China's regional inequality, 1952–1985

JOURNAL

OF COMPARATIVE

ECONOMICS

15,

I-2 1 ( 199 1)

China’s Regional Inequality, 1952-l 985’ KAI YUEN

TSUI

Chinese University of Hong Kong, Shatin, N.T., Hong Kong Received September 19, 1989; revised July 12, 1990

Tsui,

Kai

Yuen-China’s

Regional Inequality, 1952-1985

This paper explores the change in regional inequality in the People’s Republic of China from 1952 to I985 with the help of a set of newly published provincial national income statistics. The new empirical evidence suggests that interprovincial income gaps did not narrow between 1952 and 1985. There seems to be a positive relationship between fiscal decentralization and regional inequality. J. Camp. Econom., March 1991, 15(l), pp. 1-21. Chinese University of Hong Kong, Shatin, N.T., Hong Kong. 0 1991 Academic Press, Inc. Journal of Economic Literature Classification Numbers: 050, 120.

1. INTRODUCTION Until very recently, studies on China’s regional inequality were handicapped by the paucity of information at the regional level. Despite the many careful studies, e.g., Lardy (1980); Paine (198 1); Riskin (1987); Leung and Chan (1986), a number of questions still remain to be answered. Two of them will be tackled in this paper: (1) Did the Chinese Communist govemment succeed in narrowing the income gap between the rich and poor provinces in the last four decades? (2) Is there a close relationship between regional inequality and the devolution of fiscal powers from the center to the provinces? Among the various attempts to answer the two questions, Lardy’s work was the first to provide a detailed and systematic account of China’s regional inequality. He concluded that regional inequality was reduced over time ’ I thank Professors Tom Barbiero, Myron Gordon, Tien-tung Hsueh, Thomas Rawski, and Anthony Tang for their detailed comments of a previous draft of this paper. The author also benefited from a short but useful discussion with Dr. Richard Wang. Needless to say, any remaining errors are mine.

1

0147-5967191 $3.00 Copyright 0 1991 by Academic Press, Inc. All rights of reproduction in any form reserved.

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(Lardy, 1975, 1976, 1978, 1980). Two sets of evidence were employed to buttress his conclusion. First, using provincial gross industrial output data, he calculated the population-weighted coefficients of variation for 1952, 1957, and 1974 (Lardy, 1980). The index exhibited a declining trend over time. Secondly, Lardy examined information on interregional flows of resources as indirect evidence of regional inequality. Ever since 1958, the Chinese have been harping on the theme of fiscal decentralization. Lardy, however, argued that the alleged decentralization after 1958 was more apparent than real. He scrutinized the data on interregional flows of budgetary funds gleaned painstakingly from provincial newspapers and other official publications. Focusing on the revenue-sharing ratios of some provinces and interprovincial flows of budgetary funds, he found no evidence of a drastic cut in budgetary investment and expenditure in some poor provinces. Lardy contended that the indirect evidence bolstered his statistical findings. Lardy’s thesis was challenged on at least two fronts: (1) his use of gross industrial output to compute the inequality index, (2) his interpretation of the true nature of China’s fiscal decentralization. His use of an inequality index based solely on per-capita gross output value might be misleading. The problems associated with gross output data are well know and will not be repeated here (see, e.g., Paine, 1981; Riskin, 1987). Furthermore, in his paper published in 1980, Lardy used per-capita gross industrial output to compute the population-weighted coefficients of variation for the years 1952, 1957, and 1974. Yet, gross industrial output only constitutes part of the total provincial output. Various attempts have been made to include agricultural output and adjust gross output data in an attempt to improve upon Lardy’s work (Paine, 198 1; Riskin, 1987; Leung and Chan, 1986). However, the adjustments were crude and possibly introduced other sources of bias. Most of the studies adhered to the coefficient of variation as a summary measure of regional inequality, though justification was rarely given. Lardy’s interpretation of China’s decentralization is not without problems. Among his critics, Donnithorne ( 1976) argued that the focus on budgetary funds may underestimate the degree of fiscal decentralization because of the rapid growth in extrabudgetary revenues. She put forward the cellulareconomy hypothesis, sometimes called the fragmentation hypothesis, whereby decentralization since 1958 has resulted in a declining interprovincial flow of resources (Donnithorne, 1967, 1972, 1976). Donnithorne’s view has been echoed by some recent studies, e.g., Wong, (1985, 1987), Naughton (1987) Lyons (1987). Stretched to its logical conclusion, the fragmentation hypothesis predicts that “[slelf-reliance means that efficient cells do not subsidize the inefficient. This of course militates against egalitarianism” (Donnithorne, 1972, p. 6 18). The two issues raised at the beginning of this section are far from satisfactorily resolved. It is still not clear how regional inequality evolved over time and what the real nature of fiscal decentralization is. With the release of a

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3

new set of provincial income data (State Statistical Bureau (SSB), Guomin Show-u Tongii Ziliao Huibian, 1987b; henceforth GTZH) and the flood of new information coming out of China, it is time to reassessthe two questions raised at the beginning of this section. Sections 2 and 3 of this paper discuss the new set of data and the inequality measures used in the paper. Section 4 reports the time profiles of the inequality indices and their factor components. Section 5 explores the underpinnings of a positive relationship between regional inequality and decentralization. It is then shown that the empirical evidence is consistent with the above positive relationship. Section 6 investigates the relationships between the factor components and decentralization. Finally, Section 7 summarizes the new findings of this paper. 2. NEW PROVINCIAL

