HISTORICAL OVERVIEW OF REGIONAL ECONOMIC DEVELOPMENT, 1949-1978

When the Chinese communists came to power in 1949, they inherited an extremely lopsided economy. Industrial activities were to a large extent concentrated in what was then called Manchuria (the modern-day northeast provinces of Heilongjiang, Jilin, and Liaoning) and a few major coastal cities such as Shanghai and Guangzhou. Although the coastal provinces accounted for only 11.34 percent of the land, they were the source of 77.6 percent of total industrial output. The rest of the country produced only 22.4 percent of the total industrial output. In particular, western China lagged far behind. Only 8 percent of the total industrial output originated in this region, despite the fact it took up over half of the country’s territory.1

The new Communist government made a strong commitment to achieving balanced distribution of productive capacity and income. The first Five-Year Plan (1953—1957) of the People’s Republic gave high priority to the development of new industrial bases in north, northwest, and central China. Among the 694 industrial projects built during this period, most were located in the inland areas.2 But Mao hoped to see more changes. In his famous 1956 speech, “On Ten Major Relationships,” he again dwelled on the relations between the coast and the interior. In his view, it was both economically irrational and politically unacceptable to keep 70 percent of industry in the coastal areas while leaving the rest of the country more or less untouched by modernization. To speed up the industrialization of the interior, he suggested that new industrial facilities be located in the interior. Only by doing so, he believed, would industrial activities become more evenly distributed.

Indeed, Mao’s era was marked by an unprecedented spatial redeployment of productive capacity. Thanks to its strong extractive capacity, the central government under Mao had firm control over the geographic distribution of resources. The investment policy of this period clearly favored backward regions. While more developed provinces experienced substantial outflows of revenues, less developed provinces received enormous infusions of funds for infrastructure and industrial development.

Moreover, in the mid-1960s, out of security considerations, China began a campaign to construct the Third Front, which covered all western provinces and some parts of the central provinces. From late 1964 to 1971, dozens of large- and medium-sized industrial enterprises were moved from coastal provinces to inland provinces, and hundreds more were built on-site. Altogether, between 1956 and 1978, more than 2,000 large- and medium-sized enterprises were established in west and central China. This shift in investment and the establishment of new industrial centers powerfully boosted industrial growth in the traditionally less-developed regions. In 1965, for example, the ratio of agriculture to light industry to heavy industry for central China was 71:15:14. By the end of the fourth Five-Year Plan period (1971—1975), it had become 44:22:34. For the same period, the ratio for west China changed from 69:16:15 to 40:23:37. In addition to financing investments in less-developed regions, fiscal transfers were used to reduce regional inequality in income and the provision of public goods and services.3 Government transfers made it possible for consumption to be much more evenly distributed than output. As a result, Mao’s era witnessed a strong trend toward greater equality in per capita consumption across the country.

In 1978, China changed its policy orientation, shifting the emphasis from equity to efficiency. The years since have marked a period of rapid economic growth and rising living standards, both of which are unprecedented in Chinese history. Equally important, no province has been excluded from the growth club. Every one

The Political Economy of Spatial Inequality in China 93

of China’s provinces has experienced substantial real growth in the post-1978 period. While economic conditions have improved in all provinces in absolute terms, however, performance in relative terms has varied markedly among the regions.

Figure 6.1 shows the changing track of coefficient of variance (CV) of provincial per capita GDP from 1978 to 2007 (in 1978 constant price).4 It plots two measures of relative dispersion. The top and bottom curves differ only in sample size: the former includes Beijing, Tianjin, and Shanghai, whereas the latter excludes these three cities. We separate the two curves for a simple reason: although the three metropolitan areas enjoy provincial status, treating them in the same way as we treat other provinces would be problematic, because they are far more urbanized and industrialized than the others. As a result, they enjoy extraordinarily high levels of per capita GDP relative to the national average. For this reason, treating these metropolitan areas as ordinary provinces might greatly bias our analysis of regional disparities. To present an unbiased picture, it is necessary to segregate two sets of statistics—one including the three cities and the other excluding them. As Figure 6.1 reveals, changes in regional disparities display different patterns when the three cities are excluded.

The top curve represents changing coefficients of variation for the whole nation during the period 1978—2007. The time path yields an S curve. In other words, relative dispersion declined sharply between 1978 and 1991, but the falling trend was reversed afterward. The years between 1992 and 2004 witnessed an upsurge in regional inequality before the trend reversed again.

The bottom curve (excluding figures for Beijing, Tianjin, and Shanghai) yields two noteworthy changes in coefficients of variation. First, CVs become much smaller. Rather than fluctuating between 0.80 and 1.05, the curve now oscillates in the

Figure 6.1 Coefficient of variance of provincial per capita GDP (1978 constant price)

Note: Unless indicated otherwise, all data presented in this paper come from the author's databank.

neighborhood of 0.35—0.45. In other words, once extreme cases are excluded, relative dispersion in per capita GDP does not appear to be alarmingly large in China. Second, the patterns of change in CVs are more or less the same, but the magnitudes of change are much smaller. Regional dispersion decreased only marginally in the initial years of reform, but the years following 1985 saw a steady increase in relative dispersion, especially during the entire 1990s. Consequently, by 2000, CV was 0.14 percentage points higher than that in 1978 (increasing from 0.31 to 0.45). Since then, regional disparity has begun to level off and even shown signs of falling.

Mainstream economists have long argued that regional disparity is an abnormal phenomenon that will not last. Although there is no way for them to deny the presence and persistence of spatial inequality in many parts of the world, they envision a longterm trend toward interregional equality. In 1965, Jeffrey Williamson published a well- known article titled “Regional Inequality and the Process of National Development: A Description of the Patterns.” Based on a large set of cross-sectional and time series data, Williamson identified “a systematic relationship between national development levels and regional inequality,” or an inverted “U” in the national growth path; that is, regional gaps tended to increase in earlier stages of development and to diminish in later stages.5 Since then, the inverted-U-shaped pattern of regional development has often been called “the Williamson law.” Barro and Sala-I-Martin, for instance, tried to identify a tendency toward convergence among the U.S. states during the period 1840-1980,6 among Japanese prefectures,7 and among regions within Western Europe.8

Mainstream economists who studied China once also believed that, coupled with economic growth, the operation of market forces by themselves would bring convergence of regional income.9 This predication has been proved wrong. Neither of the two curves in Figure 6.1 is inverted-U shaped. Instead, they reveal S curves. It seems reasonable to divide the years after 1978 into three subperiods. Before 1985, the general trend was for relative dispersion to fall. But the trend was reversed in the mid-1980s. As market forces were playing a bigger and bigger role in Chinese economy, the country witnessed a sharp upsurge in regional inequality in the 1990s through the first years of the twenty-first century, whether or not the three centrally administered metropolises were counted.10 Having experienced a secular increase in regional disparity for more than a decade, China seems to have entered a period of stabilization or even convergence in the last few years.

 
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