Financial Development Affects The Urban-rural Income Gap Between Empirical Research

Based on the features of China's current financial development and the literature reviewed, this paper presents three effects that the development of the financial has impacted on the income gap between urban and rural areas: threshold effects, non-equilibrium effects and the effects of reducing poverty, and then makes a theoretical analysis on each mechanism of the three effects above.(1)Based on the Galor-Zeira model, in the theoretical model of this paper we make an assumption of increasing the collateral. As showed by the results of the model, the presumption of credit bound is rightly the key to the dynamic path transition of wealth, so it brings out the threshold effects of financial development. In this paper, we do not make a direct analysis of the financial threshold effects on the income gap between urban and rural areas under the premise of imperfections of the financial markets, but we can make derivations as follows: in developing countries, there exists typical dual structure between urban and rural areas, and the urban residents' overall level of income and inheritance will be better than those rural residents. So we have the reason to regard the poor and the rich in the parties of this paper as similar to urban communities and rural residents groups, thus, under the imperfections of the financial markets the financial threshold effects will have an impact on the rural-urban income gap. (2)As the development of finance, it means that the control of interest rate deregulates, and the efficiency of financial sector and the allocation of capital have improved. The three departments model that financial sector included shows: the financial non-equilibrium effects between urban and rural areas have impacts on the savings rate, productive capital investment yield, efficiency savings into investment, capital labor and equipment rate and its growth rate between the agricultural and industrial sectors. However, these factors also affect the comparison between the income gap between urban and rural areas. Thus, the financial non-equilibrium effects between urban and rural areas have impact on the income gap between urban and rural areas. In addition, in the process of economic restructuring, districts A has a comparative advantage because of the comparative industrial development advantages, and therefore non-state-owned industrial sector develops faster in the region. The development of the non-state-owned industrial sector will not only bring about the rise in urban income levels, but also create more job opportunities for rural residents and the corresponding income; But for A, B, no comparative advantage in agriculture with the industrial development of the comparative advantages, Non-state-owned industrial sector and therefore are not fully developed, and the performance of its urban-rural income gap is still mainly brought out between agricultural sector and state-owned industrial sector. Moreover, due to market forces playing a greater role, large capital flows from the region B to A, which will further widen the gap between the economic and financial area, so that it will further widen the income gap between urban and rural areas. Namely the financial development local non-balanced effect will expand Urban-rural income disparity. (3) There are two ways of the indirect channels and direct channels reducing poverty in the financial development, one is to promote economic growth which can reduce poverty levels, while Micro-finance is another effect of reducing poverty. Through the development of micro-credit, it can provide financial services for the urban and rural poor people, especially poor rural residents reducing their level of poverty. As the level of poverty declines, the income gap between urban and rural areas becomes lesser. Namely the financial development reducing the poverty effect will decrease Urban-rural income disparity.Then, we develop specific Empirical Analysis of the three major effects on the financial impact of the income gap between urban and rural areas. (1) using 1978-2004's and the inter-provincial panel data, we have made an empirical analysis of financial threshold effects and the income gap between urban and rural areas. The results showed that financial threshold effects are significantly expanding China's urban-rural income gap, independent of the characteristics of the economic structure. Meanwhile, the so-called Kuznets phenomenon does not exist. (2) selecting 1978-2004's economic and social factors such as the non-financial indicators, the registered unemployment rate in urban areas, open economic indicators index and the income gap between urban and rural areas, we can build a common measurement indicator analysis model which shows that the financial urban-rural non-equilibrium effects have significantly broadened the income gap between China's urban and rural areas. Meanwhile, using the years of 1978-2004, and sub-provincial panel data, we also made an empirical analysis of financial non-equilibrium effects and the income gap between urban and rural areas, and the results showed the financial non-equilibrium effects have significantly expanded China's urban-rural income gap.(3)based on China's 1978-2004 financial data, we draw a post-mortem from the financial indirect channels of reducing poverty, that is: financial development and rural finance development have separately decreased the Engel's coefficient and rural Engel coefficient. And it also indirectly bears that financial development and rural finance development have separately decreased the overall poverty level and rural poverty level. Meanwhile, based on micro-credit related data of China's 1994-2004, through analysis of time series and cross-section analysis it indicates: financial direct channels for reducing poverty works significantly. Thus, it has exactly proved the existence of the three effects financial impacts on the urban-rural income gap. In addition, as to the situation of China's current financial development not highly developed, the financial threshold effects and non-equilibrium effects are also occupying a dominant position, while the reducing poverty effects is still in a minority position. So the financial development, at this stage, is expanding the income gap between urban and rural areas.Finally, in the current financial environment, financial development has widened the income gap between the urban and rural areas. In the process of building a harmonious society, this gives us the implication of the policy that finance should mostly serve the poor and rural residents.