Since the beginning of industrialization, the interaction between economic growth and inequality has raised challenging questions to our societies. In the past few cades, inequality has been rising in almost all parts of the globe. Does economic development inevitably increase inequality? A study by SEM assistant professor, Xiyi Yang, and her coauthors find that China’s industrial clustering can promote economic growth and reduce income inequality simultaneously. This study, titled “Industrial Clustering, Growth and Inequality in China”, has been recently accepted by a leading economics journal, Journal of Economic Geography.
The economic reforms since late 1970s have transformed China from one of the poorest nations into a major power. The emergence of industrial clusters in numerous towns, mostly along China’s coastal areas, is among the most striking developments throughout the said reforms. However, along with China’s record-breaking growth was the rapid increase in inequality. China now has become one of the least equal economies in the world, a status that may threaten the country’s social stability and economic sustainability. How does industrial clusters interact with the economic growth and inequality in China?
The researchers first developed a density-based index (DBI) to capture the unique features of Chinese clusters under various institutional restrictions. Based on this index, using panel regressions for the 2,800 Chinese counties from 1998-2007, they find that regions with industrial clusters, particularly entrepreneurial clusters, grow significantly faster than others. More importantly, the presence of entrepreneurial clusters also substantially reduces local urban-rural income inequality, and this outcome is driven by the increased income of rural residents.
The mechanism for the reduced urban-rural inequality is that, because cluster-based production usually decomposes the production of a particular good into many small steps, the technical and capital barriers to entry can be significantly reduced within clusters, and hence rural residents can easily participate in the production and even become entrepreneurs. One thing to be noted is that the reduced entry barrier due to decomposition isn’t only applicable in manufacturing, but also exists in service and even high-tech industries. By decomposing their business process, some big data companies such as Samasource can also outsource manual work to Kenya and India to lift people there out of poverty. Hence related research on production process innovation not only has theoretical value, but also has important policy implications.
Figure 1: The income share of the top 10% individuals, 1980-2016
Figure 2： Decomposition and coordination of cashmere production in Puyuan Town