Examining the Regional Imbalance in China: Comparison with India

Abstract

In the ninth chapter of this volume, the author carries out a cross-country analysis of India and China, the two giants of Asia. Having several common issues and threats between India and China, such comparative analyses can meaningfully provide inputs to India’s policy process. It is being argued that in the post-reform periods, both the nations have been facing very high regional disparity in their development. The socio-economic costs of a sustained divergence in income between their leading and backward regions have become a major policy challenge in development. The chapter therefore is significant, and explicitly highlights how regional imbalance in China has remained conspicuous, notwithstanding a conscious shift in development strategy towards balanced growth for several years. In spite of extensive state efforts to increase investment in the backward regions, economic activity remains sluggish in these regions, constraining growth of new income generating and earning opportunities. The author shows a clear comparative advantage in production in coastal areas. Specific development strategies are not easy, given that the Chinese economy has become far more market-oriented and globally integrated than what it was during the early years of economic transition. Under the current circumstances, state efforts and emphasis are not eliciting the desired response from the market forces. Furthermore, regional development strategies like the Go West, and the Western Development Strategy are producing partial outcomes that are accentuating intra-regional disparities and aggravating overall imbalance by expanding rural-urban differentials. This according to the author is an important lesson for India and other emerging economies that are also grappling with the challenge of regional imbalance.

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9.1 Policy Priority on Regional Development in China

India’s eastern neighbour China shares many common issues and threats with India on regional development . A comparative analysis therefore would be meaningful for India’s policy process. It is being argued that in the post-reform periods , both the nations have been facing very high regional disparity in their development. The socioeconomic costs of a sustained divergence in income between their regions have become a major policy challenge in development. The chapter therefore is significant, and explicitly highlights how addressing regional imbalance has been a major policy priority for China for almost two decades. Given the structural similarities of the two nations in terms of geographical vastness and their diversities, the idea is to see whether India can draw any lesson at the policy level for a better mechanism to deal with this perpetual issue of regional imbalance. This issue in China was highlighted at the 4th Plenary Session of the 14th Central Committee of the National People’s Congress in 1995, and the decision to follow a balanced development strategy was adopted in 1997. The Chinese policymakers were particularly worried over the wide disparities emerging between the much underdeveloped western region of the country and increasingly globally integrated and prosperous coastal areas in the country’s east.

The Western Development Strategy (WDS) —a major economic initiative of China for improving the economic performance of its Western provinces—was subsequently launched. This was followed by the introduction of similar initiatives for the northeastern and central regions in 2003 and 2004.¹ The correction of the imbalance and reducing the economic gap between different regions of the country was identified as a key priority in the 11th Five-Year Plan (2006–2010). An identical focus and emphasis has been maintained in the ongoing 12th Five-Year Plan (2011–2016) as well .

The key thrust of China’s regional development policy is on the development of the hinterland and inland areas. The economic gap between the coast and the hinterland in China has rapidly aggravated since the mid-1980s. The aggravation has not only led to unbalanced concentration and localization of economic resources but has also emerged as a threat to China’s efforts to build a ‘harmonious society’. Indeed, the more underdeveloped western region has been frequent witness to sociopolitical tensions in the minority-dominated autonomous regions of Tibet and Xinjiang.

The chapter attempts to identify the key aspects of regional imbalance in China by studying some of the major economic indicators across the country. It also looks closely at provincial economic situations, particularly provincial incomes for drawing insights on interregional and intra-regional disparities and attempts to identify the policy-induced factors influencing the imbalances. It concludes by drawing some structural comparisons with the imbalances in India.

9.2 Regional Imbalance: Stylized Facts

China is a large country with contrasting geographical features. The eastern and southern parts of the country have coastlines and border the East China Sea and the South China Sea. The rest of the regions—particularly the west—are landlocked. This specific geographical contrast, particularly the uneven access to the coast, has sharply influenced the pattern of economic imbalances within the country, as discussed later in the chapter.

