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M & D FORUM Regional Income Disparity in China in 1997-2008: Empirical Analysis of the Affecting Factors YANG Hong, XIAO De School of Business, Hubei University, P.R.China, 430062 [email protected] Abstract: Since the reform and opening up of China, alongside the fast economic growth, however, has come a new problem: large regional disparity in per capita income between coastal and interior provinces. Using GDP data, this paper examines the trend of regional income disparities during the period 1997-2008 from the perspective of income distribution. It is shown that income disparities between the coastal and interior regions were widening during the period 1997-2003, but during the period 2004-2008, income disparities between the coastal and interior regions were constantly narrowing. The reason for this narrow is not income differences to a significant narrowing between coastal and interior areas, but the income’s convergence within coastal provinces. Further this paper research factors affecting economic growth from the aspects of capital investment and economic environment. The results showed that: during the 1997-2008 periods, physical capital and human capital investment increased significantly the province’s economic performance, globalization had restrained the interior provincial economic development but promoted the economic development of coastal provinces, and economic liberalization could promote significantly growth of provincial economy. Infrastructure and economic growth in interior provinces had a significant negative correlation, but it was not significant effect for the economic development of coastal provinces. Keywords: Income, regional disparity, China, economic growth 1 Introduction China has achieved fast economic development because of the dramatic growth in international trade and the inflow of huge amounts of foreign direct investment since the reform and opening up of China. However, China’s transition to a market-based economy has created new problems: large regional disparity in per capita income between coastal and interior provinces. In 2008, average real per capita income of coastal provinces and municipalities was 2.19 times that of the interior provinces. Achieving balanced growth so as to reduce disparities appears to be one of the major policy challenges that China now faces in order to maintain both its current GDP growth rate and social stability. The main objective of this paper is to examine two issues What is the trend of the regional disparity in China during the period 1997-2008 What are factors behind these trends? There are a lot of papers on regional disparity of China currently; many researchers describe regional disparity and its evolution using various indices such as the Gini coefficient, the weighted coefficient of variation or the Theil coefficient. Masahisa Fujita (2001) examined trends in regional disparity during the period 1985-1994 using GDP and industry output data, from the aspects of both income distribution and production agglomeration. It is shown that the income disparity between the coastal area and the interior had been increasing, and industrial production showed strong agglomeration toward the coastal area, while within coastal provinces there was a trend of convergence. In addition to indicators of decomposition, more scholars describe regional disparity and its evolution using growth regression, particularly convergence regression. Barro (1992) linked convergence regression with the neo-classical growth regression framework together, assuming that the various economies have consistent speed of technological progress, per capita income is inversely proportional to capital returns. So the economies which have the lower initial per capita income have the faster economic growth in the process of transfer dynamic. If the econometric model wad added the control variables affecting the production function, each of the economies have different steady-state value, the economies which were farther ? : 175 M & D FORUM away from its steady state level of the economy have the faster economic growth. For the cause of the formation and evolution of China's regional disparity, scholars have tried to obtain explanations by economic growth theory and new economic geography theory. Liu Xiaming (2004) summarized the five reasons leading to regional disparities: regional development strategy and policy, globalization and economic liberalization, factor market distortion, region-specific factors and cumulative causation. Masahisa Fujita (2001) pointed out: regional development policies have some effect, but their role was limited. More importantly, globalization and economic liberalization had significant influence on the increasing regional disparity. This paper will study the trend of China’s regional income disparities during the period 1997-2008 using indicators analysis and convergence regression on the basis of existing research, from the perspective of income distribution. Further this paper research factors affecting economic growth from the aspects of capital investment and economic environment. This paper is organized as follows. Section 2 examines the trend of regional income disparities during the period 1997-2008 from the perspective of income distribution using GDP data. Section 3 sets up an empirical model of economic growth from the perspective of capital investment and economic environment. Section 4 is the regression results of the model. Section 5 is main conclusions and policy implications of this paper. 