In China, a rising tide lifts all boats

At least that's the new finding from PREM in a paper on Rising Income Inequality in China. Coauthors Xubei Luo and Nong Zhu do a lot of number crunching using the China Economic, Population, Nutrition and Health Survey and find that while inequality has risen rapidly in China, strong growth has meant that all income groups have seen pretty substantial economic gains. Figure 1 provides a pretty clear picture of the rise in inequality as measured by the Gini coefficient:

As the authors explain in the introduction:

...widening income inequality in China is not the result of stagnant income growth in certain segments of society or regions - all sub-national areas, including lagging inland rural areas, and the entire population, including the less affluent, has experienced gains in average income - but rather the consequence of unusually high and sustained growth in coastal and urban areas.

And later:

...the overwhelming growth effect on poverty reduction is irrefutable - poverty headcount reduced significantly throughout the country, in rural as well as in urban areas, and in coastal provinces and inland provinces.

But Luo and Zhu find something remarkable happening alongside the growth in income inequality. As income inequality has grown in China, inequality in the distribution of human capital - read 'education' - has actually decreased.* And it is the increasing returns to education, enabled by market reforms, that drove much of China's rapid growth and increase in inequality. The result is that China will likely follow the much-disputed Kuznets Curve, which suggests that income inequality rises and then subsequently falls as a country's GDP grows.

So, to sum up - if you want to reduce poverty, open your economy to the world, but make sure to invest heavily in your education system.

* I corrected this sentence after realizing there was a key phrase missing. The original sentence read: "As income inequality has grown in China, the distribution of human capital - read 'education' - has actually decreased."