Can the Strategy of Western Development Narrow Down China's

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Can Western Development Narrow Down China’s Regional Disparity?

Can the Strategy of Western Development Narrow Down China’s Regional Disparity?*

Wei Zhang Abstract Faculty of Oriental Studies The main causes of the faster growth in China’s eastern coastal University of Cambridge Sidgwick Avenue area, and thus for the rise in income disparity between eastern Cambridge CB3 9AD and western regions, are the rapid increases in foreign trade and United Kingdom foreign investment resulting not only from the government’s [email protected] coastal development strategy but also from inherent advantages of the eastern coastal area. Since 1999, the development strategy for western China has focused on the injection of large amounts of capital, but fiscal constraints make this strategy unsustainable. China’s government should allow mobility of the labor force across regions to play a bigger role in solving the income disparity problem.

1. Introduction

China embarked upon economic reforms in 1978. Since then, the average annual growth rate of China’s GDP through 2001 has been 8.9 percent.1 The pace of GDP growth in different regions has varied, however. If we divide China into three areas based on geographical location and government policy coverage (viz., eastern, central,

* I thank Wing Thye Woo, Cyril Lin, Maozu Lu, Guy Liu, and Zhichao Zhang for insightful discussion on this topic. I also beneªted from discussions during the Asian Economic Panel conference on 9–10 October 2003 in Seoul, South Korea. The views expressed in the paper are those of the author and should not be interpreted as reºecting the views of those who have helped with the paper. I thank Nancy Hearst at the Fairbank Center of the East Asia Institute at Harvard for her help. 1 This calculation for the 1978–2001 period used constant prices based on the price level of 1978.

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and western),2 the average growth rates of GDP in these areas during 1978–2001 were 10.2 percent, 9.08 percent, and 8.19 percent, respectively. This means that income disparities across the three areas have increased during this time, given that the coastal area was already relatively richer than the central and western areas in 1978. The GDP share of the eastern area in the total national GDP increased from 52 percent to 60 percent; the share of the central area decreased from 31 percent to 27 percent; and the share of the western area decreased from 17 percent to 12 percent (see table 1). The widening of regional disparities is also seen in the changes of GDP per capita across regions. During 1978–2001, the ratio of GDP per capita in the eastern area to the average GDP per capita nationwide increased from 1.28 to 1.42, but the corresponding ratio for the central area decreased from 0.86 to 0.75, and that of the western area decreased from 0.72 to 0.57 (see table 2 and ªgure 1).

To address this worsening of regional disparity, the Chinese government mapped out a strategy of western development in 1999.3 In general, it should take a long time to implement a regional development policy and even longer to obtain any sustainable results, so it is perhaps premature to evaluate the effectiveness of China’s strategy of western development at present. The main purpose of this paper is to investigate the relevance of, or relationship between, the causes of China’s regional disparity and the policies chosen by the government for the development of China’s western area.

2. China’s strategy of western development

In June 1999, at a meeting on the reform and development of state-owned enterprises (SOEs) in Xi’An, Jiang Zemin, then General Secretary of the Central Commit- tee of the Communist Party of China and President of China, formally put forward the concept of the development of the western region.4 The participants of the Cen- tral Economic Working Conference held in November of the same year determined the strategy for the development of the western region. In January 2000, a leading

2 The eastern area is made up of Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong, Guangxi, and Hainan; the central area covers Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, and Hunan; and the western area includes inner Mongolia, Sichuan, Chongqing, Guizho, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang. Guangxi is an autonomous region with a seaport, Beihai. It is one of the 11 coastal provincial-level units that has enjoyed the central government’s preferential policies since 1984. It was also listed as one of the western provincial-level units when the central government launched the campaign of western development. For consistency in the data analysis, we categorize Guangxi as a coastal/eastern area. 3 Jiang Zemin, “Talk at the Workshop of State-Owned Enterprises’ Reform in Xian,” People’s Daily, 18 June 1999. 4 Ibid.

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Table 1. China’s GDP and the percentage share of GDP in total GDP for the three areas (1978–2001) Eastern area Central area Western area National GDP GDP GDP GDP (million yuan) (million yuan) % (million yuan) % (million yuan) % 1978 346,354 181,832 52.5 106,466 30.7 58,056 16.8 1979 394,275 203,873 51.7 123,687 31.4 66,715 16.9 1980 439,596 229,585 52.2 136,908 31.1 73,103 16.6 1981 479,347 250,961 52.4 151,041 31.5 77,345 16.1 1982 533,108 279,868 52.5 166,131 31.2 87,109 16.3 1983 598,085 311,019 52.0 189,495 31.7 97,571 16.3 1984 712,537 373,412 52.4 223,875 31.4 115,250 16.2 1985 862,066 455,246 52.8 267,538 31.0 139,282 16.2 1986 965,648 511,314 53.0 300,087 31.1 154,247 16.0 1987 1,144,177 612,845 53.6 352,365 30.8 178,967 15.6 1988 1,445,266 786,501 54.4 434,060 30.0 224,705 15.5 1989 1,635,691 895,790 54.8 489,251 29.9 250,650 15.3 1990 1,833,023 989,966 54.0 547,920 29.9 295,137 16.1 1991 2,110,312 1,164,293 55.2 605,130 28.7 340,889 16.2 1992 2,584,738 1,459,328 56.5 725,345 28.1 400,065 15.5 1993 3,422,001 1,981,049 57.9 931,780 27.2 509,172 14.9 1994 4,521,683 2,652,547 58.7 1,212,823 26.8 656,313 14.5 1995 5,763,278 3,361,540 58.3 1,586,764 27.5 814,974 14.1 1996 6,730,552 3,970,377 59.0 1,916,757 28.5 843,418 12.5 1997 7,547,520 4,445,350 58.9 2,164,300 28.7 937,870 12.4 1998 8,106,540 4,807,090 59.3 2,287,150 28.2 1,012,300 12.5 1999 8,619,170 5,156,430 59.8 2,397,450 27.8 1,065,290 12.4 2000 9,527,990 5,752,720 60.4 2,625,020 27.6 1,150,250 12.1 2001 10,501,650 6,362,436 60.6 2,867,045 27.3 1,272,169 12.1