The Federation of the People’s Republic of China (PRC) has 22 provinces, 4 municipalities, 5 autonomous regions and 2 special administrative regions .² Provinces are run by provincial governments and are structurally similar to states in the Indian federation. The municipalities are similar to India’s union territories (UTs) in that they are both under the administrative control of federal or union governments. However, the Chinese municipalities (e.g. Beijing and Shanghai) enjoy higher political status than the provinces.

Autonomous regions in China are administrative territories comprising minority ethnic groups as the majority population of the area (e.g. Uighurs in Xinjiang). Finally, special administrative regions (e.g. Hong Kong and Macau) are self-governing and autonomous in almost all sovereign aspects, except foreign policy and defence. These different administrative entities are grouped into four regions in Table 9.1 according to their geographical coordinates.³

Table 9.1 Regions in China

Comprising all the five autonomous regions (Inner Mongolia, Guangxi, Ningxia, Tibet, Xinjiang), six provinces (Gangsu, Guizhou, Qinghai, Shaanxi, Sichuan, Yunnan) and one municipality (Chongqing), the western region is China’s largest region with 71.5 % of the mainland’s total land area. The other three regions—east, central and the northeast, and their constituent territories, comprise 9.5, 10.7 and 8.2 % of China’s land area, respectively. The east includes the other three centrally administered municipalities—Beijing, Tianjin and Shanghai. In terms of population, at the end of the year 2010, the western provinces and autonomous regions accounted for 27.0 % (361 million) of China’s total population, while the much smaller eastern region had 38 % (507 million) of the population. The Central and the Northeast had 26.8 and 8.2 % of the population, respectively.⁴

The demographic contrasts between China’s regions—particularly the west with the largest land area and the smaller yet economically robust east—become stark on comparing the differences in rates of natural growth of population during the last decade: 7.0 % in the west as against 4.0 % in the east. The apparent paradox of the east having a much larger population than the west, despite a lower natural rate of growth, can be explained by the region absorbing large volumes of migrants from the hinterland of the western and central regions. Both the latter have almost identical demographic features in terms of birth rates, death rates and natural rates of growth.⁵ The eastern region and the coastal areas have been major destinations for job-seeking migrants from the interior areas due to greater economic opportunities and high demand for labour from export-intensive industries located on the coast. As a social and economic policy, the flow of migration has been maintained for several years by the gradual liberalization of the hukou system allowing greater mobility of labour within provinces.⁶

Migration has been responsible for producing a geography–demography imbalance within China’s regions, reflected in the irony of the west having less than a third of the mainland’s population in spite of being endowed with nearly three quarters of its land mass, and the east housing almost a fourth of the population despite accounting for less than a tenth of the land area. The imbalance underlines a specific structural aspect of the disparity between China’s eastern and western regions, or more specifically the coastal areas and the hinterland. It also helps in contextualizing the imbalance between the coast and the hinterland in terms of gaps between various social and economic indicators (Table 9.2).

Table 9.2 Major economic and social development indicators for regions. (Source: China Statistical Yearbook 2012)

The eastern region’s dominant role in the Chinese economy is evident from its contributing more than half of the country’s gross domestic product (GDP). In contrast, the central and the western regions have almost identical and lower shares in overall GDP with both accounting for less than a fifth, and the northeast region contributing less than a tenth to the overall GDP. More than the contribution to overall GDP, an even better indicator underscoring the degree of economic imbalance between the eastern and the other regions are the regional per capita incomes, which are much higher in the east. Provincial variations in rural and urban per capita incomes are analyzed in greater detail later in the chapter for obtaining deeper insights on the nature of economic imbalance.

Other than income, the eastern region is ahead of the other regions in major economic indicators like investment in fixed assets and contribution to foreign trade. With a share of 87.6 % in foreign trade, the eastern region has been instrumental in China’s integration with the world economy; the role of other regions has been minimal in this regard. The growth of both secondary and tertiary industries has been much more in the east with the region accounting for 52.1 and 58.3 % of China’s total outputs of secondary and tertiary industries. The corresponding shares for the western, central and the northeastern regions in secondary and tertiary industry output are 18.5 and 17.0 %, 20.5 and 20.3 % and 8.9 and 9.0 %, respectively.⁷ From a labour market perspective, the eastern region accounts for 48.5 % of the urban employment in China, which is an expected outcome, given the considerable industrial orientation of its economic structure as well as the region’s relatively rapid urbanization. The east also leads other regions in its shares in local government revenue and expenditure. Indeed, it is the only region in China which has a relatively greater contribution to overall local government revenues than expenditures (Table 9.2).

