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Economic Growth and Regional Disparities

Progress and Disparities Shanghai's skyline is a symbol of the country's economic progress, but disparities persist
Photo by AFP

The income disparities in the People's Republic of China (PRC)—between coastal and inland regions and between urban and rural areas—have become almost as widely known as the rapidity of its economic growth. Naturally there has been a tendency to assume that one is the direct result of the other, that the PRC has been willing to sacrifice equality in pursuit of maximum growth. But as this study makes clear, the rate of increase in inequality has been hastened by policy decisions that did not necessarily speed up overall growth. Nor is it too late for counter-measures, as the nine essays by different academic experts show.

As the study notes, the early years of the reform era beginning in 1979 saw increased equality as rural incomes responded very rapidly to decentralization, which dramatically boosted productivity. Following this, the once-favored, well-protected heavy industry centers, especially in the northeast, suffered from their age and inefficiency while the new light industries of the southern coastal regions enjoyed two decades of rapid growth. Opening to the world damaged the first and gave abundant opportunities to the second.

Adding to Inequality

Indeed, the study shows the importance of total factor productivity (TFP) growth, driven by foreign investment and township enterprises, in coastal success. This is contrasted with the negative correlation between central government lending to provincial governments and their growth rates. This suggests that the state should be less involved in credit allocation.

However, the study also noted that although private-sector and market-driven priorities may be beneficial, associated rent-seeking by officials added significantly to inequality.

The study indicates that inland provinces followed a capital-intensive growth path, fueled by central funds, when they should have been focusing on their abundance of labor.

But nuances abound. One essay is careful to note the varying resource and geographical endowments of different regions, explaining why the decentralization process—while making provinces more responsible for themselves and thus reducing the redistributive role of the center—left deprived regions in difficulty. Weak social security systems for the poor contrasted with improving ones for the better-off. The implication is that coastal regions attracted capital because of their geography and proximity to ports and financial services, not because they had inherently better policies.

More to Be Said

The study suggests that the worst and most long-lasting aspects of inequality show up in the education system, itself the route to higher incomes on the individual as well as national level. The huge variations in attainment between provinces will be felt for years to come—even if recent central government attempts to help the disadvantaged regions progress.

Perhaps all these trends to inequality were implicit in Deng Xiaoping’s original policy and his dictum “Let some get rich first.” Nor do the authors suggest that the situation is likely to be reversed in the near future—unless perhaps political, social, or environmental pressures force the government to put equality before growth. But the book does help us understand what has happened and why, and hence how its negative aspects might best be ameliorated.

As the editor admits, there is still a lot more to be said on this subject and he points to directions for further research. From this reader’s perspective there are other omissions from the study. One is the scant attention paid to the hukou (household registration) system in limiting rural-urban migration and hence enabling higher urban wages while depriving migrants’ families of urban educational opportunities. A brief reference is made to India having similar disparities despite its greater freedom of movement, but this ignores the entirely different structure of inequality in India where regional social and economic variations are much greater than in the PRC.

A Comparative Examination

A related issue, not dealt with at all, is the lack of land-sale rights for peasants, which holds backs rural wealth accumulation and labor productivity while Communist Party officials get rich from urban land rights. One may wonder whether the hukou and land rights issues are too political to be addressed in this work.

Secondly, it would be useful to have a comparative examination of why the PRC has followed the path of inequality when its northeast Asian development precursors—such as Japan and the Republic of Korea—were, at the same stage, marked by low inequality (and remain so). While these are geographically compact economies, the PRC’s desire to emulate aspects of their corporate development suggests other comparisons may be in order.

Thirdly, there needs to be some investigation into environmental degradation and public health costs when assessing regional growth disparities. Future research may show that some of the GDP gains in the advanced regions will prove illusory as “green GDP” is again officially recognized as a legitimate measure of development.

But one cannot expect everything in one volume on a vast topic. •