STATISTICS

With the recent publication of the provincial national income data in SSB (1987b), the debate on regional inequality has taken on a new life. Regional inequality indices can now be calculated for the period 1952-1985. The statistics pertinent to the construction of the inequality indices in this paper are scrutinized below. 2.1. Net Material Product, National Income Utilized, and Government Transfers’ For the first time, the Chinese have released time series of net material product at current prices (NMP; Guomin shouru) for almost all provinces for the period 1952-1985. According to China’s socialist national accounting framework, NMP is equal to the nominal gross value of output minus nominal material consumption. Besides this, time series of per-capita NMP are also published. Though NMP still excludes a large share of the service sector, these data are undoubtedly superior to the gross value of output employed in 2 In this paper, provincial per-capita net material product and national income utilized are adopted as indicators of levels of economic development. Certainly, the choice of these indicators is by no means axiomatic; see, e.g., the discussion in Sen (1988). Other measures such as consumption readily come to mind. Indeed, provincial data of current consumption are available (SSB, 1987b). It is, however, not clear whether this measure is necessarily superior to the ones adopted in this paper. For one thing, the differences in current consumption may just be a reflection of the consumption-investment choices of the provinces. Investment, which is included in national income utilized, may be regarded as the discounted value of the future consumption stream. From this perspective, national income utilized may be a proxy of potential consumption. The above comments are not meant to deny that current consumption does reveal certain facets of regional inequality. However, to control the length of this paper, the study of regional inequality in current consumption will be postponed to a future paper. Some preliminary results are, however, available. Though the values of the indices with respect to consumption are relatively higher than those in this paper, the trend of regional inequality with respect to consumption is by no means declining over time.

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previous analyses of regional inequality (see World Bank, 1983). Unfortunately, the data for Zhejiang, Anhui, Guangxi, Qinghai, and Xizang are not complete. In order to maintain a continuous and complete time profile of regional inequality for the period 1952-1985, these provinces are dropped from our analysis.3 Even more important to the study of regional inequality and the resolution of the Lardy-Donnithome dispute is the publication of data on national income utilized (NIU; Goumin show-u shiyong e). By definition, NIU is the sum of consumption and accumulation. The difference between NIU and NMP is theoretically equal to the inflow of resources, which may be regarded as a proxy of government transfers, T, positive for resource inflows and negative for outflows.4 In practice, the difference between NIU and NMP may also include estimation error (Xiao and Wu, 1983). Until more information becomes available on how NIU and NMP are actually compiled, it is difficult, if not impossible, to gauge the orders of magnitude of the estimation errors. However, the differences between NIU and NMP are by no means random. The overall pattern does conform to our preconception about the interprovincial flows of government transfers. For example, T

3 In computing the indices, the NMP of Beijing and Tianjin are included in the NMP of Hebei, while Shanghai’s NMP is included in that of Jiangsu. To get some ideas on how the omission of some provinces affects the values of the indices, the coefficients of variation with respect to per-capita NMP and NIU for the years 1978-1985 are computed, with all but one province, Xizang, included in the calculation. The choice of the period is solely due to data availability. Nominal instead of real per-capita NMP and NIU are used here because price indices for the newly included provinces cannot be constructed. The results are compared with those based on the incomplete set of provinces: NMP

1978 1979 1980 1981 1982 1983 1984 1985

NIU

A

B

A

B

0.45 1 0.43 1 0.426 0.398 0.398 0.369 0.370 0.375

0.450 0.427 0.42 1 0.392 0.382 0.367 0.369 0.374

0.249 0.244 0.247 0.249 0.252 0.234 0.260 0.286

0.257 0.249 0.248 0.246 0.25 1 0.237 0.263 0.288

where A = values of the coefficient of variation with the incomplete sample of provinces; B = values of the coefficient of variation with all the provinces except Xizang. It should be noted that the values under A are not the same as those in Table 1 because, as mentioned above, nominal per-capita NMP and NIU are used here. The values under A and B are quite similar. 4 The difference may also include private transfers. Data limitations prevent us from breaking down the total inflow into government and private sources. However, one would speculate that the private sources were negligible before 1978.

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5

INEQUALITY

would normally be negative for Shanghai and Liaoning, reflecting a net outflow of resources. Provincial NMP may further be decomposed into its agricultural and nonagricultural components so that NIU = NMP, + NMPi + T. The first two terms on the right hand side are agricultural tural NMP, respectively.5

(1) and nonagricul-

2.2. PopulationStatistics Population statistics are required in the calculation of the inequality indices. Though GTZH does not explicitly present provincial population statistics, they could easily be recovered from time series of provincial per-capita and total net material product.