In terms of physical infrastructure and social development indicators (e.g. roads, health), despite the eastern region being ahead of other regions, the regional gaps are less than those in economic indicators (e.g. income, investment and foreign trade). In physical infrastructure like highways, the west is the leading region in the country. This is both a result of the infrastructure created during China’s pre-economic reform period (1953–1978) for facilitating growth of heavy industries in the hinterland, as well as more recent efforts through balanced development strategies like the WDS for building new infrastructure capacities. The same factors explain the gap between the eastern and the western region being slender in stock in terms of health-care institutions (Table 9.2). The gap between the two regions, however, is noticeably large in share of graduate students. On the whole, there is little doubt about the west and other hinterland regions lagging well behind the coastal east notwithstanding focused attention of public policies on alleviating the regional imbalance. The continuation of the imbalance, particularly the economic backwardness of the western region, is a serious concern for China given the large dispersion of ethnic minorities in the region’s autonomous territories and the sociopolitical ramifications of such economic imbalance.

9.3 Provincial Features

The eastern region’s overall commendable economic performance does not imply an entirely balanced performance within itself. While most of its provinces are economically successful, some are noticeably more successful than others. In this respect, the eastern region reveals another aspect of disparities within China—the intra-regional disparity—that is noticed in the western region as well.

During the period 2006–2010, the Guangdong province in the eastern region has contributed the most to both national and regional GDP, followed by Jiangsu, Shandong, Zhejiang and Hebei provinces (Table 9.3). Between them, these five coastal provinces in the east accounted for around three fourths (75.3 %) of the regional GDP and about two fifths of the national GDP (40.9 %) during the reference period. The remaining provinces and municipalities in the east contribute a quarter of the regional GDP and 13.5 % of the national GDP. The Hainan province is a relatively lacklustre performer in the eastern region, and is only a marginal contributor to regional and national GDP despite enjoying the status of a special economic zone (SEZ) . This is in sharp contrast to the phenomenal economic success of the Shenzhen SEZ on the east coast, which has contributed enormously to the economic growth and significance of the Guangdong province. More examples of intra-regional disparity are discussed later in the chapter.

Table 9.3 Eastern region: provincial contributions to regional and national GDP (2006–2010). (Source: Computed by Author. Totals may not add up due to rounding off)

Rural and urban per capita incomes provide deeper insights on the nature of interregional and intra-regional imbalances in China (Table 9.4). The Federally administered municipalities of Shanghai and Beijing have the highest per capita rural incomes, followed by Zhejiang, Tianjin, Jiangsu, Guangdong, Fujian and Shandong. Hebei and Hainan are the only eastern provinces that do not feature among the top ten Chinese provinces in terms of rural per capita income. The northeastern provinces of Liaoning, Heilongjiang and Jiling occupy the 9th–11th spots in the rural per capita income rankings. The autonomous region of Inner Mongolia from the western region is ranked 15th, and is the only western administrative region to feature among the top 15 rural income territories. The middle cohort in rural per capita income ranking belongs to the central provinces, though Shanxi and Anhui are ranked at 20 and below. The Chongqing municipality from the western region figures among the top 20. With the exception of Inner Mongolia and Chongqing—which incidentally have rural incomes marginally higher than the lowest-income eastern province of Hainan—all other western provinces and autonomous regions are at the bottom rung of rural per capita income rankings.

