Download Trade Liberalization Impacts on Disparity of Income Distribution in Rural China

Trade Liberalization Impacts on Disparity of Income Distribution in
Rural China
LUO Dan Cheng1, 2, ZHANG Guang Sheng1
1. School of Economy and Trade, Shenyang Agriculture University, P.R. China, 110161
2. School of Economy, Shenyang University of Technology, P.R. China, 110023
Abstract The trade liberalization is the reflection of the economic globalization. Basing on the
international trade theory, this article elaborates the conduction mechanism of the impact of the trade
liberalization on the Chinese countryside income disparity, and analyzes the impact of the trade
liberalization on the Chinese countryside income disparity from the empirical perspective. Using
Chinese inter-provincial panel data from 1988 to 2005, the article analyzes the influence of trade
liberalization on countryside inhabitant income inequality in China. Finally, According to Chinese
reality, the article carries on the explanation to the result and puts forward the relative suggestion.
Key words Trade liberalization, Chinese countryside, Income disparity, Panel data, Gini coefficient
1 Introduction
The trade liberalization is still the irreversible tendency of the world economic development. To a
country, the trade liberalization not only impels the whole economical welfare level of this country, but
also influences this country’s domestic income distribution and disparity. According to the
Heckscher-Ohlin model as well as the Stolper-Samuelson theory, because the production elements used
by the expanded department will obtain more incomes, and the profit of the contracted department will
be reduced, the income disparity will change.
Since the reform and opening policy, Chinese economy has developed rapidly. In order to comply
with the world economics globalization, Chinese government gradually carries out the trade
liberalization policy. With the trade liberalization speeding up, the problem of income disparity also
comes out. According to statement of State Council R&D center, Gini coefficient of Chinese inhabitant
income at present has surpassed 0.45. At the same time, the opening of Chinese agriculture also speeds
up. The trade liberalization can promote the agricultural product trade growth, impel the change of
agricultural product foreign trade structure and affect farmer's non-agricultural employment. So, how
these factors influence the countryside income distribution and disparity, which is extremely worth
studying?
Our countryside inhabitant income disparity experienced the process which is from expansion to
reduction and from reduction to expansion again. Since 1978, countryside inhabitant income disparity
has expanded year by year, in 1995, and Gini coefficient expanded from 0.21 to 0.34, in 1996 Gini
coefficient dropped to 0.32, in 2004 approached 0.40. Some scholars believed, Gini coefficient of the
Chinese countryside inhabitant income disparity has surpassed the international recognized warning line,
achieved 0.4296. Certainly, there are many factors which affect the countryside inhabitant income
disparity. This topic carries on the comprehensive and regional analysis of the impact of the trade
liberalization on the countryside inhabitant income disparity. China has already become a member of
WTO, how to use our comparative advantage, how to enhance the agricultural international competition
strength and how to make more countryside inhabitant obtain benefits from the trade liberalization, the
resolution of these problems profoundly will make us know the inherent laws of the economic
phenomena and make the reasonable strategy to our agricultural economy development.
2 Mechanism analysis of the impact of the trade liberalization on the countryside
inhabitant income disparity
Firstly, the trade liberalization promotes the growth of the agricultural product trade and impels
the reduction of the countryside income disparity. Although during the period of reform, the proportion
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of the agricultural product trade amount accounting for foreign trade total amount is unceasingly
dropping, and agricultural product trade total quantity actually is rising. For example, food and the feed
import rose from 2.9 billion dollars in 1980 to 10.5 billion in 2005, the corresponding product export
increased from 3 billion dollars to nearly 17.3 billion. The agricultural product trade expansion raises
farmer's overall income level, which is advantageous to the reduction of countryside income disparity.
Secondly, the trade liberalization reduced the nominal protection ratio of agricultural product and
has the significant influence to the countryside income disparity. China has reduced the trade protective
measures largely, and the average customs tariff dropped from 52.3% to 10.4% in 2004. Moreover, with
China taking part in WTO, the nominal protection ratio further dropped, which causes the domestic
market price to close up to the international price, eliminates the domestic price distortion, optimizes
resources disposition and is advantageous to reduction of the countryside income disparity. But
simultaneously it also reduces the domestic product protection and increases its competition pressure.