2.3. Price Index Real growth rates of provincial NMP at comparable prices (kebijiage), denoted as g, below, are reported in GZTH for any two consecutive years between 1952 and 1985. It is thus possible to recover the real NMP series for each province.6 The base year for the real NMP series is not specified. After cross-checking the NMP statistics published in some provincial yearbooks, it becomes clear that the base year is 1952. With this information, an implicit price index for each province analogous to the GNP deflator can be derived. To be exact, a real NMP index for each province with 1952 as the base year,

5 The nonagricultural sector here includes industry, construction, transportation, and commerce. For the sixth Five Year Plan (198 1- 1985) the industrial share of nonagricultural NMP was 72% (SSB, 1987b, p. 10). 6 The use of real instead of nominal per-capita NMP and NIU requires some explanation. For a small country with a well-developed transportation network, one may safely assume that the rates of inflation in different regions are similar. Such an assumption cannot be maintained in the case of China. Therefore, it seems more appropriate to use real per-capita NMP and NIU to compute the inequality indices. It should, however, be mentioned that significant changes in economic structure and relative prices over the last 30 years may create some well-known index-number problems associated with the computation of the real provincial output series. In addition, there are other problems specific to the Chinese context. The procedure of deflating NIU by the provincial price indices deserves a few words of caution. The Chinese have in recent years (particularly after 1978) increased their subsidies toward certain basic consumption goods in the urban areas by maintaining the consumer prices of these items stable while allowing producer prices to grow rapidly. Insofar as the provincial price indices reflect the rise in producer and not consumer prices, the deflation of NIU using these indices may distort the estimated real NW series; the degree of distortion depends on the size of the urban sector. This problem was, however, not significant before 1978. I thank Professor Anthony Tang for bringing this point to my attention.

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i.e., RNMP( 1952) = NMP( 1952), can be inferred with the help of the formula RNMP(t)

= n (1 + g,)NMP( 1952). t n is the product operator; g, is the real growth rate for two consecutive periods t and t - 1; t varies from 1952 to 1985. With 1952 as the base year, the implicit price index can then be derived as P t,l952 = NMWIRNMW). Before our inequality indices are computed, the nominal NMP and NIU are deflated by these provincial implicit price indices.’ 3. THE MEASUREMENT

OF REGIONAL

INEQUALITY

Equipped with the data described above, regional inequality is measured here based on provincial per-capita NMP and per-capita NIU, both in 1952 constant prices. The differences between the values of the indices with respect to these two income concepts reflect the redistributional effects of government transfers on regional inequality. Most of the studies on China’s regional inequality used the coefficient of variation (Lardy, 1980; Riskin, 1987; Paine, 198 1)’ However, there is no sound theoretical reason that it should be selected over other measures. It is possible that the time profile of regional inequality may not be robust with respect to the indices. There are three approaches to the study of inequality indices. The first one borrows some common statistical measures or distribution to study income distribution. Examples are the Gini coefficient, the coefficient of variation, and Theil’s entropy measure. Secondly, the axiomatic approach attempts to ’ What actually are these implicit indices? How appropriate are they? It is well known that in calculating the growth of real gross output value, the Chinese apply “constant prices” for a given base year to convert nominal gross output values into their real counterparts (People’s University, 1987). It is not clear whether the same methodology of constant prices is also applied to the calculation of real NMP. While Chinese statistical publications do sometimes discuss various methods to estimate real NMP, it is often not clear which method is actually put into practice (Xiao and Wu, 1983). The quality of price indices has been a major problem plaguing the use of Chinese offical statistics. More efforts are needed to further our understanding of the way that the Chinese actually compiled their real NMP and the possible weaknesses of their methodology. Despite all these caveats, we may seek comfort in the fact that our real NMP series are at least derived from the same source and so are more likely to be internally consistent. * The use of the population-weighted coefficient of variation seems to be popularized by Williamson (1965). An anonymous referee has kindly pointed out that the use of the coefficient of variation does have the merit of facilitating comparisons with previous studies. In the paper, the coefficients of variation are also calculated to render comparisons with other studies possible; see Table 1.

CHINA’S

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INEQUALITY

I

derive inequality indices that satisfy a set of desirable properties. The third approach postulates some social welfare function (SWF) and derives inequality indices accordingly (Atkinson, 1970). The SWF-based approach attempts to make ethical judgements explicit. The appropriateness of each index can be gauged from these three viewpoints. It is beyond the scope of this paper to explore them in detail. For details, see Kakwani (1980). In the following discussion, the population-weighted versions of the coefficient of variation, the Gini, the Theil entropy measure, and the Atkinson index are calculated for real per-capita NMP and NIU. (See Tables 1 and 2). To identify those factors affecting regional disparities, the inequality indices can further be decomposed according to the sources of income. Let x = (x,, . . . ) x,), where xi is the total income of the ith province. The vector x is decomposed into x“ = (Y$, . . . , x$), where $ is the income of the ith province from the kth source and there are n provinces. The decomposition rule is to determine S, the contribution of xk to the overall inequality index with respect to x, such that Z(x) = s, + s, + * - - + s,. S, is often called the factor component Since

(4)

of x“ (Fields 1979, Shorrocks, 1982).

NIU = NMP, + NMP, + T, where NMP, is agricultural NMP and NMPi is nonagricultural NMP, the inequality index of per-capita NIU may then be decomposed into its factor components, each one representing the contribution to inequality from each source of income. Until recently, the decomposition rules were specific to the indices used. See Fields (1979) for a survey of the issue. In a recent important article, Shorrocks (1982) showed that by constraining the factor components to satisfy certain desirable properties, one natural decomposition rule emerges for all indices, i.e., S, = [cov(xk, x)/var(x)]Z(x),

(5)

where cov(x“, x) is the population-weighted covariance between x“ and x, and var(x) is the population-weighted variance of x. S, can easily be derived by calculating the population-weighted covariance, variance, and the overall inequality index, which can be any of the indices mentioned above with the exception of the population-weighted coefficient of variation. In the latter case, only the square of this index, the variance divided by the square of the mean, can be decomposed according to Shorrocks’ approach. A favorable property of Shorrocks’ decomposition rule is that the relative contribution of each factor

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Year 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

