Infant Mortality Rate in 2005

Xinjiang

Inner MongoliaJilin

Heilongjiang

j g

Qinghai

GansuHebei

Shaanxi

Shanxi

Liaoning

ShandongNingxia

BeijingTianjin

TibetSichuan Hubei

Hunan

Anhui

JiangxiGuizhou

Jiangsu

Zhejiang

Shanghai73/10003/1000

Taiwan

MacauHong Kong

Yunnan Guangxi

Fujian

Guangdong

Hainan

Infant Mortality Rate< 5.05.1 - 10.010 1 - 15 0 a a10.1 - 15.015.1 - 30.0> 30.0Not Included

Urban/Rural IMR = 2.2Inland/Coast IMR = 2.1

How have regional disparities in their differentdimensions evolved since the revolution?dimensions evolved since the revolution?

40

Gini

30

35

20

25

10

15 Outcome (per capita consumption at the provincial level In six decades) in three dimensions:

O ll

0

5

1950 1960 1970 1980 1990 2000 2010

OverallRural-Urban (RU)Inland-Coastal (IC)

1950 1960 1970 1980 1990 2000 2010

Rural-Urban and Inland-Coastal Inequalityq y4

14

16

312

14

28

10

Rural-urban

Inland-coast

14

6

Inland coast

2

001950 1960 1970 1980 1990 2000 2010

Why No Convergence?I id l ld if i i t t d f t• In an ideal world, if assuming integrated factor markets and full factor movement (no frictions), market forces will equalize marginal returns tomarket forces will equalize marginal returns to factor inputs, leading to convergence across regions and sectors. g

• Development strategies and economic policies p g pmatter to the observed spatial inequality.

Walk Through History: g yChina’s Development Strategy

• Heavy industry-led development strategy in the 1950s

Vi l d Chi ’ i d h i– Violated China’s comparative advantage at the time that capital was scarce and labor was abundant.

– Formed Hukou (Household registration system) and ( g y )create rural-urban gap

B h l 1970 Chi h d i d h• By the late 1970s, China had experienced the Great Famine and Cultural Revolution and its economy was at the verge of collapse.economy was at the verge of collapse.

Rural ReformRural Reform

• Abolished the inefficient collective farmingAbolished the inefficient collective farming

l h h ld ibili• Rural household responsibility system –grant farmers land user rights and allow h k h i d ithemto make their own production

decisions.

Rural-urban Disparity and HIDSp y

d/ iGreat Leap Forward/Great Famine

14.0

16.060

Cultural Revolution 66-76

10.0

12.0

40

50

6.0

8.0

20

30HID

ru

2.0

4.0

10

20

Rural reform0.00

1950 1960 1970 1980 1990 2000 2010

O UOpen Up

• In the late 1970s, China set up 14 special economic zones in the coast. Allow some people (regions) to get rich first(regions) to get rich first.

• Cheap labor and land + abundant capital from• Cheap labor and land + abundant capital from overseas made the coastal area a growth engine in the 1980s.

2. Shanghai

Page 111. Shenzhen

Inland-Coastal Disparity and Opennessp y p

3.580

Planning era Reform era

3.0

60

70

2.0

2.5

40

50

60

T d ti

Openness

1.0

1.5

20

30

40 Trade ratio

Inland-coastal disparity

0.510

20

0.001950 1960 1970 1980 1990 2000 2010

Decentrali ationDecentralization

• Expenditures tie more closely to revenue.

• Local government officials’ promotion is based on their performance in economic growth and revenue growthrevenue growth.

• Horizontal inter-judiciary competition serves as a• Horizontal inter-judiciary competition serves as a commitment device for local governments to create more favorable investment environment.

Regional Inequality and Decentralizationg q y

40.090

30.0

35.0

70

80

20.0

25.0

50

60

Decentralization

10 0

15.030

40 Gini

5.0

10.0

10

20

0.001950 1960 1970 1980 1990 2000 2010

Go West Strategy

• Started in 1999.

• Massive infrastructure investment in the west.

• Set up Chongqing as a province-level city, enjoying the same status as Shanghai and Beijing .

Other Regional Strategies

• “Rising Central”

• “Reinvigorating Northeast”

• Setting up a new economic zone in Tianjin.

4. Tianjin

3. Chongqing2. Shanghai

Page 171. Shenzhen

New Socialism Countryside

• Abolished agricultural taxation

• Provided direct grain subsidies to farmers

• Waived tuitions of nine-year basic education in vast rural areas

• Increased public investment in rural areas•• ……

Regional Inequality 1952-2007g q y

40

Gini Stimulus packa

30

35

Go West

20

25 ?10

15 New Countryside Movement &Building Harmonious Society

0

5

1950 1960 1970 1980 1990 2000 20101950 1960 1970 1980 1990 2000 2010

Conclusions

• Development strategies and economic policies have affected the course of economic growth and income distributionincome distribution.

• Changes in regional inequality match the phases• Changes in regional inequality match the phases of Chinese history remarkably well

The Limit of DecentralizationThe Limit of Decentralization

• When there is large regional variation, decentralization may not work well.

• There is an increasing scale of economy due to the fixed cost of administration.

• With the presence of increasing scale, decentralization may force capital flow from poor to rich regions.

Coastal Region: Race to the TopCoastal Region: Race to the Top

• Conditions:Conditions:• Regions are similar;• There is a mobile factor of capitalp

• Consequence:• Less tax on capital but more on land • Better investment environment

M i i h l l l l• Many innovations at the local level

Uneven Fiscal Burden

Zhang (2006)

Regressive Tax Rate in Chinag

Zhang (2006)

Two spirals

• Tax burdens are extremely high in poor regions with agriculture as the major means of production.• Downward spiral: small tax base more extraction• Downward spiral: small tax base, more extraction

from limited agricultural surplus and nonfarm activities, worsening investing environment, and lowering public goods provision.

• They are low in developed regions initially with a large• They are low in developed regions initially with a large nonfarm sector. • Virtuous cycle: light tax burden for each enterprise, y g p ,

more public inputs, better investing environment.

Per Capita GDP in 2008

Inner MongoliaJilin

Heilongjiang

Xinjiang

Qinghai

Gansu Hebei

Shaanxi

Shanxi

Liaoning

ShandongNingxia

Beijing

Tibet

g

Sichuan Hubei

Hunan

ShaanxiHenan

Anhui

JiangxiGuizhou

Jiangsu

ZhejiangShanghai

Yunnan Guangxi

JiangxiGuizhouFujian

Guangdong

Hainan

Taiwan

MacauHong Kong

GDP Per Capita(yuan)

< 1000010001 15000 $1 000

$10,000

Hainan10001 - 1500015001 - 2000020001 - 40000> 40000Not included

$1,000Urban/Rural income=3.3Inland/Coast income=2.2

The Impact of Openness

• In a closed economy, regional comparative advantage is mainly determined by agricultural production conditions.

• When opening up, regional comparative advantage i l d i l b lis evaluated in a global context.

• In addition, many policy privileges are granted to t l icoastal regions.

The Impact of Decentralization

• But decentralization has strong distributional impact.

• Centralization: more transfers and less incentives for local governments

• Decentralization: less transfers, more incentives.