Recent studies on China have focused not only on the bright side of reform and open door policy, as seen in the country's remarkable economic growth, but also on the dark side as shown by serious interregional disparities while the development wave has largely left the Western region behind. Why then, despite this remarkable growth, are interregional disparities widening? Whatever the causes, can solutions or remedies be found for them in the coming years? Answers to these questions would be quite meaningful in helping to deepen the understanding of problems faced by transition economies and developing economies.
History and current status of interregional disparities
Since shifting to a reform and open door policy in December 1978, China has promoted economic development with particular priority given to its coastal regions, following Deng Xiaoping's famous development philosophy of "allowing some to get rich first." Have interregional income disparities consistently expanded throughout this period? Not necessarily, depending on how the situation is looked at. Prior to the reform, income levels in coastal provinces such as Guangdong and Fujian were not necessarily high relative to those in other provinces. Partly because of this, the time-series coefficient of variation (standard deviation / arithmetic mean: measure of relative dispersion) in per-capita real GDP by province shows that the coefficient almost consistently declined until around 1990 and has since remained flat.1 That is, in relative terms, provincial disparities in per-capita income decreased throughout the 1980s and have not significantly expanded in and after the 1990s. A comparison between Shanghai and Guizhou province, the richest and the poorest areas respectively in terms of per-capita income, shows that the income level in Shanghai was approximately 10 times that of Guizhou both in 1978 (5,134 RMB to 538 RMB) and 2003 (33,667 RMB to 3,280 RMB).2 However, the gap in absolute terms has continued to expand and this has been seen as a big problem.
While the central government's function as controller of interregional income redistribution has weakened since 1978, interregional disparities in productivity growth are deeply entrenched. Thus, given the present situation, it is not likely that interregional income disparities will soon narrow. My analysis found the correlation between relative income levels and total factor productivity (TFP) levels was stronger in the 1990s than in the 1980s. So in working to achieve the goal of disparity-elimination it is important to identify factors causing interprovincial or interregional disparities in productivity growth.
Are market economy and open door policy responsible for widened disparity?
As expressed in the slogan "Reform and Open door," China's economic development has been driven by two pillar policies - economic reform by introducing a market economy and open door policy by increasing external trade and inviting foreign investment. A simple interpretation would be that the gradual implementation of these policies, starting from some selected areas including Guangdong province, in line with the allow-some-to-get-rich-first policy, has resulted in enormous disparities in the degree of marketization of the economy, trade dependency, and foreign capital inflows, which collectively generate interregional disparities among growth rates. This interpretation suggests that as reform and open door policy further expands, foreign capital can be expected to permeate inland China, enabling lagging regions to catch up. But is this really the case? Some empirical studies found that marketization of the economy has a positive effect on productivity in China, but other studies found no significant correlation between marketization and productivity. This is partly attributable to the difficulty of, and hence the lack of accuracy in, measuring marketization. However, the presence of factors that link marketization to greater productivity could conceivably affect estimations.
According to Lardy (1998), China's step-by-step marketization has caused many problems, such as preventing market forces from forcing inefficient companies to exit, and has not necessarily resulted in positive effects. The extent of openness of the Chinese economy requires careful examination. A comparison of trade dependencies (trade value/GDP), calculated for each region based on data from official statistics, shows substantial geopolitically related gaps between coastal and inland regions, which seemingly explains the observed disparities in productivity growth and income levels. However, in the western region, some areas, such as Xinjian, have relatively high trade dependency while productivity growth is not necessarily so high. As demonstrated by Chuang (1998), the effect of trade (especially, of exports) on productivity growth may be substantially affected not only by the scale of trade but also by trade partners' productivity levels and the composition of trade (trade items). These suggest it is perhaps unrealistically optimistic to expect that reform and open door policy penetrating the inland regions would reduce interregional disparities. Rather, the questions that need to be discussed are what conditions are necessary to fully enhance the policy's effect and how such conditions can be satisfied.
Conditions required for development of inland regions
In general terms, lack of infrastructure and low education levels can easily be pointed to as the bottleneck. Specifically with regard to education, interregional disparities in the average number of years of schooling attained by workers barely decreased between 1982 and 2000. A comparison between Beijing, which had the highest number of school-years in both 1982 and 2000, and the provinces of Yunnan and Guizhou, which were lowest respectively in those same two years, shows that the gap expanded from 4.0 years in 1982 to 4.15 in 2000 (Lin 2001).
Also, as noted by Young (2000) and Kwan (2005, RIETI column), weakening domestic, interprovincial trade under the reform and open door policy has been a big blow to the inland regions. The western region, though at a geopolitical disadvantage in engaging in foreign trade, should be able to catch up by promoting trade with advanced regions within China. However, transfer of authority from the central government to provincial governments has impelled each province to seek policies to guard provincial interests; one reason behind the currently seen entrenchment of serious interregional disparities. In addition, revitalization of rural areas is considered to be another essential condition. A positive correlation between labor productivity growth and the relative income level of rural residents has been empirically shown. Given the urban-rural population and the capacity of China's cities, existing disparities cannot be reduced unless China succeeds not only in modernizing agriculture but in revitalizing township and village enterprises (TVEs), rural firms evolved from former communes, through concurrent marketization and raising the income of rural residents.
The Chinese government is well aware of this and in its 11th Five-Year Plan for National Economy and Social Development adopted in 2005 proposed various initiatives designed to reduce interregional disparities. However, budgetary constraints faced by each province and the existence of vested interests remain major obstacles to implementation. These initiatives also typically involve budget allocations to unspectacular, long-term activities that are slow to produce results, thus the policies have low political incentive. Therefore, even though the need for such policies may be well understood at the theoretical level, their implementation poses quite a political challenge.