YUEN

TSUI

TABLE

I

INDICES

rcvlb

rgnl’

rthld

rat 1’2’

rcvF

rgn28

0.395 0.443 0.425 0.406 0.433 0.434 0.533 0.625 0.687 0.535 0.458 0.477 0.47 1 0.463 0.480 0.436 0.523 0.571 0.548 0.549 0.553 0.585 0.646 0.614 0.652 0.603 0.615 0.605 0.600 0.587 0.561 0.554 0.553 0.574

0.208 0.228 0.218 0.205 0.216 0.211 0.247 0.288 0.318 0.273 0.241 0.248 0.243 0.237 0.242 0.227 0.272 0.290 0.272 0.272 0.268 0.283 0.309 0.299 0.319 0.293 0.294 0.288 0.285 0.28 I 0.273 !. ‘71 0.::7 1 0.273

0.07 1 0.087 0.080 0.073 0.081 0.080 0.114 0.154 0.183 0.125 0.094 0.102 0.099 0.095 0.101 0.086 0.123 0.143 0.129 0.128 0.128 0.142 0.171 0.156 0.175 0.150 0.154 0.150 0.148 0.142 0.132 0.129 0.129 0.137

0.119 0.139 0.127 0.115 0.125 0.121 0.157 0.206 0.241 0.192 0.154 0.162 0.155 0.149 0.157 0.142 0.200 0.222 0.194 0.188 0.186 0.204 0.243 0.229 0.258 0.219 0.216 0.212 0.209 0.206 0.194 0.191 0.190 0.199

0.363 0.410 0.367 0.309 0.316 0.348 0.388 0.456 0.484 0.465 0.317 0.387 0.386 0.338 0.300 0.326 0.388 0.341 0.307 0.342 0.353 0.380 0.422 0.413 0.45 1 0.379 0.396 0.413 0.404 0.420 0.409 0.394 0.43 1 0.465

0.191 0.202 0.185 0.165 0.167 0.182 0.193 0.223 0.236 0.245 0.156 0.188 0.192 0.164 0.153 0.170 0.205 0.179 0.152 0.169 0.184 0.199 0.219 0.213 0.229 0.198 0.201 0.207 0.206 0.214 0.215 0.206 0.220 0.239

Note. Sources:

BASED ON REAL PER-CAPITA

NMP

INEQUALITY

AND NIU.

1952-

1985”

0.060 0.072 0.059 0.045 0.046 0.055 0.065 0.088 0.098 0.098 0.044 0.064 0.065 0.050 0.04 1 0.048 0.069 0.054 0.042 0.052 0.057 0.066 0.080 0.076 0.089 0.065 0.069 0.074 0.072 0.078 0.076 0.070 0.082 0.096

0.103 0.112 0.095 0.079 0.079 0.092 0.103 0.133 0.147 0.160 0.073 0.098 0.100 0.078 0.069 0.08 I 0.1 16 0.092 0.068 0.082 0.095 0.110 0.131 0.125 0.144 0.109 0.111 0.117 0.118 0.125 0.128 0.118 0.131 0.152

State Statistical Bureau (1987b) and author’s calculation. ’ NMP and NIU are deflated by the provincial price index. b rcvl = coefficient of variation of real per-capita NMP. ’ rgn I = Gini coefficient of real per-capita NMP. d rth I = Theil entropy measure of real per-capita NMP. e rat 1 = Atkinson index of real per-capita NMP. ‘rcv2 = coefficient of variation of real per-capita NIU. * rgn2 = Gini coefficient of real per-capita NIU. h rth2 = Theil entropy measure of real per-capita NIU. i rat2 = Atkinson index of real per-capita NIU. ‘In computing rat1 = 1 - [ZX~,/p)‘-~f(x,)]“(‘-~), where xi = per-capita NMP of the ith province, p = mean of per-capita NMP, and f(x,) = population share of the ith province; we assume that .$ = 2; the higher the value of [, the higher is the degree of aversion toward inequality. The same comment applies to rcv2. (See Atkinson, 1970).

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TABLE 2 FACTORCOMPONENTSOFTHESQUAREOF rcv2, 1952-1958” Year 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 61 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85

S$ 0.036 0.028 0.027 0.026 0.025 0.019 0.026 0.03 1 0.018 0.03 I 0.03 1 0.030 0.026 0.019 0.020 0.018 0.03 1 0.020 0.019 0.017 0.016 0.023 0.03 1 0.033 0.034 0.025 0.028 0.036 0.033 0.038 0.040 0.045 0.050 0.050

0.109 0.152 0.123 0.094 0.099 0.124 0.175 0.256 0.326 0.216 0.110 0.148 0.158 0.136 0.137 0.125 0.176 0.175 0.154 0.190 0.190 0.21 I 0.259 0.243 0.218 0.218 0.235 0.236 0.233 0.23 I 0.203 0.185 0.200 0.217

-0.013 -0.012 -0.015 -0.025 -0.024 -0.022 -0.050 -0.079 -0.110 -0.03 1 -0.041 -0.028 -0.035 -0.04 I -0.067 -0.037 -0.056 -0.079 -0.079 -0.083 -0.08 I -0.090 -0.112 -0.105 -0.113 -0.099 -0.106 -0.101 -0.103 -0.093 -0.076 -0.075 -0.064 -0.05 I

