INCOME DISTRIBUTION AND ECONOMIC DEVELOPMENT : AN EMPIRICAL STUDY OF CHINA IN THE POST-REFORM PERIOD

Abstract

In the recent revival of growth theory, attention on the relationship between income inequality and economic development has shifted somewhat from examining the impact of growth on income distribution to the investigation of the effects of income inequality on growth. Most efforts in this respect, however, are still left at the level of theoretical exploration and international cross-section studies. There is no doubt that case studies of individual countries are valuable for contributing to the understanding of the impact of income inequality on growth. This thesis is based on a model linking income distribution and development for analysing the effects of income inequality on productivity and gross output growth in China. The model makes use of the efficiency-wage hypothesis and the Cobb Douglas production function. Estimation is based on provincial data. After a detailed literature review in Chapter 2, Chapter 3 traces the changes in income inequality and economic growth in China. A striking feature of the Chinese economy in the past 18 years has been the coexistence of rapid growth and increased inequality. The effects of the post-1978 reforms on stimulating economic growth and increasing the levels of inequality have been studied in the Chapter. In Chapters 4 and 5, a model relating income distribution and economic growth is tested on the basis of two sets of comprehensive provincial data for urban areas for 1986 and rural areas for 1988. In the rural areas, income distribution has similar effects on the growth rates of productivity and gross output of agriculture and entire rural economy: the estimated relationship has an inverted-U shape. In the urban areas, income distribution presents a statistically significant impact on the growth rates of output and productivity for state-owned and publicly owned industries. The estimated relationship in this case also displays an inverted-U shape. Two factors have accounted for the explanation of the inverted U shape in rural China (Chapter 6). The reform of rural ownership is the main explanation of the positive effect of inequality on growth which is the first phase of the inverted U. The incomplete property rights system plus the development of rural non-agricultural activities have produced a negative effect of inequality on rural growth. In urban areas, in the public enterprises, some reform measures such as extended autonomy and widening pay structure have an immediately positive effect on growth rates of productivity and gross output. Defects in the reform, fundamentally relating to the ownership reform, coupled with irrational widening of income levels and the distorting incentive mechanism, produced a series of side effects harmful to the growth of urban industry in the subsequent phase. Most of the contemporary theories on income distribution and economic growth generally ignore the short-term effect of inequality on growth through the incentive effect. China's experience reminds that income inequality may have some degree of positive effects in some stages of developing countries but not a uniformly positive effect at all times.