Sources: Chinese Statistical Yearbook, 1984 to 2002. Note: GDP per capita is calculated by current price.

group for western development was set up, with Premier Zhu Rongji as the leader, Vice-Premier Wen Jiabao as the deputy, and 19 ministerial-level ofªcials from relevant ministries and commissions under the State Council as members. This group produced the report Some Policies and Measures Concerning the Launch of the Great Western Development in October 2000. This document has been regarded as the for- mal commencement of the implementation of the strategy of western development. In March 2000, the Leading Group of the Western Development Ofªce under the State Council was established as part of the State Development and Planning Com- mission (Leading Group of the Western Development Ofªce 2000).

The basic content of the strategy for western development was later included in the Outline of the Tenth Five-Year Plan (2001–2005) for National Economic and Social Devel- opment in China (State Development and Planning Commission 2001). The strategy has three main goals: ªrst, to narrow regional disparities in economic development and income distribution; second, to maintain social and political stability in the western area by accelerating western development; and third, in response to the slowing economic growth in China, to create new economic growth by expanding domestic demand. The central government also stressed the following ªve focal points for developing the western region (Wang 2001):

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Table 2. China’s GDP per capita and the ratio of GDP per capita to national GDP per capita for the three areas (1978–2001) Eastern area Central area Western area National GDP GDP per GDP per GDP per per capita capita capita capita (yuan) (yuan) R (yuan) R (yuan) R 1978 361.4 462.2 1.28 311.0 0.86 260.7 0.72 1979 406.0 511.3 1.26 356.1 0.88 296.3 0.73 1980 447.4 569.0 1.27 389.2 0.87 321.5 0.72 1981 481.1 612.6 1.27 423.8 0.88 335.8 0.70 1982 527.1 672.4 1.28 459.3 0.87 373.1 0.71 1983 585.0 739.0 1.26 517.9 0.89 414.1 0.71 1984 689.6 877.4 1.27 604.8 0.88 485.1 0.70 1985 824.9 1,058.0 1.28 714.2 0.87 580.1 0.70 1986 911.3 1,172.0 1.29 790.2 0.87 633.1 0.69 1987 1,063.5 1,383.3 1.30 913.9 0.86 723.8 0.68 1988 1,322.7 1,750.1 1.32 1,107.2 0.84 894.4 0.68 1989 1,474.8 1,965.8 1.33 1,227.4 0.83 983.8 0.67 1990 1,611.0 2,104.0 1.31 1,345.7 0.84 1,134.6 0.70 1991 1,835.2 2,451.8 1.34 1,468.4 0.80 1,296.5 0.71 1992 2,225.2 3,042.4 1.37 1,741.7 0.78 1,507.3 0.68 1993 2,918.3 4,093.2 1.40 2,215.2 0.76 1,899.9 0.65 1994 3,819.3 5,436.9 1.42 2,854.0 0.75 2,421.3 0.63 1995 4,816.3 6,812.0 1.41 3,698.7 0.77 2,972.9 0.62 1996 5,548.9 7,946.8 1.43 4,421.2 0.80 3,014.5 0.54 1997 6,327.6 8,821.9 1.39 4,952.2 0.78 3,723.8 0.59 1998 6,743.0 9,474.2 1.41 5,194.2 0.77 3,977.6 0.59 1999 7,114.8 10,089.5 1.42 5,406.8 0.76 4,145.7 0.58 2000 7,737.7 10,728.3 1.39 5,974.1 0.77 4,497.4 0.58 2001 8,490.6 12,070.6 1.42 6,400.9 0.75 4,858.4 0.57

Sources: Chinese Statistical Yearbook, 1984 to 2002. Note: GDP per capita is calculated by current price. R is the ratio of the GDP per capita for a given area to the national GDP per capita.

• Accelerating infrastructure construction, especially in water conservancy, commu- nications, transportation, travel, and broadcasting • Strengthening ecological construction and environmental protection • Adjusting the industrial structure, giving priority to the industries with comparative advantages and market prospects, while fostering and forming new economic growth points • Developing technology and education, and accelerating personnel training • Deepening reforms and openness by adopting major policies and measures to attract domestic and international funds, technology, and management experience (Zhu 2000)

Obviously, among the ªve focal points, long-term efforts and massive inputs are needed for the protection of the environment, the adjustment of the economic structure of the industrial sector, and the development of technology and education. Be- cause new infrastructure construction and the injection of domestic and international funds are able to be completed in a relatively shorter time, the central authorities and relevant local governments are inclined to focus on building large-

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Figure 1. Ratios of GDP per capita to the national average in the three areas (1978–2001)

scale projects and implementing preferential policies to attract foreign investment. During the past 4 years, the central government has begun 50 large-scale construction projects in the western area (table 3). Among them, the three most noteworthy projects requiring large-scale investment are the Qinghai-Tibet Railway and the electricity and gas transmission projects from the western to the eastern regions.

The 1,956-km Qinghai-Tibet Railway will run from Xining, the capital of Qinghai province, to Lhasa, the capital of the Tibetan Autonomous Region. The 845-km section of this railway from Xining to Golmud was completed in 1979. As part of the development of the western region, the construction of a 1,118-km section between Golmud and Lhasa began in 2001. In addition to the Qinghai-Tibet Railway, as part of the Tenth Five-Year Plan, the central government will build a 2,700-km railway network in the western area, thereby increasing the total length of the railways to 27,500 km. By the end of 2005, the total length of operating railways in the western area will account for 37.6 percent of the national total, up from 34.8 percent at the end of 2000. During the 5 years from 2001 to 2005, the total investment in western railway construction by the central authorities will reach 127 billion yuan.5

5 “China Spends 700bn Yuan on West Development Strategy,” People’s Daily, 30 August 2003.