0.27 1 0.167 0.198 0.277 0.249 0.158 0.170 0.149 0.078 0.144 0.313 0.199 0.174 0.168 0.222 0.172 0.203 0.174 0.204 0.145 0.125 0.162 0.175 0.191 0.169 0.172 0.177 0.209 0.204 0.218 0.241 0.291 0.268 0.232

0.827 0.904 0.913 0.984 0.99 I I .024 1.162 1.231 1.392 0.999 1.095 0.988 I.060 1.190 1.522 1.176 1.169 1.505 1.634 1.565 1.525 1.461 1.454 I .425 1.386 1.518 I.499 1.384 1.428 1.310 1.214 1.192 1.077 1.004

-0.099 -0.07 I -0.111 -0.262 -0.240 -0.182 -0.332 -0.380 -0.470 -0.143 -0.408 -0.187 -0.235 -0.359 -0.744 -0.348 -0.372 -0.680 -0.838 -0.710 -0.650 -0.623 -0.629 -0.616 -0.556 -0.689 -0.676 -0.592 -0.63 I -0.527 -0.454 -0.483 -0.345 -0.236

Note. Sources: Same as Table 1. ’ For definitions and explanations of the factor components, see Shorrocks (1982) and Eqs. (5) and (6) in the text. b S, = factor component of agricultural real per-capita NMP. ‘S, = factor component of nonagricultural real per-capita NMP. d S, = factor component of real per-capita government transfers. ’ s, = share of the factor component of agricultural real per-capital NMP. ‘s2 = share of the factor component of nonagricultural real per-capita NMP. g s) = share of the factor component of real per-capita government transfers.

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(6)

Sk = &,l(x)

is the same regardless of the inequality measures. We shall follow Shorrocks’ approach in the subsequent discussion. 4. TIME

PROFILES

OF REGIONAL

INEQUALITY

To gain a better perspective of our empirical evidence, it is useful to summarize some previous quantitative findings on the trend of regional inequality. Without exception, the inequality indices derived in previous studies suggested a declining trend in regional inequality (Lardy, 1980, Paine, 198 1, Riskin, 1987). For those papers that calculated inequality indices for agriculture and industry separately, they all concluded that regional inequality may be largely attributed to regional differentials in industry. With this background in mind, let us turn to the empirical evidence in this paper. Table 1 presents the values of the indices derived from real per-capita NMP and NIU, respectively. The higher the values of these indices, the greater is the degree of regional inequality. Since the data for the years around the Great Leap Forward (1958-1962) are not very reliable, less weight is put on them. The focus is on the long-term trend of regional inequality; less attention is paid to year-to-year fluctuations. The two sets of indices in Table 1 measure two different but related facets of regional inequality. The provincial per-capita NMP is the per-capita net value of output produced within a province; taking into account government transfers, real per-capita NIU measures the average amount of resources actually at the disposal of the residents in a province. Insofar as the values of the NIU-based indices are lower than those of the NMP-based indices, government transfers are progressive. With regard to the NMP-based indices, they all fluctuate in a similar manner over time. (See Table 1 and Fig. 1). On the whole, all the NMP-based indices have similar configurations. With the exception of the years around the Great Leap Forward, the indices do not seem to display any significant trend in the period before the mid- 1960s. From 1967 to 1976, a 10 year period which the Chinese officially refer to as the period of the Cultural Revolution, there seems to be a sustained upward movement of the NMPbased indices. Thereafter, the indices indicate that a phase of mildly declining regional inequality has set in. Compared with the pre-Leap years, the levels of the NMP-based indices are higher in the 1970s and the first half of the 1980s. In the long run, the interprovincial output gap has become more pronounced. Our findings clearly show that the results of such previous studies as Lardy (1980), Paine (1983) and Riskin (1987) are not substantiated by our better and more complete data set. The view that regional inequality declined over time should thus be revised. The set of NH-I-based indices, Table 1 and Fig. 2, also seems to be robust with respect to the pattern of fluctuations. The values of these indices are

CHINA’S

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INEQUALITY

__

; 'LI

.E z 2 m t

0.6 -

rcvl

0.4 -

c z I

,.,I

irg

0.0

I 55

50

'

I 60

'

I. 65

I., 70

' 75

I 80

*

I a5

* 90

Year FIG. I. NMP-based inequality indices.

consistently lower than those based on per-capita real NMP. Government transfers undoubtedly played a pivotal role in reducing regional disparities. The indices with respect to per-capita real NIU do not exhibit any long-run trend in the 1950s and 1960s. But between 1970 and 1976, there is a sustained increase in the NIU-based indices; for example, the coefficient of variation (rcv2) increased from 0.307 in 1970 to 0.451 in 1976. Though

50

55

60

65

70

75

Year FIG.

2. NW-based inequality indices.

a0

a5

90

12

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0.06

0.05

0.04

0.03

0.02

0.01 50

FIG.

55

60

65

70

75

80

65

90

Year 3. Factor component of per-capita agricultural NMP (S,), 1952-1985.

there was a dip in the values of the indices in 1977, the trend had been essentially upward up to 1985. This finding is particularly relevant to the Lardy-Donnithome debate, which focused on the ability of the center to redistribute resources so as to reduce regional inequality. While one may argue that the increasing trend after 1970 is too mild to be significant, there is no doubt that, despite continuous efforts on the part of the central govemment, interregional transfers did not bring about any reduction in regional inequality over time. Next, the factor components a la Shot-rocks are derived. Since the factor components for the various indices have similar configurations, only those for the square of the coefficient of variation are reported in Table 2 and Figs. 3-5.9 The higher the values of these factor components, the larger are their contributions to overall inequality. The nonagricultural sector is the main source of regional inequality.‘O Indeed, in Table 2, the share of the nonagricultural factor component, s,, is much higher than that of the other components. Disregarding the years of the Great Leap Forward, the factor component exhibits a long-term rising trend. This finding is at odds with that of Lardy ( 1978) who found a declining trend in inequality for the industrial sector. The upward trend of the non’ While the shares si are equal regardless of the inequality index used, the factor components S, themselves are different for different indices; see Fqs. (5) and (6) in text. lo Findings in previous studies were based on industrial output. The nonagricultural sector here does not just include industry (see footnote 5).