Thirdly, the trade liberalization impels structure change of the agricultural product trade and has
significant influence to the farmer’s welfare. On one hand, it increases income of the labor-intensive
agricultural producers; On the other hand, it decreases the income of the land-intensive producers. It
causes disparity between the different areas. The farmers in coastal area effectively who produce the
domestic animal and gardening products which have comparative advantage, thus the net export amount
is also higher. But the inland farmers who plant the wheat, the soybean and the cotton which have less
comparative advantage, thus the net export is Low. Therefore, comparing with the inland farmers, the
farmers in coastal areas receive more benefits through the trade liberalization policy.
Fourthly, the trade liberalization causes the import custom tax of many industrial commodities to
continually drop, and the domestic price of imported products and the nominal protection ratio will be
reduced, which will affect the import-export trade of the general township enterprises. This will cause
the township enterprises to increase the import and have negative effect to the countryside income
disparity, but it will possibly promote the production and the exportation of the rural labor-intensive
enterprises, thus it will have the positive effect to the countryside income disparity.
Fifthly, trade liberalization caused free flows of elements such as the labor force and capital, which
optimizes the resources allocation, affects the countryside inhabitant's income structure and the
countryside inhabitant's income disparity. The family’s managing income is the main part income which
the Chinese countryside inhabitants receive. But with the rural market economic structure renovation
deepening, the countryside inhabitants have obtained more income from the other ways. The family’s
managing income proportion has dropped from 83% to 56.67% in 2005. At the same time, farmer's
wages income is raising year by year, from 1990 to 2005, both absolute and relative value of wage
assumes the trend of escalation, its proportion achieved 36.08% in 2005. This meant the countryside
income disparity has close relation with wages disparity.
3 The empirical analysis of the impact of trade liberalization on the countryside
inhabitant income disparity
3.1 Model and data
The content above analyzed the influence mechanism of the trade liberalization to the Chinese
countryside inhabitant income disparity from theory perspective. In order to make a more accurate
judgment, we have to carry on a more precise estimate through econometrics. This article uses T (the
ratio of import and export volume to GDP) to express the degree of the trade liberalization, dependent
variable of the countryside inhabitant income disparity(Y) is expressed by the standard deviation.
Besides the trade liberalization index, independent variables include the controlled variables as follows:
(1) the production amount of per person (PGDP) and its square term (PGDP2), which is used to inspect
the impact of the economy growth on the countryside inhabitant income disparity; (2) the agricultural
output value of per person (RUA), which is used to inspect the impact of agriculture growth; (3) the
income distribution (INE), which is used to inspect the impact of income distribution. Here we use
urban-rural disparity (Lin Yifu, 1998) to substitutes it; (4) RSR reflects the countryside employment
structure, which accounts for the proportion of non-agriculture employed population in rural
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employment and expresses the influence of the non-agricultural employment to income disparity; (5) the
variable reflecting years of schooling of rural labor force: rural education level (EDU).Here we use the
proportion of labor force with high school or above in the village job holders to express this
variable;(6)RLOAN, the countryside credit amount per person, which represents the influence of the
rural finance development (eliminate the agricultural credit volume by the countryside total population).
Because of shortage of t data, we did not consider variables such as policy environment, geography and
natural environment.
In order to analyze the impact of trade liberalization on the Chinese countryside inhabitant income
disparity, the author uses the panel data model to establish the following regression equation:
1
Yit = α 0 + β 0 ⋅ Tit + β j ⋅ Cjit + Uit
㏑
（）
∑ ∑
j =1
i
The trade liberalization possibly directly affects the countryside inhabitant income disparity, also
possibly indirectly affects the countryside inhabitant income disparity. This article has joined the
interaction term ( T • X ), which attempts to inspect whether the trade liberalization affects countryside
inhabitant income disparity through total agricultural output value and rural employment structure.
Therefore, this article establishes the second equation:
2
Yit = λ + γ ⋅ Xit ⋅ Tit + αj ⋅ Cjit + Uit
㏑
（）
∑ ∑
j =1
i
In the equations, the time span is 1989-2005; i is the lateral section which expresses 31 provinces,
the municipality and the autonomous region; T represents 1989-2005; Yit is dependent variable which
represents the countryside inhabitant income disparity of the i province in the t year. Here farmers’
income uses the countryside expense price index to eliminate the inflation. The data source is from the
country committee of development and reform, the state statistical bureau and the national information
center.
3.2 regression result
The author has carried on the Hausman' S Specification Test; it indicated the data model is suitable
for the fixed-effect estimation way, its result is showed in Table 1.
