Regional Imbalance and Income Disparity

1.1 Decentralization or losing control—Looking through the National People’s Congress

China watchers pay close attention to central regional development strategies ( “zhongbu boxing”) especially since none of these interior provinces has yet appeared on the PRC’s regional top ten list for per capita income. Acutely aware that their local economies lag behind other provinces, representatives from Hubei , Hunan , Anhui and three other central provinces appealed for strategic governmental assistance at the recent National People’s Congress (NPC).

Under Premier Zhu Ronji’s administration, requests from rural areas were largely ignored or even refused. This position was both consistent with his commitment to fight inflation and with the former premier’s strong personality. More recently things have changed. To emphasize the importance of balanced regional development, the government launched the famous “go west” policy ( “xibu da kaifa”) aimed at developing inland areas. It also targeted state- owned enterprises (SOEs) in the northeast for restructuring. Still, central area provinces complain that other regions receive comparatively more governmental support.

How the central government will manage ongoing request for development assistance remains unclear. A primary commitment of the current administration is to realistically address regional disparities. Accompanying this commitment is a new management style and control of administrative directives that contrasts sharply from the former regime; and local officials are keenly aware of the new environment. One example is the way in which local representatives are using the annual NPC to convey requests and engage in substantive discussions with central government officials. Unlike before, when the NPC was essentially a ceremonial event, the meeting now serves as an important opportunity for practical discussion. And though this is a significant step toward decentralization, it may also indicate a gradual loss of central government control over the provinces.

Over the past two years, the central government’s response to provincial development requests has led to overinvestment that has caused overheating in certain sectors of the economy. One might expect Beijing to abandon decentralization policies and return to a more centrally planned system. That may not be possible given the current economic climate. Another choice might be for the government to pursue a “Pareto improvement” strategy to address regional disparity. By further promoting marketization and decentralization throughout the country PRC authorities could create more job opportunities for poor people through SOE reform and various deregulation measures without sacrificing the welfare of any other people. Either way, regional income disparity and development imbalances will become increasingly critical economic and social issues. (31 March 2005)

1.2 Income disparity and poverty in the PRC

China watchers and PRC officials alike now view the widening income gap between urban and rural areas, and the disparity within each of these areas, as one of the most serious problems facing the country. While there are few reliable indicators to accurately show income disparity, some of the estimates put forward by local experts are telling.

According to these experts, in 1990 the average income in eastern regions was 2.1 times higher than in the west. By 2003 this gap widened to 3.24 times that amount. Apparently, the income gap is widening more within urban areas. Recent surveys released by the National Statistical Bureau confirm this to be the case, and indicate that the urban income gap is up 11.8 times; a sharp increase from 4.16 and 5.7 in 1996 and 2000 respectively. The Ministry of Labor also reports that the top 10 percent of rich people own 45 percent of urban wealth whereas the bottom 10 percent of poor people own only 1.4 percent.

One well-known indicator for representing the degree of income disparity, the Gini coefficient, indicates much the same. The nationwide PRC Gini coefficient recently increased from 0.39 in 1995 to 0.48, which is well above the internationally recognized alert line of 0.4. And when looking at the breakdown, the Gini coefficient in urban areas increased more rapidly from 0.28 in 1995 to 0.32 in 2002 compared to a moderate increase in rural areas of 0.34 to 0.37 during the same period (see Table).

At the outset of the economic reforms Deng Xiaoping’s controversial statement, “let a part of the people become rich first,” acknowledged that a certain level of income disparity was to be expected. Without a doubt, rapid economic growth in the PRC has alleviated poverty and steadily improved the economic circumstances of millions of people. The government officially reports that the number of rural poor declined from 250 million in 1978 to only 34 million in 1999, and that rural income has grown by 5 times since the beginning of the economic reforms. Nevertheless, the World Bank estimates the number of poor at around 200 million based on its own criteria.

Looking ahead, so long as Pareto improvement continues, social tension arising from income disparity may not become critical. To achieve this outcome the PRC must maintain its unusually high economic growth. The sustainability of such a plan may be challenged by a need to slow down economic growth to address overinvestment and respond to environmental concerns. Alternatively, income disparity may follow the famous Kuznet’s hypothesis, which argues that the Gini coefficient hits its peak (or shows a reverse U curve) when a country arrives at a stage of middle income, and begins to decline as it becomes a high-income country.

Based on this idea, one could argue that the PRC is on its way from a low income to the middle-income stage where the Gini coefficient trends sharply upwards. This would suggest that income disparity would decline over the medium to long term. But for the short term, income disparity remains a social problem that may not wait patiently for the Kuznets’ curve to peak. Perhaps measures not only to raise GDP growth rate but also to address the income gap directly will contribute to reducing poverty and making “efficiency” and “equity” compatible. (22 November 2005)

1.3 The real problem of regional imbalance in the PRC

There is growing concern among PRC official about the widening income gap between coastal and rural areas of the country. Yet knowledgeable business observers and foreign visitors report the contrary, saying that rural Chinese generally look happy and seem to enjoy their lifestyle. These outside observers seem to suggest that the widening income gap is not as serious as presumed, and that regional imbalance, or a two-tiered economic structure in the PRC provides a solid basis for high economic growth and strong industrial competitiveness globally. These observers acknowledge that rural poverty forces people to search for jobs and income in urban areas but argue that after they work for a few years the migrant workers return to their native homes with money to contribute to local consumption and economic development. This is viewed as a positive cycle that enables the PRC to sustain its high level of economic growth.

Such an argument makes a few compelling points, particularly in view of Japan’s experience during the high growth, boom years of the 1960’s and early 1970’s. In Japan’s case, the end of the high growth period coincided with the arrival of improved rural economic conditions and the disappearance of regional economic imbalances. The fact that rural people feel happy and enjoy their lifestyle may somehow provide an attractive model of existence for outsiders who live a more stressful, modern existence. It may also provide useful insights when considering the impacts of development assistance on the people’s quality of life. Such observations do not, however, reflect on the full range of issues related to regional imbalances in a country.

After all, objective and quantitative indicators such as real income, availability of goods and services, education, sanitation, health care, and mortality rates, should be used to assess income disparity and regional imbalances. Based on these indicators, it is difficult to deny that serious regional imbalances exist in the PRC. It is possible that rural residents in the PRC remain satisfied only because they have no way to compare their situation to urban areas. But as television and internet connectivity penetrate rural areas, local people may become aware of the discrepancy. Although PRC officials have made no announcements, there are occasional rumors that riots have occurred in rural areas. If so, one cannot be certain about the underlying causes of such social unrest. Regardless, there is much more certainty around the fact that high economic growth supported by regional imbalances and income disparity can never be sustainable long-term. (28 February 2006)

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