Essays On Income Inequality, Human Capital And Economic Growth In China

This thesis consists of three essays on income inequality, human capital, and economic growth with focus on two issues:the relationship between income inequality and economic growth in post-reform China; the channels through which human capital affects the economic development of China.First, this thesis aims to study the long-run relationship between growth and inequality in China. By employing a panel of 28 provinces over a study period of 1984 to 2010 and different measures of income inequality, we find that inequality has a robust positive effect on growth. Our estimation results suggest that the economic growth of China in the post-reform period is mainly driven by physical capital accumulation and that human capital has an ambiguous role in this growth process. Furthermore, private physical capital investment plays a key role in the growth of China and the contribution of public physical capital investment is negligible.Second, we empirically investigate the relationship between income inequality and economic growth and the channels in which such a correlation arises in post-reform China. By using the panel data at the provincial level of China from 1990 to 2010, we find that economic growth and inequality are positively correlated after controlling for the standard determinant variables of growth. To understand the channels that give rise to this correlation, we examine the growth mechanisms as outlined in the unified growth theory (Golar and Moav,2004). According to this theory, the first stage of economic growth is driven by physical capital accumulation; the second stage is mainly driven by human capital. Our estimation results from the panel data models and the two-stage least square (2SLS) method and the system generalized method of moments (GMM) show that the positive relationship between inequality and growth in post-reform China is largely caused by the accumulation of physical capital and not human capital. Furthermore, inequality negatively affects growth via the human capital channel. These findings also suggest that the performance of the Chinese economy in the post-reform era is consistent with the early stage of modern growth mentioned in unified growth theory, whereby high investment and physical capital accumulation increases both income inequality and economic growth.Third, we empirical study the growth channels of human capital tracing back to the "Lucas approach" and the "Nelson and Phelps approach". Using panel data analysis, we find evidence that human capital affects economic growth primarily via its effect on total factor productivity; instead of via its role as an input factor in production function. The results of this study further indicate that both basic and advanced human capital influences growth simultaneously but in different ways. Specifically, comparable with physical capital, basic human capital directly augments production as an input factor. By contrast, advanced human capital increases growth by raising the rate of technology progress, because, presumably, advanced human capital is productive in bringing innovation and technological adaptation. The results are robust even if different measures of human capital are used. We also find evidence that supports the capital-skill complementarity hypothesis, thus indicating that human capital can significantly attract physical capital investment and indirectly promote the growth process by the complementarity between physical and human capital. In addition, the significant role of physical capital in promoting growth and the positive influence of income inequality on growth which are discussed in Chapter 2 are again confirmed in Chapter 4.