Regional disparities in China have evolved significantly since the 1950s across three dimensions: overall, rural-urban, and inland-coastal. China's development strategies and economic policies, such as the focus on heavy industry in the 1950s, rural reforms in the late 1970s, and the opening up of coastal regions in the 1980s have impacted the level and nature of these disparities over time. Decentralization has also played a role by tying local government revenues more closely to performance but reducing inter-regional transfers. More recent policies like the Go West strategy have aimed to reduce disparities but uneven fiscal burdens remain a challenge.

3. Infant Mortality Rate in 2005
Heilongjiang
Inner Mongolia
Jilin
Xinjiang
j g
Liaoning
Beijing
Tianjin
Gansu Shanxi
Ningxia Hebei
Qinghai Shaanxi Shandong
Jiangsu
Tibet Anhui
73/1000 Sichuan Hubei Shanghai
Zhejiang
Guizhou
Hunan Jiangxi 3/1000
Fujian
Infant Mortality Rate Yunnan
Guangxi Guangdong Taiwan
< 5.0 Hong Kong
5.1 - 10.0 Macau
10.1 15.0
10 1 - 15 0 a a
Hainan
15.1 - 30.0
> 30.0 Urban/Rural IMR = 2.2
Not Included
Inland/Coast IMR = 2.1

4. How have regional disparities in their different
dimensions evolved since the revolution?
Gini
40
35
30
25
20
15
Outcome (per capita consumption at the provincial level
10
In six decades) in three dimensions:
Overall
O ll
5 Rural-Urban (RU)
Inland-Coastal (IC)
0
1950 1960 1970 1980 1990 2000 2010

5. Rural-Urban and Inland-Coastal Inequality
q y
16 4
14
12 3
10
8 2 Rural-urban
Inland coast
Inland-coast
6
4 1
2
0 0
1950 1960 1970 1980 1990 2000 2010

6. Why No Convergence?
• I an ideal world, if assuming integrated factor
In id l ld i i t t df t
markets and full factor movement (no frictions),
market forces will equalize marginal returns to
factor inputs, leading to convergence across
regions and sectors.
g
• Development strategies and economic p
p g policies
matter to the observed spatial inequality.

7. Walk Through History:
g y
China’s Development Strategy
• Heavy industry-led development strategy in the
1950s
– Vi l d China’s comparative advantage at the time
Violated Chi ’ i d h i
that capital was scarce and labor was abundant.
– Formed Hukou (Household registration system) and
( g y )
create rural-urban gap
• B the late 1970s, Chi had experienced the
By h l 1970 China h d i d h
Great Famine and Cultural Revolution and its
economy was at the verge of collapse.

8. Rural Reform
• Abolished the inefficient collective farming
• Rural h
l household responsibility system –
h ld ibili
grant farmers land user rights and allow
themto make their own production
h k h i d i
decisions.

9. Rural-urban Disparity and HIDS
p y
Great Leap Forward/Great Famine
d/ i
60 16.0
Cultural Revolution 66-76
14.0
50
12.0
40
10.0
30 8.0
HID
ru
6.0
20
4.0
10
Rural reform 2.0
0 0.0
1950 1960 1970 1980 1990 2000 2010

10. Open U
O Up
• In the late 1970s, China set up 14 special
economic zones in the coast. Allow some people
(regions) to get rich first.
first
• Cheap labor and land + abundant capital from
overseas made the coastal area a growth engine in
the 1980s.

11. 2. Shanghai
1. Shenzhen
Page 11

12. Inland-Coastal Disparity and Openness
p y p
Planning era Reform era
80 3.5
70
3.0
60
2.5
50 Openness
2.0
40 Trade ti
T d ratio
1.5 Inland-coastal disparity
30
1.0
20
0.5
10
0 0.0
1950 1960 1970 1980 1990 2000 2010

13. Decentralization
Decentrali ation
• Expenditures tie more closely to revenue.
• Local government officials’ promotion is based on
their performance in economic growth and
revenue growth.
growth
• Horizontal inter-judiciary competition serves as a
commitment device for local governments to
create more favorable investment environment.

14. Regional Inequality and Decentralization
g q y
90 40.0
80 35.0
70
30.0
60
25.0
50
20.0 Decentralization
40 Gini
15.0
30
10.0
10 0
20
10 5.0
0 0.0
1950 1960 1970 1980 1990 2000 2010

15. Go West Strategy
• Started in 1999.
• Massive infrastructure investment in the west.
• Set up Chongqing as a province-level city,
enjoying the same status as Shanghai and Beijing .

16. Other Regional Strategies
• “Rising Central”
• “Reinvigorating Northeast”
• Setting up a new economic zone in Tianjin.

17. 4. Tianjin
3. Chongqing
2. Shanghai
1. Shenzhen
Page 17

18. New Socialism Countryside
• Abolished agricultural taxation
• Provided direct grain subsidies to farmers
• Waived tuitions of nine-year basic education in
vast rural areas
• Increased public investment in rural areas
• ……

19. Regional Inequality 1952-2007
g q y
Gini Stimulus packa
40
Go West
35
30
25
20 ?
15
New Countryside Movement &
10
Building Harmonious Society
5
0
1950 1960 1970 1980 1990 2000 2010

20. Conclusions
• Development strategies and economic policies
have affected the course of economic growth and
income distribution
distribution.
• Changes in regional inequality match the phases
of Chinese history remarkably well

21. The Limit of Decentralization
• When there is large regional variation,
decentralization may not work well.
• There is an increasing scale of economy due to the
fixed cost of administration.
• With the presence of increasing scale,
decentralization may force capital flow from poor
to rich regions.

22. Coastal Region: Race to the Top
• Conditions:
• Regions are similar;
• There is a mobile factor of capital
p
• Consequence:
• Less tax on capital but more on land
• Better investment environment
• MMany iinnovations at the l l l l
i h local level

23. Uneven Fiscal Burden
Zhang (2006)

24. Regressive Tax Rate in China
g
Zhang (2006)

25. Two spirals
• Tax burdens are extremely high in poor regions with
agriculture as the major means of production.
• Downward spiral: small tax base, more extraction
base
from limited agricultural surplus and nonfarm
activities, worsening investing environment, and
lowering public goods provision.
• They are low in developed regions initially with a large
nonfarm sector.
• Virtuous cycle: light tax burden for each enterprise,
y g p ,
more public inputs, better investing environment.

29. Per Capita GDP in 2008
Heilongjiang
Inner Mongolia
Jilin
Xinjiang
Liaoning
Beijing
Gansu Hebei
Ningxia Shanxi
Shandong
Qinghai
g Shaanxi
Henan Jiangsu
Tibet Anhui
Sichuan Hubei Shanghai
Zhejiang
Hunan Jiangxi
Guizhou
GDP Per Capita Fujian
(yuan) Yunnan
Guangxi Guangdong Taiwan
$10,000
Hong Kong
Macau
< 10000
10001 - 15000 $1,000
$1 000 Hainan
15001 - 20000
20001 - 40000 Urban/Rural income=3.3
> 40000
Not included Inland/Coast income=2.2

30. The Impact of Openness
• In a closed economy, regional comparative
advantage is mainly determined by agricultural
production conditions.
• When opening up, regional comparative advantage
is
i evaluated in a global context.
l di l b l
• In addition, many policy privileges are granted to
coastal regions.
t l i

31. The Impact of Decentralization
• But decentralization has strong distributional
impact.
• Centralization: more transfers and less incentives
for local governments
• Decentralization: less transfers, more incentives.