Regional Income Inequality in China: A Two-Stage Nested Inequality Decomposition Analysis

This study estimates regional income inequality in China over the 1995-1998 period using a Theil index based upon district-level GDP and population data, and conducts a two-stage nested inequality decomposition analysis to explore the factors of regional income inequality. It also performs a regression analysis to explore the possible determinants of within-province income inequality. The decomposition analysis shows that the within-province inequality component accounted for 62 % of overall regional income inequality in 1998, while the between-region component contributed 27 %. According to the regression analysis, cumulative per capita FDI and a dummy variable designating inland border provinces are found to be significant in explaining within-province inequality. It is also found that economic dualism, as denoted by a low ratio of agricultural labor productivity to labor productivity in non-agricultural sectors, is another significant factor contributing to within-province inequality.