Banking Structure And Urban-rural Income Distribution

The significance of finance is to optimize the allocation of resources:guiding funds flowing from the surplus side to the shortage side, preventing the capable participations from credit constraints. However, the economic fact since the reform and opening up is that with the rapid development of financial comes the expansion of income gap——especially the urban-rural income gap. Therefore, research on identifying the financial impact on income distribution as well as the feature and the channel of the impact is the key to study and solve the income gap problem.With the study of finance and economic growth deepens, economists found that not only the expansion of finance has a profound impact on economic growth, the transformation of the financial structure also plays a significant role. For example, the New Structural Economists believe that there is an optimal financial structure at every stage of economic development, adapting to the endowments and industrial structure. Due to the big banks’advantage of financing for capital-intensive and high-tech industrial big firms and the small banks’advantage of financing for labor-intensive small firms, therefore there is an optimal match from different scales of banks to different scales of firms. The rural employment concentrated in labor-intensive small firms, and therefore a reasonable extrapolation is:the financial structure have an impact on the urban-rural income distribution. Previous studies focused too much on the impact of financial development on income distribution, and too little on the impact of the financial structure——especially banking structure——on urban-rural income distribution. This paper attempts to make a preliminary study in this area.This paper first reviews the literature researches on financial structure and income distribution, and then gives a generalization of the Optimal Financial Structure Theory of the New Structural Economics. Through theoretical analysis and a brief two-sector model, we describe how financial structure——especially banking structure——affects firms with different scales and thus how it affects income distribution under the situation of labor market segmentation. To do the empirical analysis, this paper selects 1993-2004 province level panel data, using two-way fixed effects model. Robustness tests are carried out to deal with time fluctuations and regional differences; then, as well as to solve the potential endogenous problem by Instrumental variable method based on China’s gradual reform of banking. The analysis implies that the structure of the banking has a significant impact on the income gap between urban and rural areas; the proportion of small banks narrows the income gap; instrumental variable method does not change the conclusions; Expansion of small banks narrows the income gap indirectly through promoting the development of private firms and after controlling the level of private firms, expansion of the secondary industry and tertiary industry does not affect the income gap. Limited by the availability of panel data in recent years, this paper also uses the 1985-2012 time series data, through vector autoregression model and error correction equation to prove the robustness of the conclusion.At last, the paper offers suggestions to improve the income distribution through finance. First, the financial development has an impact on income distribution, but the financial deepening does not necessarily narrows the income gap. To improve the development of finance, we should not only focus on the financial deepening but also on the banking structure. Second, promoting the development of small banks narrows the income gap and eases the social conflict. We should firm the faith of adjusting the banking structure as it has both economic effects and social effects. Third, marketization is an important prerequisite for the development of small banks. Last, considering the labor mobility from west to east, adjusting the structure of the eastern banks has spillover effects. It not only solves the problem of local income gap, but also narrows the income gap of the whole country by improving the incomes of the migrant workers.