Financial Development and Urban-Rural Income Disparity in China

The relationship between fi nancial development and economic growth has received an increasing amount of attention and has induced a lively debate from economists. Most students of the subject believe in long run fi nancial system benefi ts, economic growth through mobilizing and pooling savings, diversifying investment risks, screening investment projects, facilitating exchange, monitoring managers and exerting corporate control, and so on. Empirical evidences also support the captioned arguments. (Goldsmith, 1969; McKinnon,1973; Shaw, 1969; Stiglitz, 1985; Mayer, 1990; King and Levine, 1993a, 1993b; Beck and Levine, 2002.) However, relatively few studies focus on the relationship between fi nancial development and income distribution. Greenwood and Jovanovic’s (1990) paper is the fi rst to explore the association among economic growth, fi nancial development and income distribution, where income distribution is treated as exogenous. A recent study by Clarke, Xu and Zou (2003) explores how fi nancial development will infl uence income distribution by using cross-country data. They fi nd fi nancial development robustly reduces the level of income inequality.