Table 9.4 Provincial per capita incomes (Yuan). (Source: China Statistical Yearbook 2012)

Urban per capita incomes are relatively higher in the western region. Inner Mongolia is among the top ten urban income provinces in China, while Chongqing, Guangxi, Yunnan, Shaanxi and Sichuan are in the middle cohort (10–20). Compared with rural per capita incomes , this is a distinct improvement. Among the central provinces, while Anhui has a higher relative rank in urban income compared with rural income, the opposite is seen for Jiangxi and Henan. From a regional perspective, while all the three northeastern provinces are ahead of the central and western provinces in rural per capita income, Jilin and Heilongjiang have the lowest urban incomes among all provinces. Most eastern provinces have higher urban incomes than other regional provinces, except Hebei and Hainan, though the latter has a relatively better urban income rank.

The regional imbalance in China varies in its rural and urban dimensions and can be perceived better by comparing the differences of provincial rural and urban incomes from their corresponding national averages (Table 9.4 and Figs. 9.1 and 9.2).

Fig. 9.1

Provincial rural per capita incomes: variations from national average. (Source: Computed by author from China statistical yearbook 2012)

Fig. 9.2

Provincial urban per capita incomes: variations from national average. (Source: Computed by author from China statistical yearbook 2012)

All western provinces and autonomous regions are behind the overall national averages for both rural and urban per capita incomes . Deviations from the national average are the least for Inner Mongolia and Chongqing. These two territories appear to be performing better than the rest of the provinces and autonomous regions from the west and are likely to narrow their income gaps with the provinces from the eastern and central regions faster than the rest. While this reflects a particular aspect of the intra-regional imbalance in the west, there are interesting aspects of the same for the east, as revealed by the deviations of provincial rural and urban incomes from the national averages.

The individual rural per capita incomes of Shanghai, Beijing and Zhejiang are at least 6000 yuan higher than the national rural per capita income of 6977.3 yuan. Indeed, Shanghai and Beijing’s rural per capita incomes (16,053.8 and 14,735.7 yuan) are more than double of the national average. At the same time, Zhejiang, Jiangsu, Tianjin, Shandong, Guangdong and Fujian provinces have rural per capita incomes ranging from 120 to 190 % of the national average. This is in sharp contrast to the western provinces and autonomous regions like Gansu, Guizhou, Ningxia, Tibet, Xinjiang and Yunnan, whose rural incomes range between 60 and 80 % of the national average. The extent of disparities in rural per capita income between the eastern region and the western region, particularly the higher-income provinces in the east vis-à-vis the lower-income provinces and autonomous regions in the west, is evident from the minority regions of Xinjiang and Tibet having rural incomes that are merely 33.8 and 33.3 % of Shanghai and Beijing’s rural incomes, respectively.

The degree of disparities reflected by the urban per capita incomes is relatively less than that revealed by the rural per capita incomes . Shanghai and Beijing’s urban per capita incomes become 170  and 150 % of the national average urban per capita income, while incomes of other prosperous eastern provinces range between 110 and 140 %of the national average. In sharp contrast, for most of the relatively backward western territories, urban per capita incomes range between 68.0 and 84.0 % of the national average. The urban incomes in the minority autonomous areas of Xinjiang and Tibet are 43.0 and 49.0 % of Shanghai and Beijing, respectively. Thus, while urban per capita incomes show a relatively lesser imbalance between the eastern and the western regions compared with rural per capita incomes, they also reflect a qualitatively different aspect of the overall imbalance between the eastern and other regions, as revealed in Table 9.5.

Table 9.5 Regional income proportions (%). (Source: Computed by author)

The northeastern region has a relatively smaller differential with the eastern region on rural per capita incomes as compared with urban per capita incomes . This is in contrast to the western region’s economic gap from the eastern region, which is more pronounced in rural incomes. While rural per capita income of the northeastern region is almost four fifths of the eastern region, its urban per capita income is 68.5 % of that of the eastern region. Indeed, as Table 9.5 reveals, in terms of urban per capita income, the economic gap between the eastern region and the rest of the regions is almost identical. However, they are different if considered with respect to rural per capita incomes, where the economic gap between the eastern and the western regions is much wider than that between the eastern and other regions. This implies that while the western region has been able to narrow its gap with the eastern region and has caught up with the central and the northeast regions in urban per capita income, it lags behind in rural per capita income from not only the eastern region but also the northeast and central regions.

