Study on Urban-Rural Income Inequality in China—Based on VAR Model

Weiji Lu


Wealth disparity is a complex issue that has plagued the world for many years. China’s economic development has achieved world-renowned results during the last 40 years. Over that time, the country has risen from extreme poverty to the world’s second-largest economy. Nevertheless, the significant wealth inequality accompanying it has also caused great concern. At the start of China’s reform and opening-up period, government officials tacitly approved of this uneven development and made plans to “drive the rich first to the rich later” in pursuit of economic development. Economic development aims to achieve shared prosperity, not to deprive the relatively poor of wealth. As a result, wealth disparity in China must be addressed. Based on the Kuznets hypothesis, the theory of urban-rural dual structure, and the current situation in China, this paper has evaluated the current wealth gap in China. Since 1978, Chinese households’ wealth accumulation has come from the income gap. Private property was not allowed to exist during China’s planned economy period (1949-1977). After the reform and opening up period (After 1978), income disparities between various industrial sectors led to an initial round of wealth accumulation for many Chinese citizens. The industrialisation process and urbanisation rate significantly impacted China’s economic modernisation and growth. Therefore, this paper has analysed the effects of several factors on income disparity in China. The examined factors were; economic development, the urbanisation rate, and the industrialisation process. Based on the theoretical analysis, this paper selected time series data from 1978 to 2021, including; per capita GDP, the per capita disposable income of urban and rural residents, the urban population to total population ratio, and industry contribution to the GDP. First, an analysis of the impact of economic development on income inequality was conducted using a static model. Then, a VAR model was built through ADF and PP testing, and an impulse response and variance analysis were conducted to explain the impact of various factors on the change rate of income inequality. The study results indicated that (1) Economic development has resulted in a significant increase in the income of urban and rural residents. However, urban residents have benefited more. Simultaneously, the income gap between urban and rural areas has grown significantly alongside economic expansion. (2) Urbanisation showed little effect on the income gap in the short term; however, it increased it in the long term. (3) Industrialisation reduced the short- and long-term income gap while increasing urbanisation.

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