Abundant Labour and Income inequality: Case Studies of China and India

This thesis studies populous countries as China and India which have had very high GDP growth rates in the last two decades but are confronted with very large populations that have to be economically activated. Moreover, in these countries there is a growing trade-off between economic growth and income inequality. We use China and India as case studies and first examine the extent of inequality in these countries. Thereafter, as the remedy against growing inequality, we focus on absorption of the pool of surplus labour in agriculture by expansion of the rural non-farm sector. Declining employment elasticities show that absorption by the urban, modern sector is not feasible. Emphasis lies therefore on the dualism that characterize the economic system of large labour-abundant developing countries: the coexistence of a large modern firm-led sector and a large traditional household sector, which differ heavily in mode of production and income generation. Agents of one setting do not easily move to the other setting, due to certain barriers of which kinship- and village-based ties are most important. We analyze the typical features of rural China and India and present a growth model that shows the persistence of dualism in the coming decades: firm settings will not easily dominate the traditional household settings.