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Table 3. Number of special projects in the western area in which the central government has invested (2000–03) Year Number of special projects 2000 10 2001 12 2002 12 2003 16 2000–03 50

The West-East Gas Pipeline Project will transport natural gas from the Tarim Basin in Xinjiang to Henan, Anhui, Jiangsu, Zhejiang, and Shanghai. The project includes exploration for natural gas in the Tarim Basin and downstream gas-using projects, including the construction of an urban pipe network. The total length of the pipeline will be over 4,000 km, and the gross investment in the project will amount to 150 billion yuan. Presently, the West-East Gas Pipeline Project is the largest project in China.6

The West-East Power Transmission Project will generate electricity in the western area using coal and water and transmit it to the economically dynamic eastern coastal areas. Southern, central, and northern China have each been allocated a transmission network project. The southern project will exploit the hydroelectric resources of the Wujiang River in Guizhou, the Lancang River in Yunnan, and the upper stream of the Pearl River at the intersection of Guangxi, Yunnan, and Guizhou. The main market will be Guangdong. The central project aims to transmit the water power of the Yangtze River and the three Yangtze Gorges to eastern China. The northern project will transmit the hydroelectric resources of the upper stream of the Yellow River and the thermal power of Shanxi and inner Mongolia to Beijing, Tianjin, and Tangshan in Hebei province. The budget for the whole project from 2001 to 2010 is 100 billion yuan.7

To guarantee that the above-mentioned construction projects will proceed, the central government has invested more than 700 billion yuan in western development from 2000 to 2003. Treasury bonds of the central government constitute a large por- tion of the funds. During the period from 2000 to 2003, the central government has invested 70 percent of the transfer payments for local governments, 70.5 percent of the treasury bonds, and 70 percent of the central loans from international ªnancial institutions in the development of the western region. The central government promised a similar proportion of fund allocation by 2010.

6 “Transmit Natural Gas from West to East,” People’s Daily, 30 March 2001. 7 “Finished Western Railway Construction to Be up to 27.5 Thousand Kilometres in 2005,” Xinhua News Agency, 6 September 2001.

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The central government’s capital injection falls into three categories: the ªrst is the program that is based on the exploitation of western resources to support the con- tinued development of the eastern area; the second is the national stability program designed to maintain the current political structure of China; and the third is what can be called the “real” western development program. The real western development program consists of those projects designed to improve the living conditions of the people of the west. This program would consist mainly of projects to reduce poverty. The projects in the third category, however, appear to account for only a small part of the total resources committed to the strategy of western development and they are not well focused. According to the West Development Ofªce under the State Council, in the period from 2000 to 2002, the investment by the central government in the west that fell into this category was about 60 million, which is less than 9 percent of the total investment (Li 2002).

In addition to the injection of huge amounts of capital, the central government has attempted to attract nongovernmental and overseas funds to the western area by en- ticing investors with various preferential policies. Preferential tax rates have been introduced for enterprises in a broad range of industries favored by the government. An income tax reduction of 85 percent will apply until 2010, except in the autonomous regions, where the reduction is 100 percent. Firms are allowed to reinvest a higher proportion of proªts before tax for further development, especially more scientiªcally- and technologically-oriented development. Enterprises investing in the provision of utilities, particularly transport facilities, electricity generation, water conservation, postal services, and broadcasting, will be exempted from corporate income tax for 2 years from the year they start to make proªts and pay corporate income tax at 50 percent of the standard rate for a further 3 years. Preferential policies regarding land use rights, fees, and taxes have also been introduced to encourage mineral prospecting, evaluation, and mining, as well as ecological regeneration ac- tivities in mountains, wastelands, and marginal farmland. Restrictions on price ºexibility in transport enterprises and in utilities are being relaxed for ªrms in the west, as are restrictions on the movement of skilled labor from the eastern to the western region. Also aimed at improving the availability of human capital in the west are various policies to improve the people’s access to education and the quality of their education, especially in ethnic, border, mountainous, and pasture areas (i.e., those areas with the highest concentration of poverty).

Although the capital injection from the central government has been signiªcant, the ratio of private sector investment, both foreign investment and domestic private investment, to the national level has not changed very much during the period from 1999 to 2002 (see table 4). Of course, more than 4 years are required to improve

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Table 4. Private and foreign investment (1999–2002) Year Area Unit Private FDI (1) FDI (2) 1999 National Million yuan 419,570 143,340 121,807 West Million yuan 90,619 8,747 9,899 Share of west Percent 21.60% 6.10% 8.13% 2000 National Million yuan 470,936 131,321 129,305 West Million yuan 101,086 8,619 10,205 Share of west Percent 21.46% 6.56% 7.89% 2001 National Million yuan 542,957 141,540 158,329 West Million yuan 123,879 7,708 10,530 Share of west Percent 22.82% 5.45% 6.65% 2002 National Million yuan 651,919 168,542 176,533 West Million yuan 145,132 9,571 14,824 Share of west Percent 22.26% 5.68% 8.40%

Sources: Author’s calculations, using data in China Statistical Yearbook: Table 6-4s in China Statistical Yearbook 2000, 2001, 2002, and 2003 (BBS, 2000–03). Note: FDI (1) = investment by foreign investors; FDI (2) = investment by investors from Hong Kong, Taiwan, and Macao.

China’s income disparity. Nevertheless, the difªculties faced while implementing the strategy for China’s western development might demonstrate the need to re- think the nature of regional disparity and the purpose, policy formation, and implementation of such a strategy.

