Development Strategy, Urbanization and the Urban-Rural Income Gap in China

Analyzing the reasons for the lag in urbanization and the persistent widening of the urbanrural income gap in China from the viewpoint of government development strategy, we find that the government's strategy of encouraging the development of capital-intensive sectors has resulted in a relative fall in labor demand in urban areas and thus delayed the progress of urbanization, hampered the effective transfer of the rural population into urban areas and widened the urban-rural income gap. Using the technology choice index (TCI) to measure the degree to which government policy is biased towards capital- intensive sectors, this paper conducts empirical tests of a series of theoretical hypotheses on the basis of Chinese provincial panel data for 1978-2008. We further find that changes in China's urban-rural income gap conform to a U-curve pattern, i.e. in the course of economic development, the income gap first decreases then increases.