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LESSON 7We have previously looked at some issues relating to regional disparities in China.Previous discussion will not be repeated but some major propositions will be reviewed before we proceed further.We have previously looked at sThe first point to note is that as development has occurred in China over the last thirty years,growth has been quite uneven when looked at in regional terms.The greatest growth has been in the coastal provinces,not in the interior.Growth in the coastal provinces,in fact,has been the driving force for the national growth experienced since 1980.The first point to note is thaThus,a significant gap has opened up between the richest region and the rest of the country.This gap can be seen in the level of GDP/capita in different regions as well as the rate of growth,employment levels,migration patterns,infrastructure development,etc.These gaps are significant and they are important.Thus,a significant gap has opIn 2007,per capita GDP in various provinces was Qinghai14257 yuanZhejiang37411 yuanJiangsu33928 yuanFujian25908 yuanGuandong33151 yuanIn 2007,per capita GDP in varPart of what makes these regional disparities important is that they indicate the unevenness of the growth and development that has taken place and the fact that a failure to address them could create or contribute to a rising level of citizen dissatisfaction with the gains from growth or at least the way those gains are distributed.Part of what makes these regioThe hukou system,which is the household registration system,is a potentially important point to consider in looking at regional disparities.When we looked at the so-called neo-classical model of regional adjustment,we saw that in a perfectly functioning market system,with perfect labour mobility,regional disparities will be eliminated by workers moving from low wage regions to high wage regions.The hukou system,which is theThis adjustment mechanism does not solve the problem because markets are not perfect and also because not all labour responds just to economic incentives.But in the China case,the hukou system adds another layer of difficulty to the analysis because it means that workers are not completely free to move.This adjustment mechanism doesIn practice,workers now are more free to move than was previously the case.But unregistered workers still have problems in terms of access to schools for children and being able to work for government,etc.This means that the market adjustment mechanism cannot work even if it was otherwise capable of solving the problem.In practice,workers now are mThe Chen and Groenewold paper that has been assigned considers this question of the impact of reducing the cost of migration.Basically the hukou system makes migration more expensive.Relaxing the rules about household registration will make it easier for workers to migrate and to take their families with them.The Chen and Groenewold paper Chen and Groenewold find thatReducing the costs of migration will reduce regional disparitiesBUTThis will be at the expense of the already leading region,which for China is the coastal region.Chen and Groenewold find thatRemember that the way the migration solution works is that as workers move from the low wage region to the higher wage region,the supply of labour in the low wage region falls and the supply of labour in the high wage region rises.These supply changes will cause wages in the low wage region to increase and in the high wage region to decrease.Remember that the way the migrSo the high wage region will experience a fall in income.The low wage region gains but part of that gain is at the expense of the high wage region.So the high wage region will eThis means that the region that starts out ahead has a lot to lose from reducing regional disparities in this way.This means that the better off regions will argue against changing the hukou rules because it is in their interests for things to stay as they are.This means that the region thaThere is also another consideration.The present system gives the better-off regions access to a cheaper source of labour to supplement their local labour force.Part of this comes from the fact that migration under the present hukou system is typically not permanent for many workers,i.e.,they are itinerant workers.Changing the hukou rules to make migration easier will change this.There is also another considerItinerant workers are typically willing to work for lower wages than resident workers.So relaxing the hukou rules to allow for more permanent migration will increase production costs for firms in the more advanced regions.Itinerant workers are typicallChen and Groenewold develop a simulation model to examine the effects of various government policies on regional income differences.The details of the model will not be reviewed here.Basically it is a two region model that assumes a coastal region and an interior region.The coastal region is characterized as predominately manufacturing based and the interior region as primarily agriculture based.Agriculture here is used to denote all primary industries,such as farming,fishing,mining,forestry,etc.Chen and Groenewold develop a Looking at their results,they find the following:1.An increase in interior government-provided consumption does not reduce the income gap in either the short run or the long run.The gap actually worsens as income per capita rises slightly in the coastal region and falls in the interior region.This is primarily because they assume that the government budget must be balanced,so the increase in consumption spending is at the expense of infrastructure spending and the negative consequences of the latter outweigh the stimulus effects of the former.Looking at their results,they2.An increase in interior government infrastructure spending reduces the gap by increasing per capita income in the interior region and reducing it in the coastal region.Again,the budget is assumed to be balanced but now consumption spending is reduced to cover the new infrastructure spending and as before,the latter has a greater income effect than the former.2.An increase in interior go3.A cut in agricultural taxes helps agriculture in the interior region but the overall impact at the end is that although the output gap gets reduced somewhat,the output per capita gap increases.This is because the extra agricultural output causes a fall in the price of agricultural goods,to put it in relatively simple terms.3.A cut in agricultural taxes4.An improvement in agricultural productivity reduces the output gap and the output per capita gap.Capital will flow from the coastal region to the interior and migration will be from the coastal region to the interior.Overall welfare increases in both regions4.An improvement in agricultu5.A relaxation of the hukou regulations,as already mentioned,results in a substantial increase in migration to the coastal region and this significantly reduces the output per capita gap.But it does this by actually lowering output per capita in the coastal region,while raising it in the interior.Hence,it involves a redistribution of income between the two regions that means the coastal region has a vested interest in preventing any change in the hukou regulations.5.A relaxation of the hukou r6.An increase in the central governments spending in the interior region does not change the per capita output gap.Because of the balanced budget assumptions they build into their model,more spending in the interior means less spending in the coastal region.The output gap does not improve because ultimately migration flows outweigh output effects and the per capita output gap increases6.An increase in the central 7.A fiscal transfer from the coast to the interior does not reduce the per capita output gap.7.A fiscal transfer from the The results of this paper are somewhat artificial as any simulation exercise will be.Some of the assumptions,especially the balanced budget assumption,also clearly affect the results.So looking at which policies work and which dont must be evaluated with these considerations in mind.The results of this paper are Nonetheless,a significant finding is that polices aimed at improving agricultural productivity are amongst the most effective in reducing regional income disparities in terms of output per capita.A second significant result is that redistribution policies do not work very well.Nonetheless,a significant finAnd a third significant result is that allowing more migration from the interior to the coast,i.e.,from the poorer region to the richer region,can be significant in reducing disparities.On the one hand,this conclusion tells us that what we already know is confirmed.No one doubts that migration will help solve the problem.And a third significant resultBut this being said,two points must be made:1.The evidence from other countries suggests that migration alone will not completely solve the problem;and2.Migration is not necessarily the best way to solve the problem because there may be costs in this that are not reflected in the C-G model.But this being said,two pointThe second paper by Chen and Groenewold asks to what extent policies designed to attack regional disparities represent a trade-off against national development.They conclude that some polices face a trade-off and some do not and for some,there may be a difference in the short-run trade-off versus the long-run trade-off.The second paper by Chen and GGenerally,the conclusions of this paper are essentially the same as for the other paper but what is different is that they draw a distinction between the output gap,the income gap and the welfare gap,showing that some policies may impact these different variables in different ways.But overall there are no surprises in their results,given what we already know from their first paper.Generally,the conclusions of
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