Source: December

In this conference paper, Senior Associate Albert Keidel analyzes the cause and impact of China's regional economic inequalities.
 
The paper's innovations aggregate China's 31 provincial-level jurisdictions into 7 major regions and then compare trends in rural income and consumption over a 20-year period. This approach is an improvement over the two most common alternatives. One standard approach compares trends for all 31 provincial level entities. But this leads to results that are difficult to interpret for policy purposes because it puts city-states like Shanghai and Beijing on the same status as heavily rural provinces, and in at least one case, Hebei Province, a province that has been stripped of its major urban areas (Beijing and Tianjin). The second standard approach dates from the late 1980s and aggregates China into three belts, coastal, central and western. While useful, these groupings fail to identify differences in patterns and trends for important sub-regions, like China's south coast.
 
The paper's initial conclusions are that the pattern of regional disparities in rural income and consumption have remained intact over 20 years (1985-2005) and have in fact worsened. However, increases in per-capita income and consumption in all regions have been so rapid that disparities are of secondary importance. The paper stresses that rather than comparing average income or wealth by region, the most important perspective for policy makers should reflect differences in the incidence of poverty between various sections of the country. This is especially so if a more accurate PPP (purchasing power parity) measure for China is used for identifying poverty levels by the World Bank dollar-a-day poverty standard.

The paper argues that for a rapidly growing economy like China's, with major income and consumption increases in all regions, inequality can serve to provide incentives for labor to move voluntarily to locations and occupations where it is more productive and hence better able to earn a higher standard of living. The paper uses census data to show that this is precisely the direction that nationwide migration is taking.