Wednesday, August 11, 2010

Geography, Inequality and the Renminbi

Yukon Huang in the FT (link here) suggests that a fixed exchange rate will help move factories to the interior and thus reduce China's massive inequality.  Therefore, he is against china appreciating its currency.  But recent research challenges the conventional wisdom that geography accounts for a lot of inequality in China.  Benjamin, Brandt, Giles and Wang (Ch. 18) in China's Great Economic Transformation find that at least half and up to 2/3 of inequality is between "neighbors" within a given locale rather than across locales (city or village). Provincial differences account for even less of the inequality.  Urban-rural differences are also not a major source of overall inequality.  However, they did find that the "dynamics of inequality" are different between interior and coastal provinces with a faster increase of inequality within interior provinces due to faster increases in rural inequality and urban-rural income differential in the interior.  Huang would surely jump on the suggestion Benjamin and his colleagues make that one of the reasons for different dynamics of inequality in the coastal provinces is the stronger job growth in the non-state sector there in order for Huang to claim that such dynamics could be transferred to the interior along with the movement of non-state production to those areas.  The question remains how much the transfer of coastal-style non-state sector job growth would reduce the overall level of inequality.  If such a transfer does not solve a lot of the national inequality it does not seem like a very strong argument against appreciating the renminbi.

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