Author: Chaipat Poonpatpibul, Lead Economist; and Suan Yong Foo, Senior Expert
While the Chinese economy has prospered with per capita income increasing by almost 60 folds over the past 40 years since the commencement of reforms and opening-up in 1978, income disparities among different regions have also become more stark. International experience suggests that such disparities can give rise to socio-political tensions and affect long-term growth.
From being “equally poor” in 1978, different geographical regions of China have drifted further and further apart in per capita income in the past decades as shown in the figure below. This is also corroborated by time series data on Gini coefficient which increased from 0.16 percent in 1978 to 0.47 percent in 2017. Per-capita income of the cities along the coastal areas grew faster than other provinces as economic activities gravitated towards those dynamic growth areas. The chart shows that diverging per-capita incomes between the coastal provinces and other parts of the country, which became notable by the second decade of the reform period in 1998, continued to persist by 2017. In 2017, per capita income in Gansu, a province in the Northwest was 84 times higher than in 1978 but per capita incomes in Beijing and Shanghai were over four times higher than that in Gansu.
What Are the Underlying Factors?
First, geographical location plays a significant role. Lower income provinces are typically located in land-lock areas and share borders with low-income neighboring economies. Many of them are even situated in mountainous or desert areas, which are not conducive for urbanization and manufacturing activities. Furthermore, it is costly to develop infrastructure and increase their connectivity to other regions. Coastal cities, on the other hand, are suitable for urbanization and infrastructure development, including sea ports, and close to much richer neighboring countries, hence having more exposure to manufacturing and trade. For example, the southeastern coastal provinces such as Guangdong, Fujian, Zhejiang, and Jiangsu, have become manufacturing hubs, benefiting from China’s opening-up to international trade as well as the rapid growth in national incomes.
Second, the role of local governments in leveraging geographical advantages has also been important. While the central government has been strategic in enabling the populous coastal areas to develop quickly to lift up the country’s overall development, local officials in the coastal areas have also been very driven in attracting foreign direct investment, and facilitating the establishment of local enterprises that process manufactured goods and re-export them.
Third, once regional disparities start to develop, further divergent paths tend to kick in. As coastal areas boomed, and special economic zones set up within these provinces spurred their development even further, more and more skilled and unskilled workers and entrepreneurs would gravitate towards these areas in search of opportunities. On the other hand, sluggish business environments and subdued tax revenues in the inner provinces mean local governments have had less financial resources and perhaps also less motivation to address related challenges ranging from persistently-unprofitable state owned enterprises and widening deficits in pension systems.
Strengthening Policy Efforts to Narrow the Gap
The Chinese government has been mindful of the need to support less-developed regions with continued policy efforts. For example, the Strategy of Development of the West Regions announced in 2000, together with the Strategy of Revitalization of the Northeast and the Strategy of Development of Central China both released in 2004, attempted to collectively open up more opportunities for poorer provinces to catch up. The central government has been investing heavily in transportation infrastructure, especially railway and expressway, to link the inner provinces with the richer coaster provinces. It has also intentionally reduced the amount of fiscal transfers to richer provinces and increased allocations to poorer provinces, especially those with larger populations, heavier social responsibilities, or weaker financial conditions.
The key challenge ahead is to develop a nation-wide social security program that ensures a minimum standard of living and provides basic social services for people in the poorer regions. Policies aimed at facilitating growth catch-up have been helpful and should be continued. However, it is unlikely for these poorer areas to fully catch up as the coastal areas will continue to advance more rapidly. Labor migration from the laggard areas to richer cities will also continue alongside increasing urbanization. As a result, policies should focus on making sure that people who remain in the less developed areas enjoy a certain minimum standard of living through a comprehensive social security system. In particular, they should have access to good healthcare services and obtain better support from stronger social safety nets. Better education is also important to help young people in these regions have better job opportunities.
Regional disparities can pose a significant concern on socio-economic stability, hence, policymakers should strengthen their efforts to enhance inclusive growth across the country.