3. The nature and causes of China’s regional disparity

3.1 The methodology of analysis The literature on changes in China’s regional disparity during the past two decades is copious but far from conclusive. While the dominant view among analysts is that income disparity has increased across regions (Knight and Song 1993; Howes and Hussain 1994; Liu 1994; Jian, Sachs, and Warner 1995; Keidel 1995; West and Wong 1995; Hu 1996; Sun and Dutta 1997; He 1998; Wan 1998; Li and Zhao 1999; Démurger et al. 2002), many others argue that the overall trend of disparity is far from conclusive because the results of the empirical investigations largely depend on how regions are deªned and what time span is speciªed (Tsui 1996; Zhang 2001). Some analysts have even provided evidence for a decrease in regional disparity after China started its economic reforms (Jian, Sachs, and Warner 1996; Gundlach 1997; Raiser 1998).

I employ a widely adopted theoretical framework, the model of economic convergence, to explore the nature and causes of China’s regional disparity. According to this approach, if we assume that the regions under investigation share the same steady state, then (because of diminishing returns to capital stock) the lower a given region’s per capita income is from the per capita income level of the steady state, the

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higher the growth rate of the region will be. Consequently, there is a trend of economic convergence among regions. This theory can be tested with the empirical formula:

ln(yy )− ln( ) it,, i0 = V*ln(),++b y ε (1) t ii,0

where y it, and y i ,0 are the income per capita of region i in year t and region i in year 0, and i and 0 are indexes for the ending and starting years, respectively, of the period under investigation. ⍀* is a constant representing a combination of various fac- ε tors that form a steady state of the regions. i is an error term. If the estimated value of ␤ is negative, it means that regions with lower original levels of GDP per capita tend to have higher growth rates. Therefore the model can demonstrate the existence of a reduction in regional disparity.

When the regions under investigation do not share the same steady state, or when speciªc factors affect the process of the convergence, then it is a common practice to use dummy variables and other speciªed variables to decompose and identify the different steady state and the speciªed factors. This situation can be tested by

− ()mm− ln(yyit,, ) ln( i0 ) =+ + jit,, ji ,,0 ++ε Vbln(y ij,0 ) ∑ d ∑ lllD i, (2) t j t l ⍀ where is a constant, and Dl and m j are dummies and any other speciªed variables representing different steady states and other important inºuential factors.

Coefªcients d j and ll are used to measure the impacts of the regions’ different steady states and the impacts of speciªc factors on the different growth rates across ε β regions. i is an error term. When a negative is estimated for equation (1), unconditional convergence is said to exist. This means that the regions in the sample have

the same steady state. If equation (2) is estimated, and some of the d j s and/or ll s are statistically signiªcant, a negative value for β means that conditional convergence exists.

Over the past two decades, considerable empirical research on worldwide economic convergence, based on equations (1) and (2), has generated lively debate. Romer (1986) ªnds no tendency of unconditional convergence among all the countries in the world after World War II. Barro and Sala-i-Martin (1995) also claim there is no evidence of unconditional convergence among 118 countries during the period from 1960 to 1985. Other research conªrms the existence of unconditional convergence in some samples: Dowrick and Nguyen (1989) claim convergence among the OECD countries; Ben-David (1993) ªnds evidence for convergence among the EU coun-

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tries; and Barro and Sala-i-Martin (1991, 1992, 1995) ªnd the convergence among 90 regions in 8 western European countries from 1950 to 1990,8 among 48 mainland states in the United States from 1880 to 1990, and among 47 prefectures in Japan during the period from 1930 to 1990.

Aghion and Howitt (1998) ªnd evidence of conditional convergence, and of the steady-state output value being dependent on such variables as the savings rate, the depreciation rate of capital, production technologies, and the growth of the population. Jian, Sachs, and Warner (1995) claim that interregional ºows of labor, capital, and technology are the most important forces in the observed convergence of regions within a country or among national economies linked through world markets. Démurger et al. (2002) and others introduce geographical factors (e.g., distance from navigable waters) into their analyses of conditional convergence.

3.2 Data, classification of regions, and special variables To employ the theory of economic convergence in an analysis of changes in China’s regional disparity, based on equations (1) and (2), we use the following regressions:

=+ +ε gyiiigg12ln(, 0 ) (3)

=+ ++++ +ε gyRODDiiiiigg1203456ln(,eW ) gggg , (4)

where g is the average growth rate of GDP per capita; i is the index of the provinces;

ln(yi,0) is the logarithm of GDP per capita at the beginning of the period; Ri is the domestic reform index, which is the average ratio of sales of the non-collective sector

to total sales; Oi is the openness index, which is the moving-average ratio of exports

to GDP; and De and DW are dummies for the eastern and western areas, respectively. ␥ ε The i are the parameters, and the i are the error terms. Equation (3) is used to test unconditional convergence across regions. The issue is whether all provinces within China have the same steady state. Equation (4) relaxes the assumption of an identi- cal steady state across provinces. Instead, the 28 provinces are classiªed into three regions according to geographical location (eastern, central, and western areas), and the provinces within each region are assumed to share the same region-speciªc steady state. The region-speciªc steady state is determined by the region dummy and the degree of domestic reform and of opening up in the region.

8 The distribution of the 90 regions includes 11 in Germany, 11 in the United Kingdom, 20 in Italy, 21 in France, 4 in the Netherlands, 3 in Belgium, 3 in Denmark, and 17 in Spain.

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The logarithm of GDP per capita (measured using constant price) is chosen to represent the income level. The data on GDP, based on the current price and the population of China’s 28 provinces,9 are from Zhongguo Guonei Shengchan Zongzhi Hesuan Lishi Ziliao, 1952–1995 (The Gross Domestic Product of China, 1952–1995) (DNEA- SSB 1997) and the China Statistical Yearbook for 1997 to 2002. The provincial-level GDP per capita is the quotient of the constant-price GDP to the population of each province. This does not take into account the ºoating population.

