Author: Peter Drysdale, Editor, East Asia Forum

There have been many studies of China’s regional income inequality, which is commonly asserted to have increased considerably since the beginning of Chinese economic reforms.

For most, this is an important starting point in thinking about the character and problems of China’s remarkable economic transformation.

China may have grown spectacularly, so the argument runs, but people in the hinterland and the west are increasingly left behind. Deng Xiaoping even foretold it, declaring that China’s economic development would naturally involve some people becoming rich before others. Inequalities, it has been argued — and still is — by many researchers, have risen steadily across (and within) China’s provinces and regions.

This is no tearoom academic debate. Chinese development policy strategies have been re-directed on a major scale to deal with the perceived problem of regional income inequality. Jiang Zemin’s Western Regional Development Program (the ‘Go West’ strategy) aimed to deal with Deng’s problem on the way to economic development by eliminating regional disparities gradually, consolidating the unity of ethnic groups, and promoting social progress. In 2002, the then new president, Hu Jintao, gave a tick to the ‘going West’ strategy as an important element of his drive for a ‘harmonious and balanced society’ and added his own ‘revive the North-East’ idea in 2004, and the ‘rise of the Central Region’ later in 2005. All this represented a massive shift in strategy, aimed at pumping resources into provinces outside the most developed Eastern or coastal provinces.

The issue was such a serious national priority because regional inequality threatened to undermine the cohesion of the state and the legitimacy of the Party.

Amazingly, after 2003, the target of policy seemed to respond to all these efforts rather quickly. Regional income inequalities, inter-provincially and intra-provincially, seemed to come down. The evidence began to grow that the eastern provinces’ industrial dominance was coming to an end, and that it was no longer performing above the average across a range of industrial sectors. The serious commitment to ‘going West’ was paying off because of a regional development strategy that was beginning to pour money into infrastructure and education and generate sustainable growth away from the coast. In some part all this may have been true. But it does not appear to have been the whole story.

In this week’s lead essay John Gibson reveals two remarkable facts. First, Chinese economic reform does not appear to have been associated with rising regional income inequality after all. And second, the fall in the indicators of regional income inequality around the time of the big regional policy shifts appears significantly to have been an artefact of an innocent but sensible change in the way the variable was measured.

What has really been going on?

On getting the measure right, Gibson points out that studies of regional income inequality have commonly ignored the fact that China’s local GDP per capita data cannot be interpreted in the way that economists would expect, by measuring value-added per resident. For most of the reform era in China, GDP per capita was recorded according to not where people were resident but where they were registered under Chinese law (the hukou registration system). This differs from the resident population because of the non-hukou migrants — people that move from their place of registration. There were fewer than five million non-hukou migrants when reforms began in 1978, but now this figure is more than 200 million — a massive 15 per cent of the entire population.

At the time of the 2000 census, Gibson points out, the key eastern province of Guangdong had a registered population of 75 million but a total resident population of 86 million — the hukou count overstated GDP per capita by 15 per cent. ‘For much larger areas, such as individual counties and big cities, the error is much larger. The city of Shenzhen provides an outstanding example: while its registered population was just over one million at the time of the 2000 census, its total resident population was seven million, so per capita GDP was overstated by almost 600 per cent in the official data’.

‘GDP per capita is most understated in interior provinces like Henan and Sichuan, where the outflow of non-hukou migrants is highest. Conversely, in the main destinations per capita GDP is overstated by an average of 15 per cent (as of 2005)’.

On the second issue, the fall in regional income inequalities after 2003 was associated with a change (largely effected at that time) in the way these data were calculated when provinces switched from the hukou count to the resident count for reporting GDP per capita. Not all provinces switched at the same time (the cause of an incidental but not trivial double-counting problem) although most did, creating a marked discontinuity in overtime measures of regional income inequality.

On the regional inequality over the period of reform and rapid Chinese growth, Gibson concludes: ‘During 1978–90 interprovincial inequality declined almost continuously. About one-third of this decline was reversed over the next three years and then a one-year rise in 2005 ended a decade of little change in inequality. But even with that rise, inequality returned to only two thirds of its starting value in 1978. Interprovincial inequality fell sharply after 2005, so that by 2010 it was right back at the low levels previously seen in 1990. The only sustained episode of rising interprovincial inequality was from 1990 to 1993, representing just three years out of the three decades of China’s reform era’.

The perception of rising regional inequality in China distorted public debate both inside and outside China. The opposite was true. As Gibson observes, it is difficult to assess the impact of the more-than one trillion yuan (US$157 billion) invested into infrastructure development in the western provinces from this period on because of the measurement error that the changing population denominators have caused.

Quite apart from the waste of public investment in the pursuit of a spurious target, the under valuation of the role of rural urban migration and attention to that problem will have had non-trivial social consequences.

Mr Gibson has done everyone, not only scholars but also Chinese policy makers, a considerable service in focusing on a couple of very important facts and drawing out their implications.

Peter Drysdale is Editor of the East Asia Forum.

1. Rising regional inequality in China: fact or artefact?
2. China: The question of income distribution
3. Confronting Thailand’s inequality through fiscal reform

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Chinese regional income inequality