Table 1 regression result
independent variable
(1)
(2)
(3)
T
0.268353
0.534224
0.82079
(2.34**)
(1.94***)
(2.4**)
PGDP
-42.4851
-48.5649
(-12.6*)
(PGDP)2
2.4811
(12.37*0
(10.24*)
(7.75*)
0.8594
0.67796
EDU
(2.47**)
INE
(4)
(5)
-42.5939
-3.2464
-3.9932
(-1.75*)
(-8.47*)
(-7.18*)
(-6.48*)
2.894129
2.47586
0.66199
1.636489
(2.58**)
(3.54*)
2.539934
(1.47)
2.20089
1.96078
2.618325
(2.63*)
(2.22**)
(3.21*)
(2.31**)
0.17575
0.113129
RLOAN
(2.92**)
RUA·T
RSR·T
(3.98*)
0.138952
-0.4893
(8.35*)
(-2.76*)
0.717601
708
(3.88*)
C
180.6276
200.178
163.95
-8.99239
43.33289
(12.12*)
(11.72*)
(9.26*)
(-3.83*)
(6.67*)
F-Stat
3.98
3.27
3.56
4.56
4.75
R-sq
0.7124
0.6415
0.689
0.6756
0.6221
obj
360
320
320
320
320
Note: 1. *, **, ***expresses 1%, 5%, 10% significance level respectively.
2. Data in the parenthesis is t-value of equation coefficients.
The result from the table shows the model estimation effect is better, F tests is also extremely
remarkable, moreover, the coefficient of independent variables and estimation value of the constant term
are also remarkable in 1%-10% significance level, which indicated the equation has rationality.
According to the estimation equation above, this article analyzed the regression result of the model
further:
(1) The impact of the trade liberalization on the countryside inhabitant income disparity
From the result, the coefficient passes the T tests in each equation, which indicated the economy
opening displays the extremely important influence to the Chinese countryside inhabitant income
disparity. The result shows, the foreign trade dependence degree enhances 1%, which could cause the
Chinese countryside inhabitant income disparity to expand 2.63%. In the model (2),(3), after joining
variables reflecting human capital and the economic development of various provinces, the impact of
the trade liberalization weakened, but it still expanded the countryside inhabitant income disparity.
(2) Impact of the rural human capital and finance development on rural income disparity
The result indicates that, the education level of the countryside inhabitant expanded Chinese
countryside inhabitant income disparity, and the coefficient in model (1) is 0.8594, which indicates with
maintaining other factors and strengthening human capital investment in countryside that can expand the
countryside inhabitant income disparity. Countryside credit per person increases 1%, it can cause the
countryside inhabitant income disparity to expand 0.1131%.
(3) Impact of economical growth and income distribution on rural income disparity
The result shows, the estimation coefficient of PGDP is remarkably negative, which shows rural
income disparity can obviously drop with the growth of GDP per person, but the estimation coefficient
of PGDP2 shows, after the certain point which GDP per capita reaches, the countryside inhabitant
income disparity is able to reduce. Estimation coefficient of INE is remarkably positive, which indicates
the urban-rural income disparity increases countryside inhabitant income disparity.
(4) The indirect impact of trade liberalization on the countryside inhabitant income disparity
From the coefficient of the estimation interaction term, the trade liberalization expanded the rural
income disparity through increasing agricultural output value per person, and reduce the rural income
disparity through increasing population of the countryside non-agriculture employment, namely the
non-agriculture employment increased 1%, which could cause the countryside inhabitant income
disparity to reduce 0.4895.
4 Conclusion
From the analysis above, there are many factors affecting Chinese rural income disparity, and the
trade liberalization is only one of important factors. The author believed that, China must speed up the
pace of reform and take the corresponding measure:
(1) Establish open trade and foreign capital policy, further encourage the beneficial departments
(areas) to lead undeveloped departments (areas) and gradually cause undeveloped areas to enjoy the
advantage which brought by the trade open.
(2) Pay attention to the enhancement of the countryside human capital, the slowness enhancement
of the countryside human capital is intrinsic reason which expands rural income disparity. The
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government should promote comprehensive enhancement of rural labor force quality through enlarging
countryside investment, promoting skill training, implementing countryside “ talent project” and so on.
(3) Encourage labor force flow, in particular, encourage rural labor force to flow to the city. Now,
our country still has the labor force flow barrier, which has limited beneficial diffusion of globalization.
According to the economic development, we should gradually eliminate the labor force flow barrier.
(4) Establish reasonable fiscal expenditure policy in order to reduce the countryside inhabitant
income disparity. The practice proved that, Chinese fiscal expenditure policy in the past effectively limit
the disparity.
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The author can be contacted from e-mail : [email protected]
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