The ratio of sales of non-collective ªrms to total sales is chosen to represent the pace of domestic reform across provinces. This accords with China’s gradualist reform path, especially with the distinctive phenomenon of allowing the non-collective economy to outgrow the state sector (Lin 1995). It is a very restrictive index, for it excludes not only the state-owned economy, but also the so-called collective economy. Non-collective ªrms refer to privately run businesses, including joint-owned ªrms, foreign-funded ªrms, and individual ªrms. Such ªrms basically operate under market competition.10 I also use the ratio of state employees to the total employed labor force as an alternative index of the pace of domestic reform. The faster this ratio decreases over the period investigated means the further the reform pro- cesses are from the original economic planning system. This variable does not take into account the employment of township and village enterprises (TVEs), which are more or less SOE-like in behavior. Between the two proxies of domestic reform variable, while the ªrst one might be an understatement of the reform, the second one tends to be an overstatement of the reform. If both of the coefªcients of the two alternative variables are similar in direction and signiªcance, they might be good proxies of an indicator of a “real” domestic reform variable.

The ratio of exports to GDP in each province is chosen to indicate the degree of openness, according to conventional practice. China’s export performance has been very sensitive to trade policies of the state, such as adjustments in the exchange rate, changes in tariff rates, and other direct state controls; therefore, year- by-year data are extremely volatile. To eliminate this volatility, I use moving-

9 There are 31 provincial units in China. Among them, three provinces are excluded from this sample. This is because the data for Chongqing are included in those of Sichuan until 1997 (thereafter, Chongqing became a provincial-level municipality), and the data in some categories for Hainan and Tibet are not available. 10 The ratio of state-owned capital stock to total capital stock seems to be a more direct indicator of the reform process. The reason I do not use this ratio here is because such data are un- available. Although there are relatively complete data on the capital stock of the state sector, there are no provincial-level data on the capital stock of the non-state sectors.

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average data rather than arithmetic averages to calculate the changes in openness during the periods in question. The ratio of foreign investment to total investment is also chosen as an alternative index to indicate the degree of openness during 1985–95 and 1996–2001.

3.3 A test for changes in regional disparity across provinces I ªrst divide the time span under investigation into three periods: 1952–2001; prior to reform, 1952–77; and during reform, 1978–2001. Then three stages of reform (1978–84, 1985–95, and 1996–2001) are examined.11 Table 4 lists the results of ordinary-least-squares cross-section regressions based on equation (3). The t-test is calculated based on a heteroskedasticity-corrected variance matrix (Greene 1997, chap. 12). The correlation of the dependent variable and the independent variable in each period is provided in the last column of table 5.

A model speciªcation test (F-test) shows that the regression models for 1952–2001, 1952–77, 1978–2001, 1985–95, and 1996–2001 are misspeciªed. This can be interpreted to mean that there are no simple linear relations between the average growth rate and the level of the original GDP per capita among the 28 provinces during these 5 periods. In other words, there is neither a trend of unconditional convergence nor a trend of unconditional divergence during the periods under examina- tion. This also means that there is neither a relative decrease nor a relative increase in regional disparity.

Analysis of the statistics given in table 5 leads to the following conclusions about unconditional convergence, or relative changes in regional disparity:

1. During the period from 1952 to 2001, there is no evidence of unconditional convergence or divergence. This means that the relative changes in regional disparity among the 28 provinces are not signiªcant. 2. The same conclusion is reached for the period from 1952 to 1977: there is no statistically signiªcant relative change in regional disparity across provinces. 3. During the reform period as a whole (1978–2001), income disparity has neither increased nor decreased across the provinces. 4. Unconditional convergence is signiªcant only for the period from 1978 to 1984. Not only are the F-test and the t-ratio for the coefªcient of the regressor signiªcant at the 1 percent level, but the speed of the convergence is highest in

11 Most scholars and policymakers share the view that agricultural reform played an essential role during the ªrst period of China’s economic growth. The main driving forces of growth after 1984 remain controversial.

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Table 5. Cross-section regressions for unconditional convergence Partial correlation of dependent and Ln(GDP per independent Period Constant capita) F-test Adjusted R2 variables 1952–2001 (0.068 (Ϫ0.009 1.430 0.04 Ϫ0.16 (2.049) (Ϫ1.728) 1952–77 (0.027 (Ϫ0.003 0.360 Ϫ0.02 0.12 (1.129) Ϫ(0.519) 1978–2001 (0.161 (Ϫ0.009 1.52 0.08 Ϫ0.20 (1.057) (Ϫ1.870) 1978–84 (0.208 (Ϫ0.022 11.64** 0.28 Ϫ0.56 (8.080)** (Ϫ5.148)** 1985–95 (0.102 (Ϫ0.002 0.230 Ϫ0.03 Ϫ0.09 (2.645) (Ϫ0.763) 1996–2001 (0.037 (Ϫ0.003 1.450 Ϫ0.06 0.18 (1.009) Ϫ(1.839)

Note: The ªrst and second columns of the ªrst lines corresponding to each period are the coefªcients for the constant and the loga- rithms of GDP per capita, respectively. Figures in parentheses are t-ratios. ** Statistically signiªcant at the 1 percent level.

the six regressions. There is a narrowing of income disparity among the 28 provinces in the 1978–84 period. 5. The trend of unconditional convergence ceased during the periods from 1985 to 1995 and from 1996 to 2001. It should be noted that the claim that there was an expansion in disparity among the provinces during this period is not supported by this investigation.

3.4 A test for conditional convergence among provinces and three regions: causes of relative changes in regional disparity The results of the regressions based on equation (4) are given in table 6, with the t-test calculated from a heteroskedasticity-corrected variance matrix.

All eight regressions indicate conditional economic convergence. When China’s domestic economic reform and the country’s degree of openness are taken into account, the regressions indicate that the poorer regions have tended to grow more quickly than the richer regions. This convergence trend is very stable across various combinations of variables in the different reform periods.