CHINA’S

50

REGIONAL

60

55

65

13

INEQUALITY

70

75

80

85

90

Year

FIG.

4. Factor component of per-capita non-agricultural

NMP (S,), 1952-1985.

agricultural factor component in this study is most conspicuous in the early 1970s. After 1975, the trend seems to have been reversed. The factor component of agricultural NMP assumes much smaller values than those of nonagricultural NMP. This finding agrees with that of Lardy

50

55

60

65

70

75

80

85

Year

FIG.

5. Factor component of per-capita government transfers (S,), 1952-1985.

90

14

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(1980), who also found that agricultural income was more evenly distributed. Ignoring the abnormal years of the Great Leap Forward and the beginning years of the period of the Cultural Revolution (1967-1969), regional inequality induced by agricultural income differentials does not exhibit any discernible trend up to the early 1970s. Since then, the trend has been undoubtedly upward. Finally, the factor component of government transfers is negative because this source of income reduced inequality (Table 2). Its contribution to the reduction of regional inequality became more and more significant until the mid-1970s. Since then, the contribution has been on the decline. While Lardy is partly right in contending that the government was able to sustain its commitment to implement progressive income redistribution despite repeated calls for decentralization, regional inequality did not actually decline in the long run. Neither the NIU-based nor the NMP-based indices display any discernible trend in the 1950s and 1960s. Though the values of the indices shot up during the Great Leap Forward, it is difficult to assess the reliability of the data for this period. The values of the indices for the 1970s and 1980s are not lower than those in the normal years of the 1950s and the 1960s. Ironically, regional inequality even seems to have worsened during the 10 year period of the Cultural Revolution when Maoist egalitarianism was the guiding principle. 5. DECENTRALIZATION

AND

REGIONAL

INEQUALITY

Lardy and Donnithorne both hypothesized a positive relationship between decentralization and future regional inequality in output. This section attempts to check the empirical validity of the hypothesis with the help of the regional inequality indices and fiscal decentralization measures. To test the hypothesis, it is important to first ascertain the true nature of China’s decentralization process, an issue that is at the center of the LardyDonnithome debate. In this connection, it is important to look into China’s fiscal system. In China, provincial revenues may be derived from budgetary and extrabudgetary sources. Based on some revenue-sharing formulas, provincial governments receive part of their revenues through the state budget, the use of which is subject to strict central controls; some taxes and surcharges are excluded from the state budget and accrue to provincial governments which may dispose of these funds at their discretion (Dangdai Congshu, 1988; Oksenberg and Tong 1987). Donnithome’s major criticism of Lardy’s works pertains to the growing importance of extrabudgetary funds (Donnithome, 1976). In view of the high investment propensities of local governments, rapid expansion of extrabudgetary revenues induces rapid economic growth of the provinces. Furthermore, the concentration of extrabud-

CHINA’S

REGIONAL

INEQUALITY

15

getary funds in the hands of the richer provinces is likely to result in widening regional disparities. ‘I We shall use the share of extrabudgetary revenues to NMP as a measure of fiscal decentralization. Then, the relationship between the measure of decentralization and estimated inequality indices is reviewed, Until 1978, roughly 30 to 35% of NMP had been channeled into the state budget (Table 3). At least in the budgetary sphere, the central government seems to hold onto its fiscal power at least up to 1978. However, the state budget does not include extrabudgetary revenues accruing to local authorities. One contentious issue in the Lardy-Donnithorne debate was the importance of extrabudgetary funds. With the release of figures on extrabudgetary funds (SSB, 1987a), we are in a better position to assesstheir role. As a share of NMP, they were relatively unimportant in the 1950s. The share shot up around the 1958 decentralization. Even after the ensuing recentralization campaign, the share in the 1960s remained at a level roughly double that of the 1950s. The ratio of extrabudgetary revenues to NMP exhibits a distinct upward trend in the 1970s and 1980s (Table 3). Taking all the new evidence into account, Lardy seems to have underestimated the importance of the extrabudgetary revenues. In Figs. 6 and 7, the NMP-based and NIU-based coefficients of variation are plotted against the extrabudgetary funds as a share of NMP. The upward trend of NMP-based inequality indices since the early 1970s seems to be consistent with the hypothesis that a positive relationship exists between decentralization and regional inequality. Donnithorne’s hypothesis seems to be vindicated. The rapid expansion of extrabudgetary funds is also consistent with some of the policies implemented since the late 1960s. Indeed, the factor components associated with the inequality indices provide further evidence of the effects of the decentralizing processes in the agricultural and nonagricultural sectors.

