Development strategies and regional income disparities in China

Since economic reforms began in 1978, China’s Gross Domestic Product (GDP) has grown at an average rate of 8.1% per annum. However, since 1990 the country has experienced widening disparities in income between regions. In 2001, per capita GDP in Shanghai was thirteen times that of some western provinces.

This paper suggests that regional disparities are caused by "flawed" development strategies by the government, which did not take into consideration the different comparative advantage of the provinces. The government promoted capital-intensive industries in many regions where capital was not the abundant factor of production. These strategies are known as comparative advantage defying (CAD) strategies. As a result, in these provinces, the government had to subsidise inefficient firms, capital accumulation was impeded and technological and productive capacity was hindered.

The paper starts by reviewing China’s regional development economic policies since 1949 and discusses the effects of the government’s industrialisation strategies on economic development. The author then tests the hypothesis that regions where strategies were CAD experienced slower growth than regions where strategies followed comparative advantage.

The author finds that:

• in regions where development strategies were CAD, GDP growth rate is reduced significantly
• central and western provinces follow CAD strategies more closely than eastern provinces
• pursuits of the wrong strategy contributed to the observed widening of regional disparities.

The paper concludes by suggesting that provinces should allocate new investments and restructure existing industries according to its regional comparative advantage. Finally, the author notes that China’s accession into the WTO may mitigate the trend of widening regional disparities because the government is restricted in its use of subsidies.