Given that China's regions have become more economically unequal since the market-oriented reforms in 1978, what is the impact of the regional disparities on economic growth overall?

Abstract

The hypothesis of the paper is that there is a statistically significant and negative relationship between regional inequality and national economic growth. This paper analyzes the impact of regional disparities on economic growth overall in China, controlling for key determinants of economic growth. While China has made remarkable advances towards growth in the past 25 years, the average income gap between regions has been magnified over the period. One consequence of the current economic growth is increased regional income disparities that pose the risk of interregional conflict in the future. In order to determine the impact of regional disparities on economic growth, this study quantifies a number of the determinants of economic growth and analyzes the impact of regional inequalities and its influence on economic growth in China. In this respect, the five independent variables used in the model (agricultural GDP share, enrollment, foreign capital actually utilized, the balance of trade, and the privatization ratio of industrial enterprises) capture the four factors (land, labor, capital, and technology) of the classic economic growth function, supporting high explanatory power to predict the relationship between regional disparities and economic growth. The analysis uses pooled time-series data on all 31 Chinese provinces from the years 1996-2004; it employs OLS model with temporal fixed effects. As expected, the results indicate that a negative relationship exists between regional disparities and economic growth. The negative impact of inequality on economic growth is broadly covered in past research but never investigated empirically. This study's findings confirm that the current practice of targeted economic stimulation could be detrimental to national growth overall. Though none of past literature directly illustrates how regional inequalities affect economic growth, the studies provide useful explanations of the determinants of economic growth as well as the impact of regional disparities. Consequently, this enables me to attempt to combine knowledge from the two literature sets in determining how regional inequalities affect national economic growth. Additionally, the findings of this study suggest that the city-based economic policies could in fact have a net detrimental effect on provinces. It is discussed in China recently that inequality in urban-rural and rich-poor is also a serious social issue that the Chinese government should address. Collecting city-level or county-level data might yield microscopic results estimating the impact of regional inequality on economic growth. Therefore, if access to city- or county-level data is possible in the future, further research studying intra-provincial disparities would contribute to the studies of regional inequalities in China.