Regional Development and Government Policy in China's Transitional Economy

This paper examines the causes and consequences of the increase in regional disparities in China during its economic transition towards a 'socialist market economy'. Part 1 seeks to explain why the 'Core' provinces in southeast China have consistently outperformed the remainder of the country, particularly in the 1990s. While it is recognized that numerous historical and geographical factors have played a role, the basic argument is that government policies concerning the nature and pattern of economic reform have been paramount in causing the observed divergence in industrial development across provinces. In contrast to the Maoist era, the regional development strategy adopted in the 1980s clearly favoured coastal provinces. In combination with preferential policies, this is shown to have benefited the Core provinces above all others. Amidst an enhanced role for market forces, fiscal decentralization has compounded disparities, creating virtuous circles in successful provinces and vicious circles elsewhere. In essence, government-induced cumulative processes abound in China's regional development story.For social, political and economic reasons, the central government's regional policy focus has shifted in the 1990s to the less developed provinces in central and western China. Part 2 of this paper examines the potential effectiveness of the latest set of policies, which includes fiscal-, credit-, and investment-based incentives, policies to attract foreign trade and investment, and various co-operative measures. The analysis draws on three simple models of economic geography which capture the role of scale economies, transport costs, wage differentials, inter-industry linkages and factor mobility in industrial development. In light of the central government's diminished power to directly control economic forces and the cumulative processes it must now work against, the task it faces is certainly a difficult one. It is argued, however, that the government has played a decisive role in determining the spatial structure of industry and consequent patterns of regional development throughout China's reform era and it will almost certainly continue to do so in the future. To succeed in its current endeavour, understanding the processes underpinning regional disparities is a vital step in the right direction.