The greater disparity in rural per capita income and the degree of rural prosperity have obvious implications for China WDS. Urban per capita income in China is higher than the rural per capita income with the latter being 35.0 % of the former (Tables 9.2 and 9.5). While the rural–urban income disparity is prevalent in all regions, it is most prominent in the western region where rural per capita income is less than a third of the regional urban per capita income (Table 9.5). Indeed, the current nature of the disparity might also point to extant public policies on balanced regional development, including the WDS, having actually contributed more to increase in both urban incomes and the rural–urban imbalance.

Apart from rural and urban per capita incomes, greater insights on interregional and intra-regional imbalances can be obtained from the provincial indicators of investment and trade. The eastern region has a higher share of investments in fixed assets (Table 9.2), and also accounts for 47 % of the gross capital formation (GCF) in China, much higher than the corresponding proportions of 22.4 and 20.7 % for the western and central regions, respectively. Guangdong, Zhejiang, Shandong, Jiangsu and Hebei are the leading eastern provinces in mobilizing investments, and between them, these five provinces accounted for 34.7 % of China’s total GCF in 2010 and 74.1 % of the eastern region’s GCF during the same year. This intra-regional imbalance in distribution of investment is noticed in the western region too where five provinces—Sichuan (16.9 %), Inner Mongolia (16.5 %), Guangxi (14.4 %), Shaanxi (12.5 %) and Yunan (10.2 %) account for 70.6 % of the total regional GCF and 16.0 % of the national GCF. The GCF is noticeably small in other western provinces with Tibet, Xinjiang, Ningxia and Qinghai accounting for barely a tenth of the regional GCF.⁸ Notwithstanding greater efforts by the Chinese state in promoting investment in the western region through the WDS, which has resulted in investment in fixed assets having the fastest rate of the growth in the western region,⁹ all of the region has not benefitted uniformly from the thrust, which probably explains why the gap between the region and the coastal east continues to remain conspicuous.

The eastern region’s dominant role in the Chinese economy is attributable to its higher shares in both domestic capital formation and international trade. The region has benefitted considerably from the preferential incentives offered to the coastal areas from the 1980s onwards. One of the outcomes of such policies encouraging exports and foreign investments is the region’s remarkable embeddedness in China’s external trade with the rest of the world. The region presently accounts for 87.6 % of China’s total international trade with shares of 87.4 and 87.9 %in its total exports and imports. The share of the western region in China’s trade is at a distinctly marginal 4.3 %, so are those of the hinterland regions of the central and northeast at 4.0 and 4.1 % ,respectively.

Apart from preferential policies, the centrally administered municipalities of Beijing and Shanghai have been instrumental in greater external trade integration of the eastern region. The two municipalities accounted for 10.2 and 12.4 % of China’s total foreign trade during 2010. The high shares are primarily due to their access and connection to the major seaports on the east coast enabling exports from other eastern provinces also to be marked and invoiced from the two cities. Jiangsu and Zhejiang provinces also have high shares of 15.7 and 8.5 % in China’s total trade.¹⁰ Jiangsu benefits from strong backward linkages with the Shanghai port through quality infrastructure like the Shanghai–Nanjing corridor. It is also located midway between the Beijing–Shanghai high-speed rail route and benefits from access to both cities. Zhejiang, on the other hand, benefits from its own active ports such as Ningbo and Zhoushan, as well as the high-grade facilities available in the Pudong area in Shanghai. The Guangzhou port in Guangdong province also handles a large volume of trade traffic coming out of the Guangdong province, though a large part of the traffic from the province also gets channelized through Hong Kong and other outlets in the Pearl River delta. The eastern region’s typical locational advantages in the form of a long and unbroken coastline, active large ports with good berthing capacities and efficient turnaround time, good airports (Beijing, Shanghai, Ningbo, Hangzhou) and sturdy rail and road infrastructure, has helped it substantively in integrating with world trade and business. The landlocked western provinces have been at an obvious disadvantage in this regard.