Domestic economic reform does not seem to play a direct and signiªcant role in the growth disparity across provinces. The coefªcients for the indexes of domestic reform are insigniªcant in seven out of eight regressions. The signs of the coefªcients for the share of employment in state ªrms to total employment during the second and third periods are even unexpectedly positive. A very important point should be

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Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/1535351054825229 by guest on 01 October 2021 Can Western Development Narrow Down China’s Regional Disparity? 2 R A- 0.44 5.27** F-test 1.340) 0.0080.013 10.39** 9.97** 0.63 0.61 0.898) 0.0131.960) 1.436) 4.85**0.006 0.42 10.52** 0.64 1.811) 0.009 10.60** 0.64 0.013 1.924) 0.017 10.55** 0.64 1.475) 1.579) 0.011 10.31** 0.63 w Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ ( ( ( ( ( D ( ( ( R(1) is the average annual change in the ratio of ) and O(2) are indexes of openness: O(1) is the moving- e 0.025 0.022 0.012 0.031 0.031 0.012 0.023 0.023 ( ( ( ( ( D ( ( ( are dummies for the eastern and western areas, respectively. 0.094 0.089 ( O(2) ( W and D e 0.678 0.839 0.564 0.809 0.612 0.494 ( ( ( ( O(1) ( ( 0.027 0.637) (0.784) (1.313) ( 0.162 0.002 ( ( Ϫ Ϫ ( R(2) 0.092 0.011 0.009 0.025 0.027 ( ( ( R(1) ( ( ) y 7.703)** (1.254) (4.088)** (4.073)** ( 0.028 0.011 0.021 5.635)**3.189)* ( (1.203) (3.252)* (6.662)** ( 0.032 7.415)** (2.145) (4.471)* (6.955)** ( 5.358)** (1.160) (0.645) (1.481) ( 0.027 5.582)** (3.054)* (6.133)** (5.479)** ( 0.030 0.017 0.014 3.069)* (3.103)* (3.453)* (7.461)** ( 6.484)** (4.945)** (3.971)* (5.967)** ( Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ Ϫ ( ( ( ( ( Log ( ( ( ( R(1) 0.239 0.301 0.196 0.260 0.228 0.241 0.204 0.246 (7.829)** ( (4.785)** ( (7.218)** ( (8.680)** ( (5.675)** ( (9.670)** ( (10.340)** ( ( ( ( ( (10.420)** ( ( ( ( Constant ( Figures in parentheses are t-test values. Log (y) is the logarithm of the original level of GDP per capita. R(1) and R(2) are indexes of domestic reform: 1996–2001 1985–95 * Statistically signiªcant at the 5 percent** level. Statistically signiªcant at the 1 percent level. Table 6. Cross-section regressions for conditional convergence Period 1978–84 Note: sales of non-collective ªrms to total sales,average and ratio R(2) of is exports the to average GDP annual and change O(2) in is the the ratio ratio of of state foreign employees investment to to the total total investment employed in labor each force. province. O(1 D

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clariªed here regarding the claim that domestic reform does not play a role in the differentiation of the growth rate across provinces in China. We are not saying that domestic reform does not play a role in China’s economic growth. What should be noted is both simple and logical: the pace of domestic reform across regions is more or less similar in terms of changes in ownership structure. This similarity seems quite unbelievable, considering that China is a huge country with very diverse conditions across provinces and areas. The only reasonable explanation for such a similarity is that the central government continues to control the pace of domestic reform, especially ownership reform, and it has very efªciently kept this reform under a tight rein.

The effects of various degrees of openness on the dissimilar growth rates across regions differ during the three sequential reform periods. The coefªcients for exports, O(1), during the period of 1978–84 are insigniªcant, but they are signiªcant during the periods of 1985–95 and 1996–2001. This result is consistent with the changes in China’s trade pattern at those times. During the early years of reform, trade was conducted mainly by a few state-owned trade ªrms, and increases in exports greatly relied on mineral fuels and other raw materials that fell under the state plan. During the second and third subperiods of the reform, along with the implementation of various trade reform measures, thousands of foreign-invested ªrms engaged di- rectly in international trade. As a result, the pattern of trade was increasingly steered by the market and in accordance with China’s comparative advantage. Trade became an indispensable part of the economies of most provinces. The role of foreign-invested ªrms in promoting exports is conªrmed by their lion’s share of exports, which accounted for more than 60 percent of total exports in 2001 (see table 7). Therefore, it is not surprising that the coefªcients for the other index of openness, O(2), which is the ratio of foreign investment to total investment in each province, are positive and signiªcant at the 1 percent level in all of the models for the subperiods of 1985–95 and 1996–2001.

The coefªcients for the dummy variables in both the eastern and the western areas in the period from 1978 to 1984 are insigniªcant, and the same is true for the coefªcients for the western area dummy variables in the 1985–95 and 1996–2001 periods. Nevertheless, the coefªcients for the eastern area dummy in all six models with various combinations of the indexes are highly signiªcant in the 1985–95 and 1996–2001 periods. This shows that the average annual growth rate in the eastern area is higher than that in the other two areas, by about 3 and 2 percentage points, respectively, during the two periods. Given that the original level of per capita income in the eastern area was higher than that in the other two areas, we can conclude that the regional income disparity between the eastern area and the rest

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Table 7. Share of trade by foreign-invested ªrms in China as a percentage of the total national trade Year Exports Imports 1981 0.15 0.50 1982 0.24 1.43 1983 1.49 1.35 1984 0.26 1.46 1985 1.08 4.89 1986 1.88 5.66 1987 3.06 7.23 1988 5.17 10.40 1989 9.35 14.87 1990 12.58 23.07 1991 16.77 26.51 1992 20.43 32.72 1993 27.51 40.24 1994 28.69 45.79 1995 31.51 47.65 1996 40.72 54.45 1997 45.23 56.38 1998 49.46 59.21 1999 53.67 62.23 2000 54.28 63.12 2001 62.12 65.78

Sources: Calculated by the author based on the data on investment in SSB, Zhongguo Tongji Nianjian, 2002 (China Statistical Year- book, 1997) and the data on trade from DTEERS-SSB, Zhongguo Duiwai Jingji Tongji Nianjian, 2002 (China Foreign Economic Statistical Yearbook, 2002).

of the country expanded. This is consistent with the observations of most Chinese people.

