Question

7. Research Questions Choose one of the questions below and write a short essay. No longer than 500 words.

1. Why has income inequality increased over time in emerging economies (China, Russia, etc.) What are some of the explanations for this increase?

2. Has intergenerational mobility increased or decreased over time within advanced economies?

Answer 1

The fundamental cause for the rising income inequality globally according to Piketty is that the return to capital has been persistently higher than the growth rate of the economy leading to an increasing share of capital and decreasing share of wages in national income. The functional distribution of income can also be found in China over the transition period.

Income inequality rises along with the increase in national income and may fall after a country reaches a certain level of income on per capita terms. This pattern of changes in inequality in relation to changes in income is commonly referred to as the inverted Kuznets U-curve (Kuznets 1955). The Kuznets hypothesis implies that there is a causal relationship running from economic or income growth to income inequality. However, in reality, patterns of income inequality have been persistent for all kinds of countries both developing and developed ones. Potential causes for this phenomenon can be very complex involving factors such as differences in levels of development, the pattern of structural changes, both political and economic institutions, social norms and cultural factors and geography. It is even more so for China, Russia and other developing countries as these countries are not only a developing country but also a transition economy. A transition economy emphasiseseconomic incentives but lacks market means for allocating resources, and the redis- tribution function for the government. In addition, there are various kinds of loopholes in its institutions in transition which are the causes for the so-called ‘grey income’ and rampant corruptions .

Regional Inequality

The regional dimensions of inequality are significant in a country as large as China. China displays enormous spatial disparities in economic activities, natural resource endowments, local market institutions, local government policies and other determinants of income levels and economic growth

income inequality between inland and coastal regions grew rapidly .

policies;

government adopted preferential policies for the coastal regions, for example by establishing export proces- sing zones along the coastal regions. This potentially increased income inequality between regions.

The prevalence of corruption;

likely influences both underlying inequality and measured inequality, since ‘grey income’ (for example, the collection by some officials of huge amounts of money at the weddings of their children and relatives) is likely to be both unequally distributed and underreported.

The Urban-rural Income Gap ;

Industrial productivity is typically much higher than rural productivity because industrial sectors are increasing return activities. This explains why urban incomes are above rural in many countries.