China’s Economic Growth, Inequality and Human Capital: 1952-1999

China’s Economic Growth, Inequality and Human Capital: 1952-1999 1. Introduction Few people would argue about the remarkable performance of China since she applied reform policies from 1978 on. In the two decades since economic reform started, China's economy has grown fivefold, average income per capita has quadrupled, and 270 million Chinese have been lifted out of absolute poverty (Chen and Wang, 2001). However, scholars have pointed out that there is an increasing tendency toward income inequality accompanying the rapid economic growth in China. There is a large body of literature studying income inequality, economic growth and human capital, especially in the period after reform. It generally concludes with that: l Income inequality comes from two resources: one is rural-urban inequality; the other is regional disparity. Among these, rural-urban inequality has dominated overall (Bhalla, Yao and Zhang, 2003; Chen and Fleisher, 1996; Kanbur and Zhang, 2003; Lee, 2000). l Among all the reasons for income inequality, the politics of reform might be the most important factor. For example, the urban-bias policy and "let-a-small-part-of-the-people-get-rich-first" policy (Yang and Qinmei 1999; Chen and Fleisher, 1996; Yang and Wei 1996). l The Chinese economy has grown rapidly since the founding of the People’s Republic. China’s GDP increased 36 times and per capita GDP increased over 16 times in constant prices during 1952-1999 (Ajit, Yao and Zhang, 2003). Economic growth was much faster during the reform period than during the pre-reform period. In the Chinese case, accumulation factors, especially physical capital accumulation, has evidently contributed to the growth rate significantly. Human capital and TFP (Total Factor Productivity) have also contributed to the growth rate, but these were less important than physical capital (Chow and Lin, 2002; Hsing and Hsieh, 1996; Wang and Yao, 2003). l China’s human capital stock has increased substantially. More than three-quarters of the population was literate by 1999, there is near universal primary education and a reasonably high enrollment ratio at secondary level. However, government investment in human capital is still at a lower level compared with many other countries (Tilak and Jandhyala 1990; Heckman, James 2003; Wang and Yao, 2003). Poverty is a relative concept: the poverty line in a rich country will be at a higher income than in a poorer country. If, as income per head rises, the variation of income per head also rises, then there is greater income inequality: while the poor may be lifted from poverty absolutely, they may nevertheless, pari passu, be made poorer relative to average, or even medium, income. Thus the debate on the sources of growth has gradually shifted from the average growth rate to the issue of the “quality” of economic growth, meaning the growth in income per head and relief of the poor via an improved distribution. This is sometimes refined to as “pro-poor growth’’. Researchers have tried to investigate the relationship between economic growth and income inequality, and have tried to answer questions such as: What type of growth is pro-poor growth? How does income inequality influence economic growth? How does income growth affect income inequality? Recently, some researchers have begun to pay attention to the impact on economic growth of human capital inequality. For example, how does the distribution of human capital affect economic growth? How does innovation technology affect economic growth? However, because of lack of data, these studies are primitive (Wei and Kim 2002; Chen and Wang 2001). To contribute to the current debate, this paper constructs a new time series of China's human capital stock and its distribution, and carries out an analysis of how economic growth is affected by the growth and distribution of human capital. The paper is organized as follows: section 2 investigates the time-path of human capital stock and its