4. Can China’s strategy of western development reduce its regional disparity?

The empirical investigations in the previous section show that different levels of foreign trade and foreign direct investment (FDI) are signiªcant factors contributing to the disparity in the pace of growth among regions of China during 1985–95 and 1996–2001. This result is in accordance with well-developed economic theories about foreign trade, foreign investment, and development economics. Such theories predict that foreign trade and foreign investment can promote economic growth in a developing country by accelerating capital accumulation, expanding exports to narrow the foreign-exchange gap, and improving economic efªciency because of spillovers from new technologies.12

China’s unbalanced locational distribution of foreign trade and foreign investment is often attributed to the central government’s discriminatory regional policy, partic-

12 For a discussion of narrowing the exchange gap and promoting exports, see Chenery and Bruno (1962) and Bliss (1989). For the spillover effect, see Romer (1990).

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ularly its treatment of the external sector (Hu and Wang 1996; Sun and Dutta 1997; Sun and Tipton 1998). This opinion has been so universally embraced that it is now almost taken as fact in discussions of China’s regional economic issues.

The coincidence of the spatial distribution of foreign investment and the direction of the bias of central government policy is the strongest supporting argument for this view. In 1979, the central government granted autonomy to Guangdong and Fujian provinces to attract foreign investment by opening four special economic zones. Since then, these two provinces have taken the lead in absorbing foreign investment and have enjoyed the highest GDP growth in the country. In 1984, such preferential policies were extended to 14 coastal cities and their afªliated economic development zones, thus contributing to the faster growth of the coastal area.

Belief in the importance of preferential policies in promoting the growth of these areas made the central government incorporate such policies as an important com- ponent of the strategy of western development. However, an obvious fact seems to have been ignored: the central government had already expanded similar preferential policies to most of the western areas by 1992. The economic development zones, high-tech industry parks, and special border economic zones, which have been regarded as engines of expansion of international trade and FDI in China, were also approved by the central government for the inland provinces, and accounted for 42 percent of the total of such areas nationwide (Li 1996) (see table 8). Nevertheless, the shares of exports and FDI for the central and western areas as a whole did not thereafter witness obvious changes (see table 9).

This counter-example to the prevailing view demonstrates that the central government’s discriminatory regional policy may not play the same role in promoting trade and attracting FDI in the western area as it did in the eastern area, and thus we cannot regard such a policy as a fundamental cause of China’s unbalanced regional growth. The eastern areas, including those originally poor eastern provinces such as Guangdong and Fujian, have some inherent comparative advantages in terms of absorbing foreign investment and expanding foreign trade. Both provinces are convenient geographical locations for imports and exports, have relatively cheap labor costs and higher productivity, and possess better industrial infrastructure. They also offer some sociocultural conditions that reduce the uncertainties for foreign investors; for example, they were major centers of foreign economic activity before 1949, and most Chinese citizens who moved overseas originated from these two provinces. These advantages had been repressed during the Mao period and even during the ªrst period of the reform. When the Chinese government ªrst began to open its doors to the outside world, market-oriented foreign investment naturally

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Table 8. Spread of preferential policies within China (1979–92) 1979 Four special economic zones were established Shenzhen, Zhuhai, and Shantou in Guangdong province; Xiamen in Fujian province 1984 Fourteen coastal cities were opened for international trade and investment Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Natong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai 1988 Established another special economic zone Hainan Island (the biggest special economic zone) Enlarged the original four special economic zones Expanded the open coastal areas into an open coastal belt Pearl River Delta Yangtze River Delta Xiamen-Zhangzhou-Quanzhou Triangle Shangdong Peninsula Liaodong Peninsula 1990 Opened the Pudong New Zone in Shanghai Opened several additional cities along the Yangtze River Hefei, Nanchang, Changsha, Chengdu, Wuhu, Jiujiang, Yueyang, Wuhan, Huangshi, and Chongqing 1992 (spring) Thirteen free trade areas were established in major coastal port cities Waigaoqiao, Tianjin, Dallas, Shatoujiao, Futon, Guangzhou, Zhangjiagang, Haikou, Qingdao, Ningbo, Fuzhou, Xiangyu, and Shinto Thirteen border cities were opened The cities of Hunchun (Jilin province), Heihe and Suifenhe (Heilongjiang), Manzhouli and Erenhot (inner Mongolia), Tacheng, Bole, and Yining (Xinjiang), Hekou, Wanding, and Ruili (Yunan), and Pingxiang and Dongxing (Guangxi) 1992 (summer) Opened seven capitals of border and coastal provinces and autonomous regions Nanning, Kunming, Urumqi, Hohhot, Harbin, Changchun, and Shijiazhuang Opened eleven capitals of inland provinces and autonomous regions These included Taiyuan, Hefei, Xining, and Yinchuan

ºowed to the eastern area. Even if the central government had simultaneously opened all of the provinces, the spatial distribution of foreign investment would not have been substantially different. China’s open-door policy has played a role in promoting foreign trade and foreign investment in the eastern area, but only in the sense that it has loosened repressive constraints, thereby allowing the relatively more advanced and developed eastern area to beneªt from economic exter- nalities, the ability to collect information, and better infrastructure facilities (Xu 1998).

This explanation is in line with Krugman’s theory of geography and trade (Krugman 1991; Krugman and Obstfeld 1994), which implies that the more developed areas are more inclined to self-enforcement because of an agglomeration effect. This also conªrms the ªndings of Démurger et al. (2002) and others, which empha- size the importance of geography in regional economic development.