Predictably, the concentration of foreign firms has also been more in the eastern region. At the end of 2010, the eastern region had 74.8 % of the total foreign-funded enterprises (FFE) in China along with 73.8 % of the total foreign investment (Table 9.6). Similar shares for the western and central regions were 9.2 and 7.4 %, and 14.5 and 10.8 % respectively. Guangdong, Shanghai, Jiangsu, Shandong, Zhejiang and Beijing lead the country both in number of FFEs as well as total inward foreign investment. The first four provinces actually account for more than half of the total FFEs and foreign investments into China. The high shares reflect the beneficial effects of the preferential incentives these provinces have enjoyed from the early period of China’s reform and opening up, particularly the fiscal incentives.

Table 9.6 Province-wise Share in number of FFEs and foreign investment. (Source: China Statistical Yearbook 2012)

While preferential fiscal incentives for FFEs are also offered as part of the WDS, the tide has not been easy to reverse, and foreign investment has not flowed into the western region purely in response to these incentives. Except for Sichuan, Chongqing and Inner Mongolia, foreign investment has hardly penetrated into the region. The shares of these provinces too in total inward foreign investments are much smaller compared with the leading eastern provinces. Among the northeastern provinces, Liaoning has been able to draw much greater foreign investment, which could be on account of its proximity to Beijing and Tianjin. The central provinces, while way behind the east, show relatively greater success in attracting foreign capital than the western region.¹¹

9.4 Factors Explaining Imbalance

Most studies examining regional disparities in China since 1978 point to an increase in inter-provincial disparities since the mid-1980s. Structurally, these disparities—as the literature points out—have largely followed a U-shaped pattern with an initial decline after the reforms of 1978 gave way to an accentuation of imbalances thereafter.

Several reasons have been identified by empirical literature for provincial disparities increasing the imbalance. These include disparate growth of industries since the introduction of market-oriented economic policies from the 1980s, difference in regional (and provincial) productivity levels influencing inward capital flows, absence of balanced regional development strategies in the early decades of China’s economic transition, labour market distortions and differing rates of returns on human capital investment in different parts of the country.¹²

On the whole, the consensus among researchers is to identify the opening-up and coastal development strategy of the 1980s and 1990s as the main reason behind the accentuation of China’s regional imbalances.¹³ The existing literature identifies the economic imbalance between the coastal areas and the hinterland as a major dimension of inequality in China. This is primarily on account of internal comparative advantages changing as a result of the opening up to external trade. The latter can indeed be a trigger for accentuating regional inequality ¹⁴ and modern China is one of the best examples. The ‘imbalance’ effect of external trade and greater global integration in China has been further enhanced by the strategy of economic decentralization allowing greater autonomy to provinces for pursuing preferential policies for exploiting their comparative advantages .

As mentioned earlier, the policy emphasis since the mid-1990s has been to minimize regional imbalances through dedicated regional development strategies such as the WDS. Several studies analyzing the spatial pattern of provincial disparities in China find disparities to have actually declined from the early years of the last decade, i.e. the beginning of 2000. Various empirical measures employed by these studies for studying disparities such as the Gini coefficient (for nominal and real per capita provincial GDPs), coefficient of variation , Theil index, mean logarithmic deviation and variance, point to a lowering of disparities.¹⁵ However, most of these studies focus on developments till 2006 and are not free from inaccuracies involved in estimating populations of provinces. The inaccuracies largely arise from population estimates not accounting for migration between provinces. Estimates of population till 2006 were not methodologically refined to capture the migration patterns leading to underestimation of resident populations in provinces receiving large number of migrants and overestimation in provinces having outward migration. Thus, populations in several eastern coastal provinces would be underestimated while those in the western and central regions would be overestimated and these differences would influence per capita income levels and conclusions on disparities.

Studies conducted on the basis of population data reflecting migration patterns do show a decline in interregional disparities after 2005. However, they also point to an increase in intra-regional disparities, particularly in the western region.¹⁶ The latter is a particularly interesting finding given that though the WDS has been operational for almost a decade now, it might not have achieved its core objective of reducing disparities. Instead, it has resulted in growth with unbalanced outcomes, particularly in terms of the increasing rural–urban divide . As the discussions in the earlier sections indicate, a few provinces in the west, such as Inner Mongolia, Chongqing and Sichuan, have been able to take better advantage of the ongoing regional development policies, compared with other areas, particularly minority regions like Tibet and Xinjiang. The WDS appears to be having a partial and unbalanced impact as opposed to a desired balanced outcome.

