5 Concluding remarks
We consider two periods in the modern economic history of China. The pre‐reform period going from 1952 to 1978 is characterized by the adoption and implementation of a Soviet‐type economy. The economy showed a modest annual economic growth rate of 2.33 percent and very low levels of inequality, with an average Gini coefficient of 0.27. The post‐reform period tried to combine central planning with market‐oriented reforms to increase productivity. In fact, the economy has grown at an annual growth rate of 7.07 percent since 1979 and also the inequality with an average Gini coefficient of 0.33.
In this context, we study the relationship between “Income inequality and economic growth in China” during the pre‐ and post‐reform periods. We found a significant and positive long‐run relationship between inequality and economic growth in both periods. The inequality‐growth elasticity is greater in the post‐reform than the pre‐reform period. Using a more robust Granger causality test we find a unidirectional predetermination between the variables for the whole period and for the pre‐reform period. However, there is not causality in the post‐reform period. Except the urban‐rural disparity which explains the unidirectional causality from inequality to growth, pre‐reform China was basically an egalitarian society. In the pre‐reform period, the low inequality was identified as a strain on economic growth. However, the reform period has seen remarkable growth. Although regional inequality and the rural‐urban gap declined from the late 1970s to the mid‐1980s, both increased rather dramatically since the mid‐1980s.
Therefore, we can conclude that the Chinese experience depicts a positive relationship between inequality and growth if the pre‐ and post‐reform periods are analyzed separately.