In contrast with China’s eastern area, the western area does not have the above- mentioned advantages. Several adverse conditions make the western area unattrac- tive to market-oriented investors: the lack of industrial infrastructure; the long dis- tances from seaports, which are still China’s main gateway to the world market; and poor living conditions, which have been continuously causing brain drain. If prefer-

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Table 9. Percentage share of exports and FDI in the national total for the three regions (1978–2001) Exports FDI Year Eastern Central Western Eastern Central Western 1978 90.0 7.1 2.7 n.a. n.a. n.a. 1979 90.0 7.5 2.2 n.a. n.a. n.a. 1980 89.9 7.8 2.2 n.a. n.a. n.a. 1981 87.7 9.5 2.8 n.a. n.a. n.a. 1982 86.3 10.5 3.5 n.a. n.a. n.a. 1983 84.8 12.0 3.6 n.a. n.a. n.a. 1984 82.9 13.2 4.5 99.3 0.7 0.0 1985 81.6 13.9 5.2 93.1 3.7 3.3 1986 76.2 17.6 6.9 89.7 5.2 6.3 1987 75.8 17.2 7.6 90.5 2.1 8.4 1988 76.1 16.3 8.3 88.5 5.8 6.0 1989 76.3 16.1 8.4 92.2 3.8 4.0 1990 78.1 14.7 7.8 94.3 3.5 2.4 1991 77.9 14.9 7.7 94.3 4.1 1.7 1992 76.8 15.8 8.0 90.4 6.8 2.8 1993 79.4 14.1 7.0 87.1 9.0 4.0 1994 82.4 11.7 6.3 87.8 7.8 4.4 1995 83.5 10.7 6.1 87.7 8.7 3.6 1996 88.4 8.0 3.7 88.6 9.3 2.1 1997 89.2 7.5 3.3 86.7 10.6 2.8 1998 90.7 6.4 3.1 88.0 9.7 2.3 1999 91.6 5.7 3.1 88.2 9.3 2.4 2000 91.5 5.7 3.1 88.3 9.0 2.7 2001 91.6 5.6 2.8 88.3 8.9 2.8

Source: Calculated by the author based on selected data from SSB, Gaige Kaifang Shiqinian de Zhongguo Diqu Jingji (China Re- gional Economy: A Proªle of Seventeen Years of Reform and Opening Up) and China Statistical Yearbook, 1998, 1999, 2000, 2001, and 2002. Note: n.a. not applicable.

ential policies cannot attract FDI and other private funds to the western area as they did in the eastern area in the 1980s and 1990s, development in the western region will have to rely heavily on government funds. The total input of government funds to the western area amounted to 700 billion yuan during 2000–03. The annual average was about 175 billion yuan, which accounted for about 1.7 percent of GDP and 45 percent of the total government bonds issued in each year (Wang 2000; Jia 2003). It is very unlikely that the central government will be able to inject such a large amount of money over the long term, considering its large contingent liability cre- ated by the nonperforming loans of the state banks; the latent losses of SOEs; the payments related to local-government borrowing and guaranteed debt; bad loans in collective organizations and private mutual organizations; and the funds needed for social security, including implicit pension debt. Even if the central government were to continuously channel a large proportion of its income to the western area, it would not solve the problem of regional disparity. The average annual capital injection from the central government to the western area only amounts to less than 20 percent of the eastern area’s ªscal expenditure, and this ªgure does not include the vast amount of private investment in the eastern region.

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5. Conclusion: a more effective and sustainable strategy

My empirical investigation demonstrates that the faster development of foreign trade and foreign investment in the coastal area has been the main cause of the higher growth rate of the coastal area, and thus the cause of the widening income disparity among China’s east, central, and western areas since 1985. Moreover, the analysis of the relationship between the evolution of China’s foreign trade and investment policies and the unbalanced development of the country’s regional economies shows that although these differential policies contributed to the concentration of foreign trade and foreign investment in the eastern coastal area, other factors were of fundamental importance. These factors included the coastal area’s convenient geographical location, better infrastructure, close linkages among industries, more skillful and productive labor force, and broad overseas connections. In the absence of these advantages, differential regional economic policies alone are very unlikely to have decisive impacts on the different paces of economic development among the regions. Consequently, at present the development of China’s western region has to rely on the central government’s injection of ªxed capital in large-scale construction projects. Because the current ªscal system and resulting constraints on the central budget cannot maintain this huge amount of capital input into the western area, this strategy will not be effective or sustainable in the long run.

This does not necessarily lead to the conclusion that nothing can be done by the government to reduce China’s regional income disparity. A new strategy is needed. The Chinese government’s current approach is a traditional strategy that empha- sizes the industrialization of poor areas through the injection of huge amounts of capital. However, we should understand that the ultimate purpose of national or regional development is to improve the people’s living standards. In the case of national development, labor force mobility is constrained by the national boundary, so that capital input and the resulting industrialization become the most important means by which poor counties can reach that goal. In the case of regional development, however, as long as the country has uniªed capital and labor markets, the role of labor mobility across regions should be regarded as another important means of improving living standards. If private capital does not enter backward areas, it usu- ally indicates a lack of economic efªciency of capital input in those areas. In that case, government input in industries in such regions means a loss of efªciency. In the long run, inefªcient capital investment by the government is not sustainable. In the circumstance of capital immobility, labor mobility becomes more important in terms of improving people’s living standards in the backward areas as well as improving the efªciency of the national economy.

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There has been an irresistible movement of the labor force across China’s regions since the 1990s, especially the movement of farmers from poor inland or rural areas to the relatively wealthy coastal areas or cities. According to government estima- tions, there were about 130 million migrant workers at the end of 2003. These migrant workers have improved the living standards of their families in the poor areas.13 Unlike the government’s efforts to develop the west, which have heavily relied on the central planning system, this movement of the labor force has been en- tirely driven by market forces and has not cost the government anything. To improve the living standards of the western area, and thus reduce regional income disparity, the government should eliminate barriers to labor movement across regions, provide more information and education to enable the migrant workers to seek job opportunities in the coastal and urban areas, and supply affordable low- cost housing and other essential facilities to help the migrant workers to settle in the new area. Such measures will be more effective and sustainable than the current policies of capital injection to promote the industrialization in the western area.

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