Income Distribution, Market Size And Industrialization

Income distribution has concerned every nation and its people for almost one hundred year. Especially since 1950s, the relation between income distribution and economic growth has become a topic subject of research within the academic circle. With the development of the new growth theory, economists have made intensive studies on the relation between income distribution and economic growth, giving their concern for the impacts of income distribution on the economic growth.Murphy, Shlefer & Vishny(1989b) worked that how demands patterns under inequality affect the process of industrialization. Due to different demands patterns for goods, the degree on the income equality would affect the market size of manufactures, therefore affect the development of industrialization.Murphy, Shlefer & Vishny's study presents us a new approach to analyze the effect of income distribution on the economic growth. In addition, from the perspective of the market demands of industrialized products, Murphy et.al. proposed the theory of the development of industrialization which not only supplemented the traditional theories in this field, but also became an important guideline for the developing countries on their sustainable development of industrialization and industrial structure upgrading.With 30 years of economic reform and opening-up, China's economy has maintained rapid growth. However, the economic growth is accompanied by the increasing income gap, which gets scholars great concerns. Consequently, literatures devoted to issues on economic growth and income distribution have been increasing.MSV theory could provide a strong explanation regarding how China's income distribution affects its economic growth. China is in the process of developing its industrialization and accelerating the urbanization and its domestic economy is transforming from the initial economy of shortage to the current excess economy, thus causing the insufficient effective demand. On one hand, domestic demand is the foundation of the economic sustainable development, and therefore, to propel domestic demand is the focus of the current economic policy. On the other hand, the increase of domestic demand depends on the improvement of people's income level and income distribution. Eventually, how to adjust the income distribution should be the main content discussed in the policy of expanding the domestic demand, and a key factor promoting further development of our economy.Based on the China's rural and urban time series data as well as major provincial cross-sectional data and panel data, we give an empirical study to test MSV theory. Our finding supports MSV theory on how income distribution affects the development of industrialization.Via empirical studies on the panel data, we find that with the development of China's economy and the improvement of people's income level, the impact of income inequality on the consumption of the industrialized products and the market size will be negative both rural and urban areas in China.First, regarding the major industrialized products, like durable consumer goods, the degree of equality on income distribution can directly affect the market size of consumption in urban areas. This is especially true for the basic consumer durable good which conforms to MSV theory statement of "since the middle class are the natural consumer of manufactured goods".Second, income inequality would be positively influence the market size of the newly industrialized products or upscale consumer durables, which shows that the consumption of innovative products may need the income disparity to some degree.Finally, with the comparison of the empirical results of rural and urban areas, we conclude that the rural income inequality decreases the market size of the industrialized products, but the income divergence to the urban areas also. The main reason is that compared with urban income level, the rural income is still very low, and its consumption of the industrialized products is still limited by income constraint. Consequently, how to reduce the income disparity between rural and urban areas also deserves our consideration.