Centre for Development Economics
Department of Economics, Delhi School of Economics


Income Inequality and Domestic Consumption in China: A Puzzle and an Explanation


Guanghua Wan
(Director of the Institute of World Economy, Fudan University, China) 

Thursday, 19 November 2020 at 3:00 PM.


Contrary to conventional wisdom and perception, income inequality is found to be positively correlated with per capita consumption in China.This puzzle implies that fiscal policies or transfers, which aims at reducing inequality and boosting consumption,have contributed to decreased domestic demand and the slowdown of the Chinese economy. Using province panel data, we show that: (1) Income inequality is positively correlated with per capita consumption and this correlation is robust; (2) When inequality is decomposed into a between urban-rural component and a within component, only the between component is significant, implying that the puzzle may be attributable to urban-rural segregation; (3) Sub-sample estimations using urban and rural data separately show that income inequality and consumption are negatively correlated, confirming the segregation hypothesis; (4) Using urbanization rate as an indicator of urban-rural integration, inequality and urbanization (the opposite of segregation) is found to exhibit an inverted U pattern, further supporting the segregation hypothesis; (5) Finally, to investigate the mechanism underlying the relationship between segregation and consumption, we estimate the marginal propensities to consume (MPC) for rural and urban residents. It is found that urban MPC is significantly higher than rural MPC, implying a higher saving rate of rural residents despite their lower income relative to the urban residents. This lower MPC is known to be caused by the serious urban-rural segregation which limits the choice set of consumption items and increases the risks faced by rural residents, resulting in the positive relationship between income inequality and consumption. Abolishing the hukou system and all kinds of discriminations against rural residents are suggested in order to resolve this puzzle, which is imperative for preventing further slowdown of the Chinese economy and offsetting the impacts of the de-globalization wave including the Sino-US trade war.

All are cordially invited.

Please find the link to the meeting below:


Meeting ID: 966 7847 6850 Passcode: 5TKZj9  


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