Income Gap Between Government Intervention And The Quality Of Economic Growth

Income inequality is always linked to the concept of unfairness or unjustice, however, it also means much to the economic growth. From the perspective of modern economics, any macroeconomic phenomena are the collective product of the decision made by those individuals faced by constraints when the decision is made to maximize their own utility. As an important environmental constraints parameter, the change of income inequality will surely achieve the overall impact on economic performance by changing the individual's decision-making. However, until Kuznets (1955) raised the well-known inverted U-curve between the economic growth and income inequality, most economists mainly regard the issue of income disparity as a normative problem. While quite a long period of time since Kuznets (1955), people's understanding of the relevance between the income gap and economic growth merely keeps the one-way style that economic growth will impose influence on the income distribution. Until the macro-economic research methods turn from total function models of Keynesian-style to the micro-optimal decision-making models in the last century 80's, the research perspective changes significantly to the opposite direction. Since then, a lot of discussions focus on the effect of income inequality on the economic growth. Now, when we talk about growth, the income inequality has become an inevitable factor taken into consideration.However, it must be pointed out that in this wave of research in foreign countries, the speed of economic growth became the only measure of efficiency. For developed countries, which of course has its own rationality, because no matter how the engine of economic growth come from factor inputs or from the technological progress, it will eventually be reflected in the growth rate. From long-term perspective, the speed of economic growth and sustainability of economic growth can also be of one thing. For developing countries, directly linking the income gap to the economic growth speed may mislead our understanding of this issue. Because in specific period of time, the speed of economic growth and sustainability of economic growth may deviate from each other.For China, compared to the speed of economic growth, the sustainability of economic growth is clearly more important. In spite that the expansion of income inequality indeed stimulated many researches in this field, however, these researches mainly focused on the measurement of the gap level and the interpretation of the formation of the gap. Few research consider the efficiency meaning of the income gap, and only use empirical research methods to test the relation between the income gap and the speed of economic growth, almost no research pay attention to the theoretical analysis of the impact mechanisms and channels between macro-economic performance and the income inequality. Scarcity of the analysis of impact mechanisms between the sustainability of economic growth and the income inequality is much more serious. For these reasons, this paper, using the sustainability of economic growth as indicators for the efficiency, focuses on the theoretical analysis of the effect mechanisms between income gap and China's sustained economic growth. after theoretical analysis, an empirical test with a database from 1988 to 2001 will also be performed..the main efforts In this paper include:1. Defining the quality of economic growth from the perspective of the capacity of sustainability of economic growth, which is different from prior definition of the quality of economic growth.2. Based on the observation of the characteristics of China's realities, this paper originally structure a mathematical model to discuss the effect of income inequality on technological progress. Compared to those existed classical model, our model in this paper has two important distinctions. First, the model in this paper makes a clear distinction between the different kind of the income inequality classified by nature, and the effects of each kind on technological progress are analyzed respectively. Second, the existed classical model does not look upon the government as the actors with independent prefer, however, a series of studies on China's economic growth have shed light on that the fiscal decentralization and political institutions stimulate local government to intervene in the economy to a great extend. Based on this, our model include the analysis of government with independent preferences in order to analyze the effects of government's intervention.3. Using data between 1988 and 2001 to test the effect of the urban-rural income inequality on the technological progress, technical efficiency, total factor productivity and efficiency of economic growth mode.The main conclusions of this paper include:1. There may exist an inverted U-curve between institutional income inequality and the technological advances which is similar to the inverted U-curve depicting the relationship between economic growth and the income inequality. That is, in the early stages of economic development, the institutional income inequality is in favor of technological progress, but when the economic development reached a certain stage, the institutional income gap will hinder technological progress. This conclusion can be seen as a mechanism to support the Kuznets inverted U-curve.2. The effect of endowment income inequality on technological advances has two possibilities, depending on the condition of marginal labor cost. Different from the existing literature's argument that the tax will harm the enthusiasm of people to work and so will do harm to the economic growth, this paper's analysis shows that, sometimes, increasing taxes will stimulate work effort, thereby enhancing the macro-economic performance. 3. The demand effect mechanisms and the labor supply mechanisms are the two main channels through which the income inequality influences the path of technological progress. In an open economy, behind the change of domestic consume demand is often the decision-making change in labor supply. If we do not recognize this point, the government's intervention would be likely to play a negative role in accordance with the requirements of the demand regulation4. Government's intervention has changed the efficiency parameters of different industries, leading to a reallocation of resources in the inter-industry. Depending on the specific effect of government's intervention on different industries, expansion of the scale of short-term outputs maybe accompanied by a wide range of possibilities of the effects on the technological progress.5. The empirical results show that between 1988 and 2001, the income gap between urban and rural areas has promoted technical progress, but at the same time promoting a extensive economic growth model. During this period,the government's intervention undermines the advances in technology, but because of the efficiency of investment promotion as well as crowding-out effect, it is in favor of a intensive growth pattern.