The Impact Of Formal And Informal Financial Development On Urban-rural Income Gap

Since the reform and opening up,the problem of inequality in income distribution in China is becoming more and more severe,especially the income gap between urban and rural residents,and it has been an important factors that hinder the health development.As China’s industrial structure upgrading and restructuring,financial as formulators of production funds,has become the core driving force of modern economy,determines the level and direction of economic development,but also indirectly controls the income levels of workers. At present, China’s financial system is not perfect.The funds formal financial institutions offers can not meet the needs of the market, and they willing to provide the funds to "rich".Although the informal financial institutions willing to provide service for the "poor", its development has been inhibited.Therefore,the correct understanding of the relationship between formal financial,inform financial and urban-rural income gap has an important significance to reform China’s financial system to improve rural income and the urban-rural income gap.In view of this, the paper study the impact of formal financial and informal financial development on the income gap between urban and rural residents by theoretical analysis and empirical testing.First, the paper defines the concept of formal and informal financial,then collates and summaries the relevant and literatures,study the impact of financial development on income gap between urban and rural residents by theoretical analysis.It provides a theoretical groundwork for subsequent empirical research.Second,we design a indicator to measure the level of formal and informal financial development,then use the data from 1978 to 2013 to study the impact of formal and inform financial development on urban-rural income gap by a VAR model.From the empirical result,we know it has a cointegration between urban-rural income gap and formal financial or inform financial,formal financial will expands urban-rural income gap,informal financial will narrow urban-rural income gap;the system will pull it back by the speed of 35.39% and 7.53% when their relationship deviates from equilibrium;in the short term formal financial development will expand the income gap between urban and informal financial development will reduce the income gap between urban and rural residents;The level of formal financial development is Granger cause of the income gap between urban and rural residents, and vice versa; the level of informal financial development is Granger cause of the income gap between urban and rural residents, but not vice versa;if we give a positive impact to formal financial,first urban-rural income gap will get larger,then it will get smaller and finally it will get larger again,on the whole it will get larger,if we give a positive impact to informal financial,urban-rural income gap will get smaller;within their system,the contribution amount of formal financial and inform financial are 15.79% and 2.63%.Through the analysis, we believe that the reason for this phenomenon is formal financial institutions always provide service for large or state-owned enterprises,formal financial will worsen the rural financing environment and new formal financial will give urban more chance to investment, informal financial institutions pay more attention to SMEs and rural economic organizations and it can prevent the outflow of rural funds.Finally,we give some recommendations from formal and informal financial development to improve China’s financial system and narrow the income gap between urban residents. First, improve rural financial services network, the government give incentives and innovative financing models to reverse the formal financial sector to non-continuous sloping trend; Second, we need distinguish informal financial and unlawful financial and the central government should relevant laws and regulations to recognize the legitimacy of informal finance as soon as possible. Then we should support and regulate the informal financial development by making lower barriers for financial institutions,improving informal financial regulatory regime and cracking down on against unlawful financial.