The Problem of Growth-Inequality Nexus：An Analysis based on the Case of China since Reform and Opening Up

The dissertation contributes to both development economics and the new institutional economics. It mainly concerns long-run economic analysis. We argued and showed that pure neoclassical models without considering institutional factors cannot correctly analyze the real economic development, esp. for a transitional economy. Meanwhile, we showed that more neoclassical analytical skills can be incorporated into institutional analysis. The marginal analysis, for example, is successfully adopted in this dissertation dealing with the concepts like transaction cost and rent which often appear in the new institutional economics. The combination of both analytical frames can generate more explaining power on the real economy. The dissertation discusses the relationship between economic growth and income/wealth distribution. Several views on the problem of growth-inequality nexus have been established: firstly, we confirmed that institutional arrangements are crucial for economic performance. A good institutional arrangement will benefit both economic growth and income/wealth distribution in the long run; secondly, we enhanced some of the former neoclassical viewpoints on wealth inequality evolution during growth, arguing that the crucial roles of rent distribution and more equal dissemination of education should be noted for achieving “common prosperity”; finally, we pointed out that inequality has a negative relationship with economic growth in the long run. To the opposite, equality takes a positive effect on sustainable growth, especially for a transitional economy experiencing the tertiarisation process. This dissertation is a comprehensive study on the growth-inequality nexus based on the economic performance of P. R. China since reform and opening up in 1979. Thus the dissertation is also a contribution to the understanding of the so-called “China’s Economic Miracle”. The dissertation challenges the prevalent optimistic perspective on China’s sustainable growth and provides counterarguments. The analysis also leads to suggestions for China’s future reform which will help the economy overcome the “middle-income trap” problem. The dissertation’s content is summarized as follows: in Chapter 1 we summarized the basic characteristics of economic growth and income/wealth inequality during this period of China as a background introduction of the study. Then we made an empirical research in Chapter 2 on explaining China’s income inequality since 1990s with institutional analysis, pointing out that the tertiarisation process plays a crucial role for both income/wealth distribution and sustainable economic growth. We argued that there are mainly three institutional arrangements in China blocking the process of tertiarisation: China’s political and cultural institutions which make this country a very high rent-seeking economy, the double-track economic system and the dual-sector economy dividing into rural and urban sectors. In Chapter 3 we built three models to deepen our analysis. In the 1st model we extended the Ramsey-Cass-Koopmans growth model to explain how inequality evolves with two representative agents representing “inside institution” (“tizhinei”) and “outside institution” (“tizhiwai”) economies in China. The 2nd model shows that the double-track economic system should be transferred into a single-track one in order to maximize the output. We finally established a generalized model and proved that in a rent-seeking economy excluding labor wage, when the rent distribution is more equal, the wealth distribution will be also more equal in the long run. We turned to build a new theoretical frame based on a newly defined “transaction cost” in Chapter 4 in order to present another angle to look at both the short-run and long-run economic size changes. We put forward the concept of “unit transaction cost” and explored its relationship with economic growth. The analysis in this chapter confirms and deepens the arguments of the new institutional economics on economic growth. In Chapter 5, we extended our analysis on rent-seeking space and discussed the effect of inequality on economic growth from the perspective of rent. Combining the arguments of Chapter 2, the negative long-run relationship between income/wealth inequality and economic growth is established. Finally, we discussed the conclusions and implications of the dissertation in Chapter 6. We argued that one doctrine of Marxism that the economic base determines the superstructure is strongly doubtful in the short run if we treat 30 years’ development as a short-run historical view.