Inclusive growth dilemma: Weighing the pros and cons of land market reform

Abstract

The policy reform-induced tradeoff between efficiency and equality is a critical concern in promoting socially inclusive growth. However, there is limited evidence showing that whether a reform in enhancing the property right of a fundamental asset – land suffers or escapes from this tradeoff. We examine this question by evaluating the benefits and the drawbacks of a rural land market reform on income growth and income inequality. We employ a difference-in-difference method using a large-scale and long-term panel data from 1993 to 2014, covering 20,000 farmers in China to examine the impacts of the Rural Land Contracting Law (RLCL), which officially relaxed the restriction on land rental activities, initiated in 2003. Results show that the reform improved overall income by promoting agricultural land aggregation and farmers' non-farm activities, leading to a heterogeneous restructuring of income sources of farmers with different comparative advantages in farming or nonfarm works. Additionally, the reform widened rural-urban income gaps by stimulating productive young labors to conduct rural to urban short-distance migration. Third, the reform increased rural income inequality, which is mostly contributed by the enlarged disparity in farm incomes for farmers staying in villages. This study contributes to literature by revealing a property right improvement reform can exacerbate income inequality. Policymakers need to carefully weigh the pros and cons of agricultural land rights reforms and provide countermeasures to address threats to equity.