China in Transition

# Redressing China's Regional Disparity Problem - Labor and capital mobility holds the key

Chi Hung KWAN
Consulting Fellow, RIETI

The economic gaps among different regions represent a potential obstacle to further economic growth in China. Official per capita GDP statistics indicate large income disparities between urban areas and rural areas as well as between coastal regions and inland regions. In 2001, Shanghai and Beijing reported per capita GDP levels of US$4,500 and US$3,000, respectively. These figures exceeded China's per capita GDP for that year - about US$900 - by several multiples. Nevertheless, the government's per capita GDP figures are likely to have exaggerated economic differences among Chinese regions for the following reasons. First, rural areas boast high ratios of self-sufficiency; self-grown crops, for example, are not fully reflected by GDP statistics, which are based on market transactions. Second, purchasing power of the same amount of money tends to be higher in less developed regions because costs tend to be lower than in advanced regions. Third, worker mobility helps reduce income disparity. The last point needs further elaboration. ## How labor mobility helps to reduce regional income disparity Since large numbers of workers have migrated from rural areas to urban centers and from inland areas to coastal cities, actual population figures exceed registered population figures in advanced regions that attract migrant workers, and the reverse is true for less developed regions. As a result, the official figures, which are based on the number of registered residents instead of the actual population that includes migrant workers, tend to overestimate per capita GDP levels for advanced regions while underestimating those for less developed regions. Let me illustrate this point with concrete figures. According to the year 2000 census, the respective populations of Shanghai and Beijing were 16,970,000 and 13,820,000. But the number of registered residents was 13,210,000 in Shanghai and 11,000,000 in Beijing. In the year 2000, the respective per capita GDP levels for Shanghai and for Beijing came to US$4,173 and US$2,713, respectively, when calculated on the basis of number of official registered residents. When we use the census figures, the corresponding figures for Shanghai and Beijing drop to US$3,264 and US\$2,167, respectively. Conversely, actual populations tend to be lower than registered figures in inland regions such as Anhui province. In these areas, actual per capita GDP exceeds the official figure ( figure 1 ).

In addition, by sending money home, migrant workers help reduce regional income disparity. When there is capital mobility, the GNP (gross national product) of a country (or region) differs from its GDP (gross domestic product) by the amount of investment income (dividends and interest earnings) paid or received. Likewise, with labor mobility, income as measured by GNP also deviates from production as measured by GDP. Thus in the case of China, while production (and thus GDP) is increasing much faster in coastal provinces than in the inland provinces, the contrast in income growth is less sharp when remittances by migrant workers are taken into consideration.

Scholars in Japan tend to see worker migration within China as a purely negative phenomenon, apparently believing that the migration of residents from impoverished inland areas to affluent coastal areas serves only as a destabilizing force. No doubt income differentials lead to worker migration; but they have failed to recognize that worker migration corrects income differentials. Through reducing regional income disparity, worker migration has actually contributed to political stability. In a bid to further promote labor mobility, the Chinese authorities have begun relaxing the existing resident registration system that tends to bind citizens to their birthplaces.

## The flying-geese pattern of economic development in China

In addition to the movement of labor from inland to coastal regions, over the long term, reducing current economic gaps will also depend on the movement of capital in the opposite direction. This process will be similar to the flying-geese pattern commonly used to describe the spreading of the wave of industrialization from Japan to the Asian NIEs and then further to ASEAN and China during the postwar. Under the flying geese model, countries specialize in the exports and production of goods in which they enjoy comparative advantage commensurate with their levels of development, and at the same time they seek to upgrade their industrial structures through receiving foreign direct investment from more advanced countries.

The flying-geese model is usually discussed in terms of nations serving as units, but in the case of an immense country like China, this issue would be easier to understand if we divide China into three regions - Eastern China, Central China, and Western China, which are at different stages of development. The coastal areas in Eastern China have achieved high economic growth over the past 20 years based on the production and export of labor-intensive products. However, wages and land prices are expected to rise in places such as Shanghai and Guangdong in due time, stripping labor-intensive industries of their competitive edge and forcing both foreign firms and Chinese companies to move production bases to other areas that offer lower labor and land costs. Inland regions in Central and Western China will emerge as alternative sites for such direct investment. Meanwhile, if the coastal regions do not seek to develop new industries, they will face the prospect of a hollowing out of industry.

Foreign companies have concentrated direct investment in coastal regions because the inland regions lack the necessary infrastructure, including the railway and highway systems required for transport. Shipping parts inland has been both technically difficult and extremely costly. To realize this flying geese pattern of development, the Chinese government is now moving ahead with an ambitious plan to develop the western part of the country in a bid to improve the regional environment for prospective investors. At the center of this plan are large projects, including those for natural resource transport, airport construction, and railroad establishment. The infrastructure improvement achieved through these projects should make inland regions attractive for investors engaged in labor-intensive businesses. These projects are also likely to stimulate efforts to develop production networks based on the division of labor among various regions of the country. These developments, in turn, will enable China to reduce the economic gaps among different regions.

Base on two articles published in RIETI's website in Japanese on January 25 and February 1, 2002 .

January 25, 2002

January 25, 2002

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