2 China's Regional Disparities In Income: The Trend We put the 31 provincial units into two kinds of regions, the first region called the interior regions includes the 18 provinces of China except the coastal provinces and municipalities; the second region called the coastal areas includes 13 coastal provinces and municipalities of China. 2.1 Index analysis To measure the provincial disparity, we use the measure of weighted coefficient of variation (Williason, 1965). Weighted coefficient of variation is expressed with CVW. The larger is the CVW, the larger are the disparity among regions. Figure 1 describes the changes of provincial CVW. CVW of 31 provinces in China is gradually increasing from 1997 to 2003, there is a decrease since 2004. However, CVW increased in the interior region during the period 2004-2008; decreased in the coastal region in the same period. This indicates that CVW of 31 provinces in China the provinces decreased during the period 2004-2008 due to 13 coastal provinces and municipalities in the coastal area generate income convergence. Weighted CV 0.6 0.5 0.4 Nation 0.3 Region 1 0.2 Region 2 0.1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Figure 1 Provincial Disparity: CVW of per capita GDP (in current price) Using Theil index (Theil, 1967), we can decompose the total provincial disparity into inter-regional disparity and intra-regional disparity. The inter-regional Theil index measures the disparity between the two regions, and intra-regional index is a weighted average of provincial disparities within the coast 176 M & D FORUM region and within the interior region. It is seen from Figure 2, inter-regional disparity and intra-regional disparity have narrowed since 2004, and narrowing speed of intra-regional is faster than that of inter-regional. Income disparity between the provinces of the interior region is growing in the period 2004-2008; income disparity between the provinces of the coastal region is shrinking during this period. This indicates that the greatest contribution factor to shrink regional disparity is a decrease in income disparity between the provinces of the coastal region. 0.16 0.14 Theil 0.12 0.1 Betw een 0.08 Intra 0.06 Region 1 0.04 Region 2 0.02 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Figure 2 D composition of China’s regional disparity: Theil index 1997-2008 2.2 Convergence regression: income convergence of coastal region and income divergence of interior region We used model proposed by Dan Ben-David (1993), regression for three different groups in three different sample periods. Convergence coefficient κ represents the rate of convergence of province ith per capita income to the group’s average income level. κ >0 represents provincial income disparities’ shrinking. The larger is κ ’s absolute value, the faster is the convergence. Table 1 shows the regression results. The disparity between China’s 31 provinces occurred divergence in the income disparity during the period 1998-2003, but there occurred a very significant convergence during the period 2004-2008. The disparity between provinces of coastal region had a significant convergence during the period 1998-2008, with a decline in the income disparity taking place during the period 2004-2008. While the disparity remained relatively constant during the period 1998-2003. The disparity between provinces of interior region had a significant divergence during the period 1998-2008, with an increase in the income disparity taking place during the period 2004-2008. While the disparity remained relatively constant during the period 1998-2003. Table 1 Convergence Coefficients Regression for China’s Regression for 13 coastal Sample period 31 provinces provinces and municipalities 1998-2008 0.001357 0.007337** * 1998-2003 -0.003678 -0.002479 2004-2008 0.007349** 0.019686*** Note: * ** *** significant at the 0.1 0.05 0.01 level 、、 、 、 Regression for 18 interior provinces -0.013533*** -0.001277 -0.026111*** 3 Economic Growth Model Income disparity between coastal region and interior region has not significantly reduced during the 177 M & D FORUM period 1997-2008 by the analysis of regional income disparities trend in China, which is very detrimental to maintaining both its current GDP growth rate and social stability. Similar to the method of Demurger (2001), we study the factors affecting regional economic growth in China using the standard Barro-type analysis framework. In this paper, we try to account for differences in capital investment and in economic environment. The growth equation has the form git =αi+β1ln(yit-1)+β2PCit+β3HCit+β4FDIit+β5EXit+β6GYit+β7TRANSit+uit (1) Where g represents the average annual growth rate of real GDP per capita, y represents the level of real GDP per capita. PC represents gross fixed capital over province, measured the effect of physical capital accumulation on economic growth. HC represents number of people who have completed at least secondary education divided by the total population, measured the effect of human capital accumulation on economic growth. FDI represents foreign direct investment as a share of GDP, EX represents total exports as a share of GDP; these two indicators measured the effect of economic globalization on economic growth. GY is state-owned industrial enterprises as a share of the total industrial enterprises’ number, as an approximation of economic liberalization’s level. We exploit regression of coastal and interior regions to distinguish difference in the implementation of reforms. TRANS is railway, road, and inland navigable water network length per square kilometer, measured the effectiveness of infrastructure. Improvement of infrastructure will contribute to knowledge spillovers and technological progress. α stands for productivity level differences among provinces and take into account unmeasured characteristics of provinces. u is a random error term. Since Chongqing became a municipality in 1997, sample data period is from 1997-2008 to the integrity and comparability of data. All the data is from China Statistical Yearbook through 1998-2009. Because we selected all 31 provinces of China as objects of the study, this paper estimates the equation on panel data using two different techniques of direct pooled data GLS estimation and fixed effects GLS estimation, which is the way to check the robustness of our results. : 4 Estimation Results Table 2 is the estimated results of the equation (1). The coefficient of y is significant in all regression equations. Investment in physical capital and human capital investment is significantly improved provincial economic performance. FDI and EX measured the effect of economic globalization on economic growth is not significant for all provinces in China. EX and economic growth is significantly negatively related for provinces of interior region in direct mixed data GLS regression, while EX and economic growth is significantly positively related for the coastal provinces and municipalities in two regression methods. Coastal provinces and municipalities experienced a long period of rapid economic development, which resulted in resource constraints, brought the factor costs to a substantial increase, the developed coastal regions transferred the low-end industrial or industrial processing to the interior provinces. As the interior province’s exports are primary products and raw materials, the rapid expansion of labor-intensive products inevitably leads to reduce productive capacity and national income, triggering the growth of poverty (Niu Hongli, 2004). GY and economic growth is negatively correlated in all regression equations, implying the higher the level of economic liberalization, the faster the speed of economic development. State-owned enterprises lack of supervision, leading to the breeding of corruption and ineffectiveness; while the operators themselves bear the company’s profits and losses in non-state enterprises, especially township and villages’ enterprises. So they have a greater power to improve production efficiency, then get more benefits from technological advances, knowledge spillovers and economic liberalization, pursue maximization of profit, thus boosting the local economic development. TRANS measured the effectiveness of infrastructure and economic growth is significantly negatively correlated in the regression of all provinces in China. However, the effect of TRANS on the two regions is different: the effectiveness of the infrastructure of interior provinces and economic growth is significant negative correlation, while the effectiveness of infrastructure of the coastal region and economic growth is no significant correlation. Probably economic base of some China’s provinces 178 M & D FORUM is relatively backward; improvement of transport facilities can not attract industrial enterprises to location in these places. On the contrary, with the improvement of transport network, the transportation cost of the core area to less developed areas is lower than the transportation cost between less developed regions, which promote the further concentration of industry in the developed regions (Fujita and Mori, 1996). Table 2 The estimated results of the equation (1) 13 coastal China’s 31 provinces 18 interior province municipalities pooled data fixed effects pooled data fixed effects pooled data GLS GLS GLS GLS GLS estimation estimation estimation estimation estimation provinces and fixed effects GLS estimation consta nt ln(y) PC HC FDI EX GY -0.00496* 0.05420*** 1.47232*** 0.01407 -0.00017 -0.05196*** -0.05098*** 0.07665*** 2.19589*** -0.00506 0.01982 -0.03669*** 0.01386*** 0.05633*** 1.20897*** -0.05796 -0.20459*** -0.055268*** -0.02607* 0.09521*** 2.23365*** -0.17884 -0.04312 -0.06834*** -0.02697*** 0.09966*** 2.28334*** 0.01460 0.02387* -0.06359*** -0.07716*** 0.08939*** 4.05840*** -0.11308 0.05176** -0.10815*** TRANS n -0.00976** 341 -0.01424** 341 -0.01560** 198 -0.02046* 198 0.00222 143 0.01098 143 0.92201 0.93963 0.93506 0.92304 0.91116 *** significant at the 0.1 0.05 0.01 level. n is number of observations. 