Disparities in Chinese Economic Growth

When there is rapid economic growth in an economy, it is not surprising that some sectors and regions grow more rapidly than others. How the economy deals with the disparities will have a large impact on its very long-term outlook.

Ben Muse cites a recent study by Shane and Gale, showing that incomes and income growth in Western China have lagged behind income and growth in the east, especially the urbanized areas. To address these differences,

In 2000, China embarked on a “develop the west” campaign to push both public and private investment into the country’s poorest western provinces. In 2004, the party and central government leadership issued a “No. 1 Document” that made increasing rural incomes a top policy priority. Major policy initiatives in 2004 included a phase-out of agricultural taxes and direct subsidies of $1.2 billion to grain producers in 13 of China's 31 provinces.

Why use policy to address the differences? Why not let the market address them? Business should flow to areas of cheap land and cheap labour, and resources should flow to the areas and sectors of greater opportunity.

Perhaps in China, as has happened in Canada, residents of poorer regions are envious of the successes of others? If so, the Chinese might do well to learn from the abysmal failure of Canadian "equalization" payments from the "have" provinces to the "have-not" provinces. These policies amount to little more than greed and theft; but, worse, they distort incentives, leading to some important inefficiencies that arise from rent-seeking and reduced factor mobility.