GCOE Discussion Paper Series
Global COE Program

Human Behavior and Socioeconomic Dynamics
Discussion Paper No.122

The Chinese Economy and Income Inequality
among East Asian Countries

Sumie Sato and Mototsugu Fukushige

February 2010

GCOE Secretariat
Graduate School of Economics

OSAKA UNIVERSITY

1-7 Machikaneyama, Toyonaka, Osaka, 560-0043, Japan

The Chinese Economy and Income Inequality among
East Asian Countries
Sumie SATO

Graduate School of Economics, Kobe University
1-2, Rokkodai-cho, Nada-ku, Kobe 657-8501, Japan
Mototsugu FUKUSHIGE

Graduate School of Economics, Osaka University
1-7, Machikaneyama-cho, Toyonaka, Osaka 560-0043, Japan
Abstract
Using the Atkinson inequality measure of income distribution, we analyze the impact of China as a single country
and examine the effect of its domestic income inequality on total income inequality among East Asian countries.
First, we find that China‟s domestic income inequality exacerbated income inequality among East Asian countries
from the 1980s, and this effect became even more pronounced from 1990. Second, the growth of China‟s per
capita GDP had an equalizing effect on income distribution in a framework of ASEAN + China, but this effect was
reversed around 1997. However, relative to higher income countries such as Japan and South Korea, China‟s per
capita GDP remains low, and although China has contributed to income inequality in the area, it has recently had amore equalizing effect.

Keywords: East Asia, China, income inequality, free trade agreement, harmonious society
JEL classification: O15, D31, F43

Correspond to: Mototsugu FUKUSHIGE
Graduate School of Economics, Osaka University
1-7, Machikaneyama-cho, Toyonaka, 560-0043, JAPAN
Phone: & fax: +81-6-6850-5248
E-mail: mfuku@econ.osaka.u.sc.jp-1-

1. Introduction
At the National People‟s Congress of 2007, Chinese Premier Wen Jiabao emphasized theconstruction of a „balanced society‟, signaling that China had abandoned its „Get Rich First‟ policy, inthe words of Deng Xiaoping in 1978. This policy change was made to deal with dissatisfaction about
domestic policy; that is, the policy of „Get Rich First‟, which made economic growth its highest priority,
caused domestic income inequality. There are many empirical studies of recent trends in China‟sdomestic income inequality. For example, Tsui (1993), Chen and Fleisher (1996), Akita (2003) and
Kanbur and Zhang (2005) conducted a decomposition analysis of income inequality. Yao and Zhang(2001), Zhang, Liu and Yao (2001) and Maasoumi and Wang (2008) investigated regional income
convergence. Liu (2006), Wan (2004) and Zhang and Wan (2006) measured China‟s inequality in rural
areas. Wang, Shi and Zheng (2002) measured urban inequality. Dong (2005), Gustafsson and Shi(2002) and Sicular, Ximing, Gustafsson and Shi (2007) investigated differences in economic growth
rates in urban and rural areas. In addition, Kanbur and Zhang (1999) examined differences between
inland and coastal areas. Further, Meng, Gregory and Wang (2005) and Meng, Gregory and Wan (2007)
studied poverty problems brought about by increased inequality. In attempting to determine the causesof rising inequality, Fujita and Hu (2001) and Wan, Lu and Chen (2006, 2007) analyzed the relationshipbetween globalization and economic growth, and Ma (2006) studied the role of foreign direct
investment. It is difficult to survey all the early work on China‟s income inequality because there are somany empirical studies. However, most studies focus only on the trend and growth rate of inequality;
we cannot find studies of its international effect or of its effect on China‟s neighbors.
In terms of population and size, China‟s provinces (including five big cities) are similar inscale to individual ASEAN countries. In this paper, we regard Chinese provinces as one country, andcompare China with ASEAN countries. For example, the per capita GDP of Shanghai is higher than thatof Malaysia, which has the second highest per capita GDP among the ASEAN countries and a larger
population. The per capita GDP levels of the Chinese cities of Tianjin and Beijing exceed that ofThailand, which has the ASEAN region‟s third highest per capita GDP. China‟s per capita GDP
exceeds Indonesia‟s and, while falling short of the levels of Singapore, Malaysia and Thailand, exceeds-2-the ASEAN average. Hence, were there to be an economic union or a free trade agreement (FTA)
between China and ASEAN, China would be expected to be the leader because of its economies of scale
and presence in terms of both population and income. Regarding income inequality, although inequality
among Chinese provinces has exhibited a recent upward trend, it remains low by ASEAN standards. In
other words, in forming an economic union or FTA in this area, ASEAN countries would face a greater
income inequality challenge than would Chinese provinces. The existing studies of income inequality in
the ASEAN region by Mizoguchi and Yoshida (1998) and Datt and Walker (2004), who analyzed
inequality in 1985 and 1997, respectively, are somewhat dated. The problem of inequality became more
apparent in 2004, which is the final year covered by our study.
In this paper, using the Atkinson inequality measure of income distribution, we investigate theimpact of China‟s inequality in two ways. First, we investigate the impact of China‟s domestic
inequality when calculating inequality measures with and without considering Chinese provinces as acountry. Second, we measure the impact of China as one country when comparing income inequality
among East Asian countries including and excluding China.
A summary of the results follows. Since 1980, the inequality of China‟s domestic income
distribution has exacerbated income inequality in East Asia, and this effect has been even more
pronounced since 1990. On the other hand, this result depends on how income inequality is measured:
within a framework of ASEAN + China, the growth of China‟s per capita GDP has had an equalizing
effect on income distribution in the area. However, this effect has weakened since 1997. These
outcomes were a consequence of the economic stagnation of some ASEAN countries following the East
Asian financial crisis and the rapid growth of China‟s economy. When higher per capita GDP countries
such as Japan and South Korea are included, per capita GDP in China is relatively low, and although
China has contributed to income inequality in the area, it has recently had a more equalizing effect.
This paper is organized as follows. In Section 2, we explain the inequality measure used in thisstudy and propose indices to measure the effects of China as one country and its domestic inequality. In
Section 3, we define specific geographical areas for considering regional economic inequality andinvestigate recent trends in per capita GDP and income inequality. In Section 4, we investigate the-3-impact of China‟s economic growth and its domestic income inequality on East Asian countries, using
the indices developed in Section 2. In Section 5, we summarize our results and discuss remaining issues.