0.92175 R2 Note: * 0.11443*** 、、 ** 0.27684*** -0.02901 、 、 5 Conclusion Using GDP data, this paper examines the trend of regional income disparities during the period 1997-2008 from the perspective of income distribution. It is shown that income disparities between the coastal and interior regions were widening during the period 1997-2003, but during the period 2004-2008, income disparities between the coastal and interior regions were constantly narrowing. The reason for this narrow is not income differences to a significant narrowing between coastal and interior areas, but the income’s convergence within coastal provinces. Further this paper research factors affecting economic growth from the aspects of capital investment and economic environment. The results showed that: during the 1997-2008 periods, physical capital and human capital investment increased significantly the province’s economic performance, globalization had restrained the interior provincial economic development but promoted the economic development of coastal provinces, and economic liberalization could promote significantly growth of provincial economy. Infrastructure and economic growth in interior provinces had a significant negative correlation, but it was not significant effect for the economic development of coastal provinces. From this analysis, we come to a few policy recommendations to narrow the income disparity between the coastal and interior regions, accordingly ensure China’s economic development and stability of society. One is to change the trade pattern of interior provinces. After reform and opening up, coastal provinces gradually shifted manufacturing production and exports, while the mainland especially in the western still export mainly primary products and raw materials. The difference of coastal and interior trade patterns makes globalization has contrary effect on coastal and interior provinces: globalization inhibits economic development of interior provinces; while promotes the economic development of coastal provinces. Thus, the Government of interior provinces should seize the opportunity that economic globalization is speeding up, cross-regional capital flows are frequent, industrial investment 179 M & D FORUM shift from the coastal to the central and west, formulate preferential policies to attract foreign investment, increase productivity use of knowledge spillovers, accordingly speeding up the pace of economic development. The second is to speed up the pace of interior provinces’ economic liberalization. We know that economic liberalization can promote rapid economic development from the empirical results. In 2008, the average of state-owned industrial enterprises as a share of the total industrial enterprises’ number in the provinces of coastal region was 0.15, while the average of interior provinces was 0.07, indicating that the degree of economic liberalization of the coastal region is much higher than interior regions. Therefore, the interior provinces should speed up the process of economic liberalization reforms to improve economic growth, thus reducing the disparity between the coastal and interior regions. The third is to increase financial support and construction investment of the poorer interior provinces. Through the previous analysis we know that income of interior provinces is divergent during the period 1997-2008. With the rapid economic growth of relatively well-developed interior provinces, if the government has increased financial support and construction investment of relatively less developed interior provinces, the economy of these less developed provinces can quickly grow, which will lead to interior provinces generate income convergence, thus reducing the disparity between the coastal and interior regions. Fund: This paper was produced as part of National Natural Science Foundation of China (Grant No.70873033) and Youth Project of Chinese Ministry of Education(Grant No.09YJC790071). References [1]. Barro. Robert and Xavier, Sala-i-Martin. Convergence. Journal of Political Economy, 1992, 100(2): 223~251 [2]. Dan Ben-David. Equalizing exchange: Trade liberalization and income convergence. The quarterly Journal of Economics , 1993, 8:654~679 [3]. Demurger. Infrastructure Development and Economic Growth: An Explanation for Regional Disparities in China? Journal of Comparative Economics, 2001, 29:95~117 [4]. Fujita and Mori. The role of ports in the making of major cities: self-agglomeration and hub- effect. Journal of Development Economics, 1996, 49(1):93~120 [5]. M. Fujita and Dapeng Hu. Regional disparity in China 1985-1994: The effects of globalization and economic liberalization. Ann Reg Sci , 2001, 35:3~37 [6]. Theil, H. Economics and information Theory. 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