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The income inequality, financial depth and economic growth nexus in China

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  • Sharon G. M. Koh
  • Grace H. Y. Lee
  • Eduard J. Bomhoff

Abstract

Income inequality has increased in China despite rapid economic growth. Income inequality could impinge on future development, leading to social tension or political instability. Our study investigates the short‐run and long‐run relationship between three important macroeconomic indicators—income inequality, economic growth and financial depth. We utilise a two‐step procedure of ARDL bounds and Granger causality for the analysis. The bounds test indicates the presence of a cointegrating relationship between income inequality, financial depth and economic growth in the long run. In the second step, we utilise the Granger causality approach. Results show a bidirectional causality between financial depth‐growth and a unidirectional causality between inequality‐growth in the short run. In the long run, results reveal that growth and financial depth determine Gini. Our findings provide support for the inequality‐widening effect due to economic growth and higher credit provided to the private sector. We find no evidence of inequality‐narrowing or income‐equalising effect in the long run for the period of study. It is possible that the government's inclusive growth policies which started less than a decade ago have not taken effect for us to capture the inverted U‐shape income equalising effect significantly.

Suggested Citation

  • Sharon G. M. Koh & Grace H. Y. Lee & Eduard J. Bomhoff, 2020. "The income inequality, financial depth and economic growth nexus in China," The World Economy, Wiley Blackwell, vol. 43(2), pages 412-427, February.
    • Handle: RePEc:bla:worlde:v:43:y:2020:i:2:p:412-427
    DOI: 10.1111/twec.12825
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    Cited by:

    1. Jian Yang & Chaohua Dong & Yongjin Chen, 2021. "Government’s Economic Performance Fosters Trust in Government in China: Assessing the Moderating Effect of Respect for Authority," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 154(2), pages 545-558, April.
    2. Abdul Rahim Ridzuan & Shahsuzan Zakaria & Bayu Arie Fianto & Nora Yusma Mohamed Yusoff & Nor Fatimah Che Sulaiman & Mohamad Idham Md Razak & Siswantini Siswantini & Arsiyanti Lestari, 2021. "Nexus between Financial Development and Income Inequality before Pandemic Covid-19: Does Financial Kuznets Curve Exist in Malaysia, Indonesia, Thailand and Philippines?," International Journal of Energy Economics and Policy, Econjournals, vol. 11(2), pages 260-271.
    3. Yahya, Farzan & Lee, Chien-Chiang, 2023. "Disentangling the asymmetric effect of financialization on the green output gap," Energy Economics, Elsevier, vol. 125(C).
    4. Murat Cetin & Harun Demir & Selin Saygin, 2021. "Financial Development, Technological Innovation and Income Inequality: Time Series Evidence from Turkey," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 156(1), pages 47-69, July.
    5. Koh, Sharon G. M. & Lee, Grace H. Y. & Siah, Audrey K. L., 2022. "The Resurgence of Income Inequality in Asia-Pacific: The Role of Trade Openness, Educational Attainment and Institutional Quality," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(3), pages 11-27.

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