keywords:Income inequality, Growth, Econometric model, China