Financial Development, Urbanization, and Urban-Rural Income Disparity: Evidence Based on Chinese Provincial Data

Abstract

China's economic development has maintained a rapid growth trend since 1978, but the problem of imbalanced income distribution between urban and rural residents also has been increasingly aggravated. This paper discusses the relationship between financial development and urban-rural income disparity and examines the impact of urbanization on the relationship between financial development and urban-rural income disparity. Then this paper selects the provincial panel data of 28 provinces in China from 1978 to 2014, using GMM dynamic model and fixed effect panel model, respectively, to do the empirical test. The results show that: 1) the imbalance of urban and rural financial resources is exacerbated by the financial threshold effect, leading to the fact that the financial development-measured by scale, efficiency and structure, respectively, expand the urban-rural income gap. 2) The developing urbanization will widen the urban-rural income gap. However, as the urbanization and mainly the urbanization of land is rapid in China, the expansion effect of the increasing financial development level on the income gap between urban and rural residents in China will be weakened with the acceleration of urbanization based on the financial threshold effect. It provides empirical support for the financial reform and for the assumption that urbanization development reduces the income gap between urban and rural areas.