2. The Inequality Measure and its Application
In this paper, we measure inequality in the income distribution by using the measure proposed
by Atkinson (1970). To analyze inequality, this measure uses a social welfare function that is based on
the evaluation of individual utility, which is defined as follows:x 1
for   1, and   0,
u(x)  a  b1 u(x)  ln x for   1.

Then, the Atkinson measure is defined as:1

 1 n  x 1  1
A  1     i   , for   1, and   0,
 n i 1    

1 n
 x 
A  1  exp   log i  , for   1,
  
 n i 1

where n is the total number of individuals, xi is the income of the i-th individual, and  is average
income. The parameter  represents the degree of inequality aversion. Treating the social welfare
function in such a way is an advantage of the Atkinson measure.
We propose two methods for capturing the impact of China as one country and the impact ofits domestic income inequality using the Atkinson inequality measure. First, to measure the impact ofChina as one country on income inequality in East Asia, we propose using two versions of the Atkinson-4-measure: one including and one excluding China. Second, to measure the contribution of China‟sdomestic income inequality, we propose two versions of the Atkinson inequality measure: one based on
considering China as one country and one based on considering Chinese provinces as individual
countries.
To measure income inequality among East Asian countries including China, with a population
weight for each country ( w i , i  1,2,..., M ), the Atkinson measure is calculated as:

1

1 
1 M
 x i   1
A  1    w i    , for   1, and   0,
 N i 1    

1 M
 x 
A  1  exp   w i log i  , for   1,
  
 N i 1in which N is the total population of the area under study. Defining A C as the Atkinson measure that
excludes China from the area under study, we propose the following index for measuring the impact ofChina as one country:

DC  A  AC .

To clarify the use of this index, consider the following simple numerical example. Suppose there is an
economy comprising five people ( j  1,2,...,5 ), whose incomes are 10, 20, 30, 40 and 50. Table 1
compares the Atkinson measure for all five people with that when one is excluded. Table 1 shows thatwhen the maximum and minimum incomes are excluded, the Atkinson measure is low, but when
average incomes are excluded, the Atkinson measure goes up. Hence, this index measures thecontributory effect on income inequality of a specific country. For our analysis, when China is-5-

classified as a low income country in the area, DC is positive, and changes from positive to negative
according to China‟s economic growth. Further, DC is minimized when China‟s income is the averagefor the area, and its value can only increase from that point. One would expect DC to become positive if
China‟s income grows sufficiently. It is clear from Table 1 that positive and negative changes in DC areasymmetric; that is, DC falls rapidly but rises slowly. The changes are not symmetric around theaverage.
To measure the contribution of China‟s domestic income inequality in the area under study, we
calculate the Atkinson measure considering China as one country ( A ), and considering the Chinese
provinces as countries ( A D ). The difference between these two measures represents an index of thecontribution of China‟s domestic inequality, as follows:DD  A  A D .

