Yang Zhou

Abstract

After initially reviewing the existing literature on the inequality-growth nexus, this thesis then conducts empirical studies to explore the spatial dynamics of China’s regional income inequality and economic growth, investigates the relationship between inequality and growth, and the influences of human and physical capital, to examine the theoretical mechanisms underlying the inequality-growth relationship. The findings from these studies can offer valuable insights for the policy makers in China. Using the latest data, the first study in the thesis explores the pattern and evolution of China’s regional inequality. In addition, the study depicts the spatial dynamics of the inequality, growth and the human and physical capital within the country, using provincial level data. The results indicate a declining trend in national income inequality in the period from 1980 to 2016, where intra-regional inequality outweighed inter-regional inequality as the main contributor to national inequality. The study also reflects the unbalanced inequality and growth across the provinces. By offering a comprehensive overview of the variables of interest, the study facilitates a better understanding of China’s complex and unique background of inequality and growth. The second study investigates the two-way causality between inequality and growth using the latest provincial-level data together with new empirical methods. It addresses the issues that appear in many previous studies, such as data incomparability, cross-country heterogeneity, sample selection issues and cross-sectional dependence. In particular, a panel vector error correction model (panel VECM) is adopted to estimate the impacts of inequality on growth, and vice versa; a factor that is largely overlooked in existing literature. The empirical results suggest that the long-term relationship between inequality and growth was positive during the period from 1990 to 2003 and negative from 2003 to 2017, and that physical capital plays a more important role in China’s economic growth than does human capital. The third study first examines the one-directional impacts of inequality on growth, using the panel autoregressive distributed lag model (panel ARDL model). Moreover, as most of the existing empirical studies fail to explore the theoretical mechanisms underlying the inequality-growth connection in China, this study fills the gap by examining the mechanisms through which inequality affects growth. The empirical results suggest that income inequality enhances economic growth in the long term, and supports the classical channel and credit market imperfections channel where inequality promotes growth through physical capital and harms growth through human capital.

Document Type

Thesis

Publication Date

2022-01-01

DOI

10.24382/1033

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