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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
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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
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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
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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
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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
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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).
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