Clearly, DD is zero if all the average incomes of the Chinese provinces are equal; otherwise, this index
takes a negative value. This index measures the decreasing effect of the domestic inequality of a
specific country on overall income inequality. Using the Atkinson measure, Das and Parikh (1982) and
Lasso de la Vega and Urrutia (2003) developed a decomposition method. However, instead of using a
decomposition method, because we focus on the contribution of China‟s domestic income inequality,
we construct an index from the difference in Atkinson measures. Thus, we investigate the impact ofChina as one country and the impact of its domestic income inequality by using the DC and DD indicesdescribed above.

3. China’s Regional Income Inequality versus ASEAN’s Income Inequality
To analyze the inequality of China‟s income distribution from the viewpoint of East Asia, weconsider the following specific groups of East Asian countries: the ASEAN countries; ASEAN + China;
ASEAN + 3 (namely China, Japan and South Korea); and all East Asian countries. The first three-6-

groups relate to countries bound by FTAs or involved in negotiations. Table 2 shows the member
countries. Before calculating the DC and DD indices, we investigate the relative position of China‟seconomy and trends in per capita GDP and levels of inequality within the country groups. The data used
are population and GDP figures denominated in US dollars from 1980 to 2004. We obtained Chinese
data from the China Compendium of Statistics 1949–2004, compiled by the Department ofComprehensive Statistics of the National Bureau of Statistics (2005). China‟s GDP figures areconverted from Chinese yuan into US dollars by using annual exchange rates from the World Economic
Outlook Database of the International Monetary Fund (IMF). All other data are from the World
Economic Outlook Database of the IMF. In this paper, the (eight) ASEAN countries are Indonesia,
Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam; because the World
Economic Outlook Database of the IMF lacks the necessary data, we omit Brunei Darussalam andCambodia.
In 2004, because China‟s share of East Asia‟s total population was 62.9% and ASEAN‟s(including Brunei Darussalam and Cambodia) was 27.1%, China and the ASEAN 10 accounted for 90%
of East Asia‟s population in that year. The percentages of East Asia‟s population accounted for by othercountries were: Japan, 6.3%; South Korea, 2.4%; Taiwan, 1.1%; and Hong Kong, 0.3%. Figures 1 and 2
compare levels of per capita GDP and economic growth rates for groups of countries with those of
China. To smooth out annual fluctuations, we used three-year moving averages for economic growth
rates. These figures confirm that China‟s recent economic growth rate exceeded the average growth rateof the ASEAN countries, and China‟s level of GDP has almost reached that of ASEAN. Figure 3, whichshows each country‟s share of regional GDP, indicates that Japan accounted for more than 50% of East
Asia‟s GDP in 2004. However, the combined share of China and ASEAN is about 30%. Moreover,Figure 3, which also shows GDP shares for 1980, 1990, 2000 and 2004, indicates that East Asia‟s GDP
for 2004 was almost five times its 1980 level.
In Figure 4, we compare the GDP per capita levels of the ASEAN countries with those of the
top five Chinese provinces (in terms of GDP per head), which are Shanghai, Tianjin, Beijing, Zhejiang
and Jiangsu. In 1980, the per capita GDP levels of these top five Chinese provinces were similar to-7-those of the ASEAN countries. In 2004, Shanghai‟s per capita GDP grew more rapidly than did that of
Malaysia, and China‟s fifth largest city, Jiangsu, matched Thailand‟s per capita GDP. These highgrowth rates in coastal China probably result from China‟s „Get Rich First‟ policy.

