Interaction Of Economic Development And Income Inequality

Economic growth and income distribution are two of the major subjects in economic research. World economic experience shows that growth is not irrelevant to income distribution. China has achieved rapid economic growth during the past two decades since economic reform begins in 1979, however, the income inequality markedly increases during the same period. Therefore, it is very important to study the relationship between distribution and growth. This dissertation reviews the development of modern economic theory on the relationship between the two subjects, and combines the theory with Chinese economic reality.As for the long term orbit of income inequality with economic development, the dissertation mainly focuses on the Kuznets curve. The dissertation will introduce four famous theoretical models for Kuznets hypothesis: Lewis model, Fields model, Robinson model, and last but not the least, Anand-Kanbur model. These models share the same theoretical framework of dual economy, and prove the Kuznets hypothesis under certain assumptions. The dissertation also reviews the empirical literature. Although it has been supported by some empirical analysis (mostly the cross-country analysis), the debates have never end, and will not end in the near future.As for the effect of income inequality on growth, the dissertation mainly focuses on the mechanism of. income inequality affects the growth. These mechanisms include the saving-investment mechanism, credit constraint mechanism, market size mechanism, and political economy mechanism. The saving-investment mechanism shows that inequality is helpful for increasing saving rate which is the power source of growth by Harrod-Dormar model. The credit constraint mechanism shows inequality is harmful for accumulation of human capital which is the engine of economic growth by endogenous model. The market size mechanism shows that inequality is harmful for the market expansion of domestic product which plays a key role in the process of industrialization. The political economy mechanism shows that inequality have strong effect on the preference of median voters who determine the government policy which have different consequence on economic growth. All the mechanisms mentioned above will be reviewed in the dissertation as well as the empirical literature.After the review of the modern theory on the interaction between inequality and growth, the dissertation will combine the theory with the Chinese economic reality. The kuzents Inverted-U curve will be tested using time-series data of both urban sector and rural sector of China; and the result seems to provide little empirical support for it. Two mechanism mentioned above, saving-investment mechanism and market size mechanism, will also be tested by two-step analysis. The results suggest that the former gets little support while the latter gets some (especially with consumption as its median variable). Some unusual phenomenon involving the different performances of three inequality coefficients will also be discussed in the dissertation, inducing a new way looking at the old issue.