A tale of economic growth engines and income inequality: The case of China

Against a dearth of economics literature in analyzing the impacts on income inequality of economic growth patterns and corresponding growth-oriented macroeconomic policy, this paper develops a framework consistent with Heckscher-Ohlin theory that allows to explore the growth path conducive to reduction of income inequality.  China in the 1990s was a large labor-abundant country at its early phase of global integration, heavily dependent upon two economic growth engines – net exports and capital investment.  In such a phase, income inequality is sensitive to the pattern of economic growth, among other things.  In a framework that applies a Gini-coefficient related measure of income inequality to the Heckscher-Ohlin model, we analyze the effects on income inequality of growth-oriented macroeconomic policy as well as economic openness.  We show that the net export-oriented growth policy tends to increase income share of labor more than income share of capital by raising the relative return to labor and (possibly) the labor-capital ratio, whereas the policy in favor of capital investment features the opposite income distribution effect.  Given that the ownership of labor is distributed more equally than the ownership of capital in the low-income population, it follows that export-oriented policy reduces income inequality but investment-oriented policy raises it.  This study provides not only theoretical underpinnings for these growth propositions but also empirical evidence with China’s panel data at the provincial and national level.  With supportive preliminary analysis of the data, we plan to expand empirical analysis to the econometrics estimation methods, including generalized least squares regression, two-stage least squares regression, and cointegration regression.