Abstract: This paper constructs and analyses a long run time series for regional inequality in China from the Communist Revolution to the present. There have been three peaks of inequality in the last fifty years, coinciding with the Great Famine of the late 1950s, the Cultural Revolution of the late 1960s and 1970s, and finally the period of openness and global integration in the late 1990s. Econometric analysis establishes that regional inequality is explained in the different phases by three key policy variables-he ratio of heavy industry to gross output value, the degree of decentralization, and the degree of openness.
Keywords: Inequality, polarization, decentralization, industrialization, openness, globalization, Chinese economy.
3. Inequality Change through the Phases of Chinese History: A Narrative
Following standard discussions, Communist Chinese history can be divided into several phases: 1949-56 (Revolution and Land Reform), 1957-61 (The Great Leap Forward and the Great Famine), 1962-65 (Post-Famine Recovery), 1966-78 (Cultural Revolution and Transition to Reform), 1979-84 (Rural Reform) and 1985-present (Post Rural Reform, Decentralization and Opening up to Trade and Foreign Direct Investment).
Table 1 presents economic indicators for China from 1952 to 2000. It includes three key indicators of economic policy—the share of heavy industry in gross value of total output (a measure of the bias against agriculture and China’s comparative advantage), the ratio of trade volume to total GDP (a measure of the degree of openness), and the ratio of local government expenditure to total government expenditure (a measure of decentralization). Figure 1 shows the evolution of real per capita GDP through the different phases identified above. Table 2 presents long-run inequality series, and Figure 2 graphs the evolution of Chinese regional inequality, as measured by the Gini and the GE（the generalized entropy index）indices, through the six phases of development identified above. The two indices move in close relation to each other, and match the different phases of Chinese development remarkably well.
Inequality was relatively low and steady in the early first years of communist rule when land reform was introduced. However, it rose precipitously during the Great Leap Forward and the Great Famine, reaching to a peak in 1960. It fell during the recovery from the Great Famine, reaching a trough in 1967. But the effects of the Cultural Revolution, which began in late 1966, started an increase in inequality which peaked in 1976. The transition from the Cultural Revolution to the period of rural reform saw a decline in inequality which gathered pace in the early 1980s and reached its trough in 1984. In the post rural reform period after 1984, when China decentralized, opened up and experienced an explosion of trade and foreign direct investment, inequality rose steadily and sharply right through to the end of our data series, in 2000.
Thus over the past fifty years inequality has peaked three times—during the Great Famine, at the end of the Cultural Revolution, and in the current period of global integration. In fact, the Gini coefficient of regional inequality in China in 2000 exceeds the peaks of inequality reached at the end of the Cultural Revolution in 1976, and at the Great Famine in 1960. Using the Gini coefficient, inequality in 2000 is about 16 percent higher than that in 1960.
Similarly, there are three major troughs in the overall evolution of inequality—in 1952, right at the beginning of the data series; in 1967, at the end of the recovery from the Great Famine and before the effects of the Cultural Revolution set in; and in 1984, at the end of the rural reform period and the start of the expansion based on global integration. Overall, inequality seems to have been low when policy was encouraging to agriculture and the rural sector generally and high when this sector was relatively neglected. These effects can be further investigated by decomposing overall inequality into sub-components and examining the evolution of these components.
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