The relationship between economic g

The relationship between economic growth and income inequality has been widely studied and still is an interesting topic of present and future research. For instance, among others, there are early contributions in the last decade showed that higher inequality at the beginning of a longer‐term period was linked to poorer growth performances Alesina and Rodrik (1994), Perotti (1994, 1996) and Persson and Tabellini (1994), that is, the relationship between inequality and growth results to be negative. Gradually this consensus weakened, since a negative relationship was found in developing countries, but for richer countries there was no relation at all. Anyway, an opposite consensus with a very different content seems to take shape: inequality stimulates economic growth (Forbes, 2000; Arjona et al., 2001).

At any case, the debate on the issue of inequality and economic growth continues and the main consensus comes from the idea that the income distribution in a country is traditionally assumed to shift from relative equality to inequality and back to greater equality as the country develops. That is, inequality will rise as some people move away from prevailing traditional activities, which yield a low marginal product, into more productive venture, i.e. the well known Kuznets hypothesis (Kuznets, 1955).

In this vein, in a theoretical framework Benhabib (2003) demonstrated that while excessive inequality can disrupt the economy by inviting political interference through rent‐seeking behavior and appropriation, policies which support some modest inequality to take advantage of productivity differences will lead to the best growth rates. Benhabib concludes that the relationship between inequality and growth may be as follows: “growth may rise modestly at first, as we move away from complete equality, and then drop again as inequality increases further”.

This relationship is particularly relevant in the case of China. Since, the last 50 years have been a period of upheaval, the Chinese economy has changed from the Communist Revolution to the present period of openness and global integration (Kanbur and Zhang, 2005). The official raison of these reforms was to promote rapid economic growth and a more equal income distribution, to attain national self‐sufficiency, and to further socialist or communist ideals. In fact, the reforms made the real per capita GDP (Y) to grow at 7.07 percent annually since 1979, however the inequality (I) has also grown at 1.41 percent to a Gini coefficient of 0.42 (it was 0.22 in 1952). Two distinct stages are normally used in describing the development of the national economy: adoption and implementation of a Soviet‐type economy from 1952 to 1978 and gradual economic reform toward a market‐led economic system since 1979. Chinese economic reforms tried to combine central planning with market‐oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. China pursued agricultural reforms, dismantling the commune system and introducing the household responsibility system that provided to the peasants greater decision‐making in agricultural activities.
Therefore, this paper contributes to the empirical research of growth and inequality in China by analyzing two different periods. The first period from 1952 to 1978 is characterized by a Communist planned economy. The second period from 1979 to 2007 is characterized by the Rural reform where the decentralization and opening up to trade and foreign direct investment was the engine of economic growth.

Hence, the aim of this paper is to offer a proper answer to the issue inequality‐growth nexus by using a cointegrated vector autoregressive (VAR)‐setting approach, in this way, we can cope and avoid the problems of parameter heterogeneneity, omitted variable bias and endogeneity, from which suffers the model of macroeconometric analysis (Gobbin and Rayp, 2008).

The remainder of the paper is organized as follows. The next section presents a short review of the Chinese economic system in the last 50 years. Section 3 introduces the methodology and dataset. Section 4 presents the empirical results. Finally, Section 5 draws some conclusions.