Income Distirbution’s Effects On Growth Since Reform And Opening

After the30years of reforming and opening, with the rapid growth of China’s economy,the income gap is gradually expanding. In2012China’s Gini coefficient has reached thestunning0.474, which is above the warning level. Income inequality is not only a source ofvarious social problems, but also an impediment of the sustainable economic development.Therefore, the unequal distribution of income attracts much concerning. Income distributionin China has a characteristic of complexity, which contains that the income gap between urbanand rural areas, among different industries or in different regions is huge, and that theproportions of government, corporations and residents are not balanced in national incomedistribution. In addition the most prominent problems are the urban-rural gap and regional gap.The income gap between urban and rural residents reached3.33to1in2009. For regional gap,the per capita disposable income of central and western regions accounted for only50%to60%of eastern regions.On the basis of understanding the characteristics of income inequality, this paper focuseson analyzing how income gap effects on economic growth in China since1978. Consumptionand investment directly impact on economic growth, whereas the income inequality makes anindirect effect through a kind of mediation. First, inequality affects economic growth byconsumption. All social members can be divided into7classes according to the income level.Based on Keynesian theory of consumption, it can be deduced, from the definition ofpropensity to consume, that the social average propensity to consume (APC) is summed up bymultiplications of each class’ propensity to consume and income proportion in total7classes.Under the assumption of the standstill gross income, the inequality means that the income oflow classes flows to the high classes if income structure changes. In this case, the socialaverage propensity to consume will decline. After removing the previous assumption, theconclusion still stands income distribution inequality to reduce the social average propensityto consume, and reduce consumption, have a negative impact on economic growth; Second,the inequality affect economic growth through investment. On the one hand, assuming thatonly the government, enterprises and residents in the national economy three departments, so the social investment rate depends on the three departments of the respective investment rateand the status of all departments in the national income distribution, because our countryresidents’ high savings rate and low investment rate, investment rate is high, the enterprise andthe government income inequality increase social investment rate, thus increasing the totalinvestment. Market resources, on the other hand, high income regions and industries, whilelow-income areas and industries do not have enough capital, so that income inequality causedpart of the region or industry investment, another part of the region or industry investment isinsufficient, distorted social investment structure, investment efficiency; Third, Thedistribution of income inequality through human capital accumulation, The accumulation ofhuman capital influence economic growth. In Galor and Moav (2004), the mathematicalmodels of intergenerational alternate (Overlapping generation model) within the frameworkof analysis, demonstrates that different three stages of economic development inequalitydifferent effects on economic growth, according to the situation in our country, moreperformance for the second stage, the characteristics of the social total output can be regardedas low-income increasing function of the next generation of transfer payments, and inequalityof income distribution to reduce low-income transfers, so conducive to the growth ofeconomy. Notice at the same time, the distribution of income inequality on consumption andinvestment, to form the low consumption, high investment growth mode in our country.Our economy is now at a critical moment. The elimination of distribution of incomeinequality is facing challenges, at the same time there are also opportunities. The challenge istwo reasons to the income gap: the urban and rural dual economic structure (dual-texture)and unbalanced development between various regions. Opportunity is that China needs to bechange the way of economic growth, and transformation of the mode of economic growth,whether it is "to make economic development rely more on domestic demand, especiallyconsumer demand pull" or rely on human capital, must be from the elimination of inequalityof income distribution.