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

Abstract Analyzing the reasons for the lag in urbanization and the persistent widening of the urban- rural 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.