Can west China’s GDP per capita catch up with the east coast in the next decade?

Sunday 14th June, 2015 13:00 HKT



Background:- There are no faded drapes hanging across the window, the carpets are stain free, and entering the toilet one no longer has to manoeuvre as if tip-toeing through a minefield. China’s slick new high-speed rail (HSR) network is here, connecting China’s tier one cities on the east coast, with rural provincial capitals in west China, propelling China’s new urban class into (as yet) relatively unspoilt countryside.

However the problems begin as soon as one steps off the HSR. That beautiful countryside that you’ve just spent the past few hours gliding by is now all around you, the mountains and rivers fencing you in, making any onward journeys a mission. The urbanite’s kids are hungry, but looking down the main high street, cannot make out the signs of any fast food chains they snack on during school lunchbreaks. In short, HSR has just brought you a lot quicker into China’s past, one which still faces obstacles in catching up with the affluent east coast.

 

The problem of geographical income disparity in China has worsened since Deng Xiaoping’s policy of opening up and reform over thirty years ago, and the situation is unlikely to improve in the next decade, unless new reforms are swiftly implemented.

The cause of western and central regions income per capita lagging the eastern regions derived from economic reform and loosening of restrictions which were first implemented in the coastal cities in the 1980s. Since then, the eastern regions enjoyed have enjoyed high speed export led growth, and it was hoped, the economic benefits would trickle down to interior provinces. When economic data showed otherwise in the 1990s, the Chinese government implemented the “Go West” policy, which directed more government resources to western and central provinces.

Yet more recent research has shown, whilst government investment amounts increased in real terms, as a percentage of GDP, they were no higher than before China’s opening up and reform. The reasons behind the persistent regional income inequality rest not only in government policy, or economics, but can be attributed to the physical geography, historical situation, and social conditions.

Firstly a look at policy: The Chinese government continues to invest heavily in the western and central regions as improvements are still required in basic infrastructure, transport links, power, and provision of basic government services. Consequently over the next decade, it can be expected that GDP growth in the interior provinces should outpace that of the eastern region. But in real terms, this is mainly due to the low base effect, so may not necessarily be enough to reduce the gap in income per capita.

The effect of government investment will be more pronounced if the improvements in infrastructure, combined with rising labour costs on the east coast, attract more manufacturing to the western regions. One central government policy which will support this is the new ‘One belt, one road’ policy, which aims to expand land trade links between western China and Asia into Europe. The building of rail links in particular, for example a link connecting Chongqing with as far as Frankfurt, could reduce transport times and costs enough to attract more manufacturing to the region.

Other areas of China’s reform laid out at the 2013 Third Plenum should help boost the economies of western and central regions, by removing restrictions on land and household registration. Both reforms tie in with central government plans to increase China’s urbanisation, a rate which is below national average in the provinces. Through urbanisation, local economies can increase trade and productivity through industry agglomeration effects and more efficient supply chains. The State Council has announced a series of measures in this area, particularly in setting up regional logistics hubs and technology parks, to stimulate industry.

If land reform is implemented, rural residents are no longer chained to their land, but can freely lease out to others (knowing they retain official land rights), and then work in the city. Or the opposite, rural residents can increase their agricultural land, by leasing from others, and reaping the benefits of increase in economies of scale from working larger, concentrated plots.

Or they can sell the land and use the proceeds to move to the city. For this to work, and unlock the potential productivity of rural workers, the government needs to reform the ‘hukou’ system, allowing rural residents equal rights and access to services in the cities. As the interior provinces have a greater rural population relatively speaking, these reforms should provide a greater boost to income per capita, allowing the regional gap to narrow.

However the planned government reforms outlined by the current administration, which include a greater role to be played by market forces in the allocation of resources, and setting prices, could have the unintended effect of hitting the western and central regions hardest. If the power of government intervention is reduced, and with the east coast already having a head start, the western regions could find themselves lagging further behind.

This leads to the second main factor which will determine regional incomes per capita convergence in the coming decade, macroeconomic trends. Alongside urbanisation, the government hopes to boost the roles of technology and innovation in the economy, and steer greater GDP contribution from the service sector. This allows the playing field to be levelled to some extent.

Take for example the rise of Alibaba, and e-commerce. In the past decade, the government has rolled out communications infrastructure across the country and now plans to improve broadband access to all rural areas. Suddenly the geographical disadvantage experienced by the interior provinces in being so far away from the coastal export markets has diminished.

Research has shown the most avid consumers of internet shopping are based in lower tier cities. Alibaba and similar internet companies have also expanded operations into rural areas, and supported by the government’s desire to rebalance the economy by increasing domestic consumption, remote areas economic development should close the gap on the eastern provinces.

Only one note of caution, those factors mentioned earlier, which still hinder development in the western regions. As the government works to upgrade the economy, and increase total factor productivity through advanced technology, the interior provinces could find their weak knowledge base and small talented worker pools limiting catch-up growth.

The central government and provincial governments will need to push harder to wrestle the oligopoly on higher education from eastern universities, providing incentives from grass-roots level and attracting top technical expertise, to address this imbalance. Without it, there’s a risk the western and central regions will miss out on this new period of reform, and thus the opportunity for convergence in income per capita.

 

 

(Views are the author’s only, not the employer’s.)

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