The Effect Of Financial Development On Urban-rural Income Gap In China

Finance is the center of the whole national economy, which has permeated every part of economic system. Many national and international scholars have launched detailed analysis and discussions on the relations between financial growth and economic development. Most of them contend that a financial system with high efficient and thorough is beneficial to long-term economic development, which has been basically proved by a crowd of empirical analysis.Therefore, finance is the flow of value, also it is an important distribution mechanism. Financial system has an influence on the formation and allocative efficiency of capital in economy, while capital is one of essential productive factors. Thus, financial development exerts critical impact on distribution and redistribution of GNP through influencing the capital flow.There is a controversy among academia, which is the influence the financial development has on income distribution. Some tend to believe that financial development has a positive influence on income gap, since a highly-developed and free financial market could enrich approaches of credit and loan which make sure that the low-income have access to financing to invest and thus accumulate fortune. Consequently, financial institutions could narrow the income gap via providing financing for the low-income group. Nevertheless, others suppose that the low-income have low level of primary fortune, so there exists restrictions on credit and loan for them. As a result, they have not received the same opportunity to attain financing support. Meantime, along with the continuous development of finance, thus it will more likely give rise to the deterioration of income gap, as there occurs difference of beneficiaries between the high-income and the low-income.Starting from1980s till now, nearly thirty years reform, China financial development has enjoyed a great growth. However, our country’s financial development was motivated within economic transition and under strict control from our government, as a result, the rapid expansion of financial treasure is still accompanied by the imbalance among urban, rural areas and regions.Since the reform and opening up, our country’s economy has enjoyed a rapid development, and people’s income gap is increasingly expanding with economic development. Urban-rural income gap is a significant showing of China income gap. The increasing expansion of urban-rural income gap will not only not be beneficial to improvement of people’s welfare, but also trigger constrains for sustainable development of economy.Hereby, based on the specific conditions of China, this thesis tends to explore and analyze the relations between our national financial development and urban-rural income gap, which will be of great significance.According to background for topic selection and its significance, starting from reviewing literature materials concerning relations between financial development and income gap, through theoretical and empirical analysis, this thesis focuses mainly on analysis of the following issues:first, what the level of China financial development is; second, what the mechanism of action China financial development has on urban-rural income gap is; third, what on earth the influence China financial development has on urban-rural income gap is; fourth, what measures should be taken to bridge urban-rural income gap from financial perspective. Content and structure of this article are organized as follows:The first chapter:Introduction. It is composed by study background information of this thesis, significance and its sources of data and materials.The second chapter:Literature review. It discusses from theories and empirical analysis. Theoretical analysis mainly centers on conclusions of existing theories, while empirical analysis combs from national and international aspects. Based on the conclusion and comment on literature review, this chapter helps determine research contents and methods of this paper.The third chapter:current situation of national financial development. This chapter initially outlines its historical background, then describes current situation of national financial development from three perspectives respectively:overall levels, urban-rural differences and regional differences.The fourth chapter:analysis of influence financial development has on urban-rural income gap. This chapter firstly starts from the variation tendency of urban-rural income gap and summarizes its characteristics. Then, it combines national actual conditions to analyze mechanism of action which financial development has on urban-rural income gap through a micro perspective.The fifth chapter:empirical analysis. Combining with analysis from4chapters, this chapter makes empirical analysis via setting up panel data model, and uses GMM estimator to estimates this model. Meanwhile, considering our regional differences in development further, it introduces dummy variables to make analysis and comparisons between regions.The sixth chapter:conclusion and policy proposals.The main conclusions this article has arrived at lie in four aspects. First, there is a large sustainability in China urban-rural income gap, namely, it itself has a trend to expand, which reveals that present urban-rural income gap will be influenced by the previous gap. Second, the regression coefficient financial development to urban-rural income ratio is positive, it demonstrates that financial development is not beneficial to narrow urban-rural income gap. Third, economic development, opening up and government expenditure could effectively prevent urban-rural income gap. Fourth, the influence financial development has on urban-rural income gap is different from region to region. Among them, financial development has least negative influence on urban-rural income gap in China eastern areas, the middle area follows, while it presents the most in western areas.The innovative points of this article are as follows:first, based on combing the literature regarding financial development and urban-rural income gap, and dual economic structure of our country, it analyzes mechanism of action between this two from a micro perspective. Second, this article adopts provincial panel data, sets up dynamic model with a lag, and overcomes endogeneity via GMM estimator. Third, considering the imbalance of regional development, this article introduces dummy variables to seriously analyze and make comparisons between financial development and urban-rural income gap and in eastern, middle and western regions respectively.The shortage of this article consists in two aspects. First, owing to the limit of data, from the selection of variables, financial development index adopts financial interrelation ratios, which only reflect the "scale" of financial development, instead of covering "quality" of it. Second, due to the sample period of this article is from the year of1995to2011, which is only17years, which makes impossible to validate the inverted U-shape graph proposed by Goldsmith.