Subsidising inequality: Economic reforms, fiscal transfers and convergence across Chinese provinces

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The author himself, not the Kiel Institute of World Economics, is solely responsible for the contents and distribution of each Kiel Working Paper. Terms of use: Documents in EconStor maySince the series involves manuscripts in a preliminary form, interested readers are requested to direct criticisms and suggestions directly to the author and to clear any quotation with him. I. INTRODUCTION*In a vast country such as China, the regional impact of economic reforms naturally commands high policy interest. As regions may differ according to initial conditions such as economic structure, resource endowments, and level of development, the outcome of China's transformation process towards the market is expected to be regionally differentiated. Moreover, one element of the reform process in China has been the reduction of inter-provincial fiscal transfers from the coastal area to the interior. Indeed, in recent years, there has been a growing concern that a widening income gap between the prosperous coast and the laggard interior might eventually cause the break up of the Chinese national state.Such concerns (typically associated with a call for more inter-provincial redistribution) run counter to the theoretical expectation that regional income convergence should accelerate in a country implementing economic reforms as factor markets improve and capital starts flowing from richer to poorer areas. This paper presents results that overall confirm the theoretical expectation that reforms have led to the convergence of per capita incomes across Chinese provinces. However, this process has been uneven both across time and acrossThe Author thanks Erich Gundlach, Peter Nunnenkamp and Rolf J. Langhammer for extensive discussion and comments on earlier drafts. Financial support from the Volkswagen Foundation for the Project "Decentralisation and Enterprise Reform in China" is gratefully acknowledged. 2 regions of China. The paper shows that convergence was more rapid during the early reform phase than after the mid 1980s. This recent slow-down in convergence is due to a combination of two factors; a widening average income gap between the coast and the interior and the partial reversal of convergence among interior provinces after 1985. While faster growth along the Chinese coast can be explained as a result of favourable structural conditions and rising investment rates, the lack of income convergence among interior provinces after 1985 may be attributed to the perverse ...

Foreign Direct Investment and Regional Inequality in China

“…The income levels between different economies, however, may not necessarily approach to a similar level over time. Specifications similar to the above-mentioned model could also be found in Gundlach (1997), Raiser (1998), 4 Zhang (2001) and Yao andZhang (2001a, 2001b). In assessing the growth pattern of China, Yao and Zhang (2001b) incorporate some additional factors, such as the international trade to GDP ratio, transportation measured by the equivalent length of highways and regional dummies in their estimation.…”

“…Gundlach (1997) finds absolute convergence in regional output per worker across Chinese regions in 1978-89. Raiser (1998) also notes similar evidence of absolute convergence using regional data in 1978-92. Huo (1994) and Chen and Fleisher (1996) observe similar results.…”

“…The CV not only quantifies the income inequality problem but also measures the development of income gap between different economies. It has been widely used in the literature, such as Lyons (1991), Tsui (1996), Chen and Fleisher (1996), Raiser (1998), Zheng, Xu and Tang (2000), Xu and Zou (2000), Wu (2002) and Chang (2002). The CV index in these studies is calculated by the net material product, national income, or per capita GDP in nominal or real value to assess the evolution of regional income inequality in the preand post-reform periods.…”

“…To examine absolute β-convergence, the simple regression that was suggested in Baumol (1986) and applied in Chen and Fleisher (1996), Jian, Sachs and Warner (1996), Gundlach (1997), Raiser (1998), Zhang (2001 and Yao and Zhang (2001b) will be adopted in this research, to regress the growth rate of real GDP (RGDP) per capita against the beginning period's level of RGDP per capita. The regression function is specified as:…”

“…One group of articles has decomposed the Gini coefficient of mainland China in order to explain the causes of income inequality, and find that rural-urban inequality and spatial inequality are the causes of such inequality (Tsui 1996;Yao 1999;Yao and Zhang 2001a;Gustafsson and Shi 2002). Some articles employ the classical approach and the concepts of β-and σ-convergence to address the spatial pattern of China's economic growth and income inequality (Jian, Sachs and Warner 1996;Gundlach 1997;Raiser 1998;Démurger 2001;Zhang 2001;Yao and Zhang 2001b). In this study, the σ-and β-convergence tests in absolute and conditional convergence with respect to per capita real GDP will be applied.…”