6. FACTOR 6.1. Agricultural

COMPONENTS, AND REGIONAL

Factor Component

DECENTRALIZATION, INEQUALITY (S,)

Before 1972, the factor component of agriculture did not exhibit any clearly discernible trend. From a low of 0.0156 in 1972, the component climbed to 0.05 in 1985 (Table 2 and Fig. 3). To explain the configuration of the agricultural component, one should bear in mind that agricultural NMP

” The distribution of extrabudgetary funds among provinces can be found in Caizheng Bu (1987), pp. 144-145.

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TABLE 3 NMP, BUDGETARY,ANDEXTRABUDGETARYFIJNDS, 1952-1985 (100 MILLIONRUB) Year

A”

Bb

CC

Dd

E’

52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 14 15 76 77 78 79 80 81 82 83 84 85

173.94 213.24 253.53 255.46 286.26 3 10.04 387.60 487.12 572.29 356.06 313.55 342.25 399.54 413.32 558.7 I 419.36 361.25 526.76 662.90 744.73 166.56 809.67 783.14 815.61 776.58 874.46 1121.12 1067.96 1042.22 1016.38 1083.94 121 1.16 1467.05 1837.16

13.62 8.91 14.23 17.02 21.42 26.33 55.99 96.55 117.78 57.40 63.63 51.85 65.86 75.56 81.13 83.61 77.44 81.42 100.94 118.56 134.24 191.29 219.72 251.48 275.32 311.31 347. I1 452.85 557.40 601.07 802.74 967.68 1188.48 1530.03

589 709 748 788 882 908 1118 1222 1220 996 924 1000 1166 1387 1586 1487 1415 1617 1926 2077 2136 2318 2348 2503 2427 2644 3010 3350 3688 3940 4261 4730 5650 7007

0.295 0.301 0.339 0.324 0.325 0.341 0.347 0.399 0.469 0.357 0.339 0.342 0.343 0.341 0.352 0.282 0.255 0.326 0.344 0.359 0.359 0.349 0.334 0.326 0.320 0.331 0.372 0.319 0.283 0.258 0.254 0.256 0.260 0.262

0.023 0.013 0.020 0.022 0.024 0.029 0.050 0.079 0.097 0.058 0.069 0.052 0.056 0.054 0.05 1 0.056 0.055 0.055 0.052 0.057 0.063 0.083 0.094 0.100 0.113 0.118 0.115 0.135 0.151 0.153 0.188 0.205 0.210 0.218

Note. Sources: State Statistical Bureau (I 987a) and author’s calculation. u A = total budgetary revenue. b B = total extrabudgetary revenue. ’ C = net material product. dD=A/C. ‘E= B/C.

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0.65 -

0.35

I 0.00

REGIONAL

I

I

0.10

Extrabudgetary

17

EJ

q

I 0.05

INEQUALITY

I 0.20

0.15

funds

as a share

0 !5

of NMP

6. rcvl and extrabudgetary funds as a share of NMP. Data for the years 1958-196 I are omitted because the data during the Great Leap Forward are not reliable. FIG.

reported in GZTH includes rural enterprises at the village level.r2 One dimension of decentralization was the rapid development of these rural collective enterprises under local control. Compared with a real growth rate of about 5% for agriculture as a whole, the gross output value of rural enterprises in 1970 constant prices at the commune and brigade levels grew at an average compound rate of 22% between 197 1 and 1980 (SSB, 1984). The growth of rural enterprises was highly concentrated in the richer coastal provinces and cities such as Jiangsu and Shanghai (Riskin, 1978). The expansion of rural enterprises has remained unabated in the recent reform period. The differntial growth rates of rural enterprises in the rich and poor provinces might have been one major factor in widening regional inequality in agricultural income.

6.2. NonagriculturalFactor Component(S,) The movement of the nonagriculture factor component seems to be consistent with the vicissitude of the financial policies toward state industrial enterprises and the rapid development of local collective industrial enterprises (Naughton, 1987; Wang, 1986; Wong, 1987; Dangdai Congshu, I2 Since 1984, under a new classification system, output of rural industrial enterprises at and below the village level has no longer been included in agricultural NMP. However, to facilitate comparison, SSB (1987b) still follows the old classification.

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V.“”

0.25 0.00

r 0.05

I 0.10

I 0.15

I 0.20

0 .;!5

Extrabudgetary funds as a share of NMP 7. rcv2 and extrabudgetary funds as a share of NMP. Data for the years 1958- 196 1 are omitted because the data during the Great Leap Forward are not reliable. FIG.

1988). As early as 1967, state enterprises were allowed to keep their depreciation allowances. As pointed out by Naughton (1987), depreciation funds become a major source of extrabudgetary funds accruing to local enterprises. Furthermore, a wave of decentralization swept the country in 1970. The control of many state enterprises was transferred to local governments. The rapid growth of extrabudgetary funds accruing to state enterprises in the 1970s is consistent with the events of the time. This period was also characterized by the rapid growth of collectives (Wang, 1986). Collective enterprises expanded at a much faster rate than state enterprises after the mid60~‘~ (see Table 4). These enterprises and their revenues were largely controlled by local authorities. The extrabudgetary funds generated were likely to be in the hands of the more industralized coastal, i.e., richer, provinces. The marked increase in the factor component in the tumultuous years of the Cultural Revolution ( 1967- 1976) (Fig. 4) may seem paradoxical in view of the massive transfers of resources to the interior during the Third Front campaign which roughly began in 1965 and ended around 1973 (Naughton, I3 In a private correspondence, Professor Rawski suggested that the rapid growth rates in columns B and C of Table 4 may be exaggerated because some collective and village enterprises reported current price output under the rubric of constant prices. It is difficult to assessthe degree of bias introduced by this practice. However, the differences in the growth rates between the collective and state enterprises are so great that, even if the data were to be adjusted, I believe that our conclusion might still be valid.