A critical aspect of the regional imbalance in China is the rural–urban inequality , which is a significant dimension of the economic gap between the coastal areas and the hinterland. Several factors appear to be contributing to the rural–urban divide. These include inadequate investments in the rural economy by local governments, ceaseless outflow of the rural skilled and less-skilled population from the hinterland to the coast, loss of rural farmland and incomes due to rapid urbanization, degradation of the ecological environment in the western region impeding growth of rural nonfarm activities and inadequate expenditure on building rural infrastructure capacities. Given that more than 60 % of China’s rural population resides in the western region and the majority of the rural poor in the country are also in the same area, the rural–urban differential is a major worry for the Chinese policymakers.

9.5 Contextualizing with India

The nature of regional imbalances in China has changed sharply over the past six decades. These changes are intrinsically linked to the Chinese policies on regional development, which have swung between balanced and unbalanced postures at different points in time beginning from the 1950s and the overall shifts in China’s policy towards economic growth and development.

For nearly three decades, since the early 1950s, and till the onset of economic reforms in the late 1970s, China’s policy focus on balanced regional development led to the hinterland areas benefitting more from the emphasis on growth of heavy and military industries. The policy emphasis aimed at correcting the historical advantages of the coastal areas in the eastern region in development and modernization. By focusing on the inland, the extant policies marginalized the coastal areas and left their natural comparative advantages underutlilized. The situation changed from the 1980s with Deng Xiaoping’s unbalanced growth strategy identifying the coastal regions for faster development by providing discriminatory incentives for promoting growth ‘poles’ such as the SEZs , and the Pearl River and the Yangtze River deltas. It is also noticeable that the three major growth nodes in the eastern region—Beijing, Shanghai and Tianjin—have remained under the administrative control of the federal government, enabling faster implementation of development policies and projects. The unbalanced posture, identifying the coastal areas as the engine of growth for China, was in contrast to the more balanced and egalitarian focus during the pre-reform era. While the latter policy was also in a sense ‘unbalanced’ and aimed at correcting the existing regional imbalance, it was in contrast to the deliberate emphasis on exploiting the locational advantages of the eastern region introduced by Deng for faster economic growth through trade-based global integration.

The unbalanced strategy resulted in the economic inequality between the coastal and hinterland areas widening at a rapid pace. Expectations over the benefits of high economic growth and external economic integration of the coastal areas ‘trickling down’ to the hinterland did not materialize. The fruits of the economic success produced by the coastal areas and the eastern provinces were almost entirely enjoyed by the people of the region themselves. Indeed, opening up and decentralization, allowing provinces to aggressively mobilize investments and other resources for increasing growth, resulted in relative comparative advantages between provinces changing significantly in favour of the coastal regions.¹⁷

The widening regional imbalance forced a return to the balanced development strategy during the 1990s with specific emphasis on the hinterland areas. For more than a decade now, regional development strategies are being deployed in China for reducing the economic imbalance between the coastal and hinterland areas. In this respect, the past six decades in China have witnessed the wheel turning full circle with respect to the emphasis on regional development strategies . This is rather different from the Indian context.

Regional development, while being a priority for India’s development policies and strategies, has never assumed as pronounced and explicit a dimension as it did in China, in terms of introduction of specific policies for changing the economic balance between regions. This objective has generally been implicit in India’s strategies. India, unlike China, hardly has a history of offering geographically distinct growth incentives for the coastal areas and the hinterland, particularly through preferential fiscal and financial policies, except for new industries in backward areas and in the SEZs. Again, SEZs in India are not concentrated only in the coastal areas and have come up in the hinterland too. Thus, while the current regional imbalance in China is by and large an outcome of the ‘deliberate’ policies it pursued, for India, the imbalance, while attributable to policies in several respects, is not the product of a deliberate emphasis. This could, in part, be due to the much greater autonomy enjoyed by Chinese provinces in declaring significant incentives for attracting capital, compared with Indian provinces. Fiscal incentives used by Indian states for attracting investments have generally been confined to only lower rates of state excise duties and subsidies on investment, as opposed to more economically influential measures like lower rates of income tax that could be offered by Chinese provinces to new investors.