4. China and Income Inequality in East Asia
In Figure 5, we compare the Atkinson income inequality measures, with  = 1, for ASEAN +China, ASEAN + 3, the Chinese provinces and the ASEAN 8. Figure 5 shows that the Atkinson
measure for China has risen recently, but remains low, which means that China‟s inequality is relatively
low among ASEAN countries. For example, whereas China‟s Atkinson measure, with  = 1, is 0.11 for
2004, the corresponding figure for ASEAN is 0.30. This result is consistent with the findings ofMilanovic and Yitzhaki (2002), who “find that Asia is the most heterogeneous continent;
between-country inequality is much more important than inequality in incomes within countries.”
Figures 6 and 7 illustrate the DC and DD indices corresponding to the Atkinson measures with
 = 0.5 and  = 2, respectively. In both figures, the DD lines for ASEAN + 3 and East Asia are so similarthat it is difficult to distinguish between them.
The DC index with  = 0.5 within a framework of ASEAN + China implies reduced inequality
after 1988 and then a resurgence from the trough reached in 1998. This result means that, within an
ASEAN + China framework, around 1998 China‟s impact changed from reducing inequality toincreasing it. Moreover, China‟s entry into the higher income group of ASEAN countries around 1998
because of its rapid economic growth transformed China‟s effect on inequality. Further, in a frameworkof ASEAN + 3 or an East Asian framework, China only began reducing income inequality around 2001.
This means that China‟s economic growth is expected to reduce income inequality within the ASEAN +3 and East Asia. On the other hand, the DD index shows that the effect of domestic income inequality in
China increases income inequality in ASEAN + China, ASEAN + 3 and East Asia. However, thecontributions implied by DD are small relative to those implied by DC. In a framework of ASEAN +China, DD indicates that China‟s domestic income inequality increased overall income inequality, but-8-that after 1988 (and with  = 0.5), this effect was dwarfed by China‟s contribution to reducing its own
income inequality, as shown by the DC index. In ASEAN + 3, with  = 0.5, this phenomenon occurred
after 2002.
With  = 2.0, because the DC and DD indices have relatively high weights on higher income
classes, DC exhibits its income-inequality-reducing effect continuously from 1980 for ASEAN + China,
ASEAN + 3 and East Asia. This effect also became more pronounced around 1998 for ASEAN + China,
with  = 0.5. Further, a comparison of the DC and DD effects for ASEAN + China reveals that, from1989, China‟s favorable impact (reducing inequality through DC) exceeded its contribution to increased
inequality (from domestic sources through DD).
For an overall summary of the results, in a framework of ASEAN + China, theincome-inequality-reducing effects of China‟s economic growth (DC) weakened after about ten years;
that is, from 1988, when the effects of DC outstripped those of DD, to 1997, when the DC effects
bottomed out. Hence, in another ten years, the effects of DC are expected to be outstripped by theeffects of DD, some years after which the DC effects will become positive. This means that China will
increase income inequality through its rapid growth. In other words, China will become a high income
country in the region at the end of the 2000s (China changed policy around 2007). In an ASEAN +China framework, China‟s economic growth will have less of an impact in reducing income inequality
than China‟s domestic inequality will have in increasing income inequality. By contrast, the DD
contribution to income inequality is smaller in ASEAN + 3 and East Asia overall than in ASEAN +China. The DC impact suggests that China‟s economic growth will reduce income inequality in the
future. In other words, our results suggest that China‟s economic growth is required for the convergenceof incomes in East Asia.

5. Conclusion
Studies of global income inequality include those of Berry, Bourguignon and Morrison (1983),
Milanovic and Yitzhaki (2002) and Dowrick and Akmal (2005). However, there are no studies that-9-

focus on a specific country and analyze the impact of that country‟s economic growth and its domestic
income inequality on the income inequality of the region to which it belongs. By developing the indicesfor measuring the impact of China as one country (DC) and for measuring the contribution of China‟sdomestic inequality (DD), our paper represents the first attempt to evaluate these effects quantitatively.
According to the results of our analysis, first, China‟s domestic income inequality increased
income inequality among East Asian countries, particularly from about 1990. China‟s per capita GDP
lowered income inequality in the ASEAN nations (including China), until about 1997, after which theeffect weakened. In comparison with high income countries such as Japan and South Korea, China‟s per
capita GDP remains low, and China‟s own income inequality contributed to that of the region until
recently. However, when the degree of risk aversion is relatively low (with  = 0.5), China‟s recent
economic growth has reduced income inequality in East Asia, thus overturning the effect.
On the effects of China‟s economic growth and domestic income inequality within the
ASEAN region (including China), China has already entered the groups of higher income countries, and
its GDP level has risen to soften the effect of increased domestic income inequality, despite China‟s
successful pursuit of external economic growth. Thus, from the ASEAN + China point of view, China‟s
policy change made to reconcile economic growth and domestic income inequality is appropriate.
However, China‟s per capita GDP is not sufficiently high to justify the economic integration of theASEAN + 3 group of countries, and China needs to raise its per capita GDP for the convergence of percapita incomes in East Asia. If China considers the economic benefits of free trade agreements or
economic integration to be important for the formation of foreign policy, our results imply that China
should prioritize free trade agreements within ASEAN + China over agreements within the ASEAN + 3
group.
Finally, we discuss a limitation of our analysis. Although empirical research suggests income
inequality between urban and rural areas in China, we have ignored this aspect to focus on the effects ofChinese provinces in comparison to East Asian countries. It is appropriate to compare income- 10 -

