This paper reviews the theory and application of decomposition techniques in the context of spatial inequality. It establishes some new theoretical results with potentially wide applicability, and examines empirical evidence drawn from a large number of countries.

A considerable literature exists on the measurement of income inequality in China and its increasing trend. Much less is known, however, about the driving forces of this trend and their quantitative contributions. Conventional decompositions, by factor components or by population subgroups, only provide limited information on the determinants of income inequality. This paper represents an early attempt to apply the regression-based decomposition framework to the study of inequality accounting in rural China, using household level data. It is found that geography has been the dominant factor but is becoming less important in explaining total inequality. Capital input emerges as a most significant determinant of income inequality. Farming structure is more important than labour and other inputs in contributing to income inequality across households.

China's recent accession to the WTO is expected to accelerate its integration into the world economy, which aggravates concerns over the impact of globalization on the already rising inter-regional income inequality in China. This paper discusses China's globalization process and estimates an income generating function, incorporating trade and FDI variables. It then applies the newly developed Shapley value decomposition technique to quantify the contributions of globalization, along with other variables, to regional inequality. It is found that (a) globalization constitutes a positive and substantial share of regional inequality and the share rises over time; (b) domestic capital, however, emerges as the largest contributor to regional inequality; (c) economic reform characterized by privatization exerts an increasingly significant impact on regional inequality; and (d) the relative contributions of education, location, urbanization and dependency ratio to regional inequality have been declining.

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This paper focuses on methodological and empirical issues in analyzing regional poverty and inequality trends in China. It provides a time profile of China's regional inequality, outlines the latest development in inequality decomposition techniques, introduces six papers in this special issue of the Review , and finally offers suggestions for future research. Copyright � 2007 The Author; Journal compilation � International Association for Research in Income and Wealth 2007.