**Table 8 – Year effect by province**

## Reference: _<u>Guizhou</u>_

||||||Province||||
|---|---|---|---|---|---|---|---|---|
||Total|_Liaoning_|_Jiangsu_|_Shandong_|_Henan_|_Hubei_|_Hunan_|_Guangxi_|
|Urban|0.019|-0.012|0.010|0.035|0.017|-0.003|-0.004|-0.024|
|Rural|-0.062|0.027|0.030|0.013|-0.042|-0.016|-0.028|-0.046|

# **7. Conclusion**

Before 1978, China was a poor society and the issue of uneven distribution had not surfaced. The reforms have unleashed market forces, and improved economic efficiency. As a result, the economy grew, and disparity in income rose. Using CHNS data, we examined the changes in inequality during 1989-2004, and the impacts of structural transformation on income growth. We find everyone has benefited from economic growth over time. The poverty headcount has fallen. Inequality in per capita household income widened, especially among urban residents in coastal and interior provinces and between households with better education and those with less. The dynamics of income divergence has been taking the form of “a race to the top”.

The increase in urban income inequality in 1989-2004 is largely a result of the differentiated opportunities and remuneration between the skilled and unskilled, as reflected in the rising returns to schooling and the occupations in secondary and tertiary sectors. During the transition from planned to market economy, institutional reforms failed to keep pace. Rent-seeking, unclear property rights in SOEs, and imperfect tax system have benefited some more than the others. Retrenchment from SOEs and collective-owned-enterprises, and reduction in real income of the retired also contributed to widening income gap, especially in urban areas. In rural areas, participation in non-farm activities is among the main factors of income growth. Differentiated returns to education, especially between those with primary middle school education or above and those with less education, is also an important factor that contributes to rural income inequality.

A decomposition analysis based on household income determination shows that the largest proportion of changes in total income can be attributed to the increase in returns to education. As economic reforms deepen, labor market works more efficiently by balancing demand and supply of skills. Scarce skilled labor is commanding higher premium. Such efficiency gain is one important force that drives rapid economic growth, while at the same time contributes to rising inequality. As Dollar (2007) suggests, education is one of the key paths out of poverty. Among those with nine years or more of education, the poverty rate is only 2%, compared to a 10% national average in China. Inequality of access to education is an important source of inequality across people contemporaneously and across generations (Heckman, 2003; 2005). Under the uniquely decentralized fiscal system, funding education is primarily responsibilities of local governments. As poor localities are less able to fund these services due to tighter fiscal constraints and poor households are less able to afford the high private cost of basic education, if not appropriately addressed, an increase in income inequality may lead to an increase in 20