inequality in Chinese provinces with domestic income inequality among ASEAN countries. We should
try to analyze this problem in the future when suitable data are available.

Acknowledgments
This research was supported by the Murata Science Foundation, which we thank for financial assistance.

- 11 -

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Table 1. Numerical Examples for Atkinson Measures

Atkinson Measure (Total)
 = 0.5

0.06315

 = 1.0

0.13161 = 2.0

0.27007

Deleted Number of Persons

Atkinson Measure (Subtotal)

DC

10.026810.036352

0.06626–0.00310

30.07862–0.01547

40.07422–0.0110750.05559

0.007571

0.054360.077252

0.14364–0.0120330.16171–0.03010

40.14896–0.01735

50.11465

0.016961

0.109460.1606120.30985–0.039783

0.31624–0.04617

40.28465–0.0145850.23200

0.03807

Note: Incomes are {10, 20, 30, 40 and 50}.

- 14 -

Table 2. Country Groups

Number ofTargeted FTA Area

Countries

Countries

ASEAN (Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam),1

ASEAN + China

9
China

2

ASEAN + 3

ASEAN, China, Japan, and South Korea

113

East Asia

ASEAN, China, Japan, South Korea, Hong Kong and Taiwan

13- 15 -

4500.00
4000.00
3500.00
3000.00

US$

2500.00
2000.00
1500.00
1000.00
500.00

Year
China

ASEAN

ASEAN+China

ASEAN+3

Figure 1 Trends in Per Capita GDP- 16 -

East Asia

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

0.00

25.00

20.00

15.00

5.00

-5.00
Year
-10.00-15.00
China

ASEAN

ASEAN+China

ASEAN+3

Figure 2 Economic Growth Rates ( Tree-year averages )- 17 -

East Asia

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

0.00

1983

%

10.00

9000
8000
7000
6000

ASEAN
China
Hong Kong
Japan
Korea
Taiwan5000
US$(billions)
4000
3000
2000
1000
0
1980

1990

2000

2004

Year

Figure 3 GDP for ASEAN, China, Hong Kong, Japan, Korea and Taiwan- 18 -

(US$)
40000
35000
30000
25000
20000
15000
10000
5000

Figure 4 Per Capita GDP for ASEAN, China, Hong Kong, Japan, Korea and Taiwan- 19 -

Jiangsu

Zhejiang

Beijing

2004

Tianjin

Laos

2000

Shanghai

Vietnam

1990

China

Philippines

1980

MyanmarIndonesia

Thailand

Malaysia

Korea

TaiwanHong Kong

Singapore

Japan

0

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1

Year
ASEAN+China
ASEAN+3 (Disaggregated)

ASEAN+China (Disaggregated)
China (Disaggregated)

ASEAN+3
ASEAN

Figure 5 Inequality in East Asia based on Atkinson Measure, with ε=1- 20 -

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

0

0.15

0.1

0.05

0

-0.05

-0.1

-0.15

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

-0.2

Year

DC: ASEAN+China

DC: ASEAN+3

DC: East Asia

DD: ASEAN+China

DD: ASEAN+3

Figure 6 Diffrences in Atkinson Measure, DC and DD, with ε=0.5- 21 -

DD: East Asia

0
-0.05
-0.1
-0.15
-0.2
-0.25
-0.3
-0.35

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

-0.4

Year

DC: ASEAN+China

DC: ASEAN+3

DC: East Asia

DD: ASEAN+China

DD: ASEAN+3

Figure 7 Diffrences in Atkinson Measure, DC and DD, with ε=2.0- 22 -

DD: East Asia