Intra-regional disparities are becoming increasingly prevalent in China and are noticeable in both coastal and hinterland areas. Among coastal areas and in the eastern region, intra-regional disparity is particularly visible in provinces like Hebei and Hainan that are developing larger economic distances from the rest, predominantly in urban incomes. The disparity can be explained by the relative inability of these provinces to industrialize as extensively as the rest of the region. Similar disparities are noticed in the northeastern region with the upper northern provinces of Jilin and Heilongjiang gradually falling behind Liaoning in urban incomes. Western China’s internal disparities are also showing up in the expanding distance between the relatively better-performing provinces of Chongqing, Guangxi, Inner Mongolia, Shaanxi, Sichuan and Yunnan, from Gansu, Guizhou, Ningxia, Qinghai, Tibet and Xinjiang. While minority provinces like Ningxia, Tibet and Xinjiang are among the western provinces that are increasingly falling behind and creating major concerns from economic and sociopolitical perspectives, it would be erroneous to classify the intra-regional disparity in the western region as mainly an imbalance between minority-dominated areas and the rest since Inner Mongolia and Guangxi—two minority provinces—have experienced a sharp increase in urban per capita incomes. In this regard, what is noticeable and also similar to the intra-regional disparities observed in the eastern and northeast regions, is the role of urban income in increasing the divide. While rural income gaps within the western region are much less, the urban income differentials are increasing fast and accentuating disparities.

The structural aspects of regional disparities in China do have similarities with India in terms of the intra-regional gaps and the rural–urban differentials. There are considerable variations in economic performances and living standards between India’s coastal states also, such as between the economically robust states of Gujarat, Karnataka, Maharashtra, Tamil Nadu and Andhra Pradesh, on the one hand, and the much backward coastal states of Odisha and West Bengal on the other. On the whole, however, coastal states are economically more significant and better-off in India too, notwithstanding exceptions of economically strong hinterland states such as Delhi, Haryana and Himachal Pradesh. These states also reflect the intra-regional variations in the country in terms of their pulling ahead of larger neighbouring states like Uttar Pradesh and Bihar. On the other hand, while the urban and rural income differential is as glaring in India as in China, comparative studies point to the urban–rural income gap in China being much larger. These results need to be cautiously interpreted, given that the time frame for comparison is only up to the early years of the last decade.

9.6 Summary and Policy Lessons for India

Regional imbalance in China remains conspicuous notwithstanding a conscious shift in development strategy towards balanced growth for several years. In spite of extensive efforts by the state to increase investment in the backward regions, economic activity remains sluggish in these areas, constraining growth of new income-generating and earning opportunities. Clearly, real comparative advantages in production still remain entrenched in the coastal areas. Neutralizing such advantages, which are products of historical policies and specific development strategy, is not easy given that the Chinese economy has become far more market oriented and globally integrated than what it was during the early years of economic transition.

Under current circumstances, state efforts and emphasis are not eliciting the desired response from the market actors. Furthermore, regional development strategies like the WDS are producing partial outcomes that are accentuating intra-regional disparities and aggravating the overall imbalance by expanding rural–urban differentials. Correcting the historical alignment of locational comparative advantages through the efforts of the state is far more difficult than envisaged. This is an important lesson for India and other emerging markets that are also grappling with the challenge of regional imbalance. The Chinese experience also highlights that the virtuous income multiplier effects of large-scale investments and fiscal incentives can be subdued if private investment and entrepreneurship does not respond positively to these initial efforts. Indeed, favourable business climate and conditions—features that are more conspicuous in China’s eastern region than the rest—are major determinants in attracting long-term private investment and sustaining growth as China is discovering, and what India and other similarly placed economies also need to take note of.