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19

INEQUALITY

TABLE 4 REALGRO~THRATESOFGR~~~INDUSTR~ALO~TPUT(W)

Year”

Ab

B’

1953-1951 1958-1962 1963-1965 1966-1910 1911-1915 1916-1980 1981-1985

19.2 5.1 18.9 11.4 1.9 8.1 8.1

13.1 -5.5

10.1 14.1 16.8 13.9 18.2

Cd

-12.5 18.1 25.1 26.4 20.5

Note. Source: State Statistical Bureau, Zhongguo Gongye Jingji Tongji Ziliao ( I98lc, p. 129). ’ 1953-1951= first Five-Year Plan; 1958-1962 = secondFive-YearPlan; 1963-1965 = three year adjustment period; 1966-1970 = third Five-Year Plan; 1911-1915 = fourth Five-Year Plan; 1916-1980 = fifth Five-Year Plan; 1981-1985 = sixth Five-Year Plan. b A = Real growth rates of gross industrial output of state-run enterprises. ’ B = Real growth rates of gross industrial output of collective enterprises. d C = Real growth rates of gross industrial output of enterprises at the village level.

1988); an explanation seems warranted. The Third Front campaign did not result in a decline in regional inequality for at least two reasons. First, this spurt in investment in some inland provinces did not actually last long. In fact, in the fourth Five-Year Plan, the coastal provinces regained much of their losses (Naughton, 1988). Second, it is by now well known that the price tag of the Third Front construction was extremely high (Wang, 1986 and Naughton, 1988). Many of the enterprises set up in the interior provinces turned out to be grossly inefficient. Thus, capital investments did not automatically translate into increased productivity.

6.3. Factor Componentof GovernmentTransfers(A’,) The contribution of government transfers to the reduction of regional inequality (S, in Table 2; see also Fig. 5) exhibits an upward trend before the mid- 1970s. Despite repeated attempts to decentralize, the central government seems to have built into the budgetary framework safeguards that would protect the central government’s share of fiscal revenue; see Oksenberg and Tong (1987) for details. One does not find a drastic reduction in government transfers to poor provinces. However, as discussed above, the disposition of the state budget provides only a partial view of fiscal decentralization, which was also partly the result of the rapid expansion of extrabudgetary funds. Thus, decentralization properly measured is not contradictory to an actual increase in the role of government transfers. However, after 1978, the new wave of fiscal decentralization unleashed by the reforms seems

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to be strong enough to erode the ability of the central government to redistribute income to the poorer provinces (See Table 3, column D). 7. CONCLUSION The purpose of this paper is to measure regional inequality over time with the help of more accurate and complete statistics and explain the time profiles of the inequality indices and their factor components. Furthermore, we hope that the new findings shed some light on the Lardy-Donnithome debate. Some important findings of this paper are as follows: (1) While there is no discernible trend before 1970, regional inequality in terms of per-capita NMP undoubtedly increased since then, implying the widening of the income gaps. The result is robust with respect to the NMPbased indices used. The NIU-based indices are, without exception, below those of the NMP-based indices. Thus, the empirical evidence confirms Lardy’s findings that the center continuously played an important role in the redistribution of income from the rich to the poor provinces. However, the transfers were not significant enough to reduce regional inequality in the long run. (2) By decomposing the regional inequality indices, it is clear that the worsening of regional inequality in the past two decades may be explained by the rapid growth of extrabudgetary funds that has overwhelmed the effects of government budgetary transfers. Thus decentralization properly measured seems to be a reason for the increase in regional inequality. The recent reforms have so far reinforced the trend of administrative decentralization. The resulting fragmentation of the economy coupled with very limited factor mobility does not bode well for the convergence of regional development. REFERENCES Atkinson, A. B., “On the Measurement of Inequality.” J. Econorn. Theory 2,244-263, 1970. Caizheng Bu [Ministry of Finance], Zhonggou Caizheng Tongji 1980-1985 [Fiscal Statistics of China, 1980-19851. Beijing: Zhonggou Caizheng Jingju Chubanshe [Chinese Public Finance and Economics Press], 1987. Dangdai Congshu [Contemporary China Series], Dangdui Zhongguo Cuizheng [Public Finance in Contemporary China], Vol. 2. Beijing: Zhongguo Shehui Kexue Chubanshe [Chinese Social Sciences Press], 1988. Donnithorne, Audrey, China’s Economic System. New York: Praeger, 1967. Donnithorne, Audrey, “China’s Cellular Economy: Some Economic Trends since the Cultural Revolution.” China Quart. 52:605-6 19, 1972. Donnithome, Audrey, “Centralization and Decentralization in China’s Fiscal Management.” China Quart. 66:328-354, 1976. Fields, G. S., “Decomposing LDC Inequality.” Oxford Econom. Papers 31, 3:437-459, 1979. Kakwani, Nanak C., Income Inequality and Poverty. New York: Published for the World Bank by Oxford Univ. Press, 1980. Lardy, Nicholas R., “Centralization and Decentralization in China’s Fiscal Management.” China Quart. 61:25-60, 1975.

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Lardy, Nicholas R., “‘Replies’ to Donnithorne (1976)” China Quart. 66:340-354, 1976. Lardy, Nicholas R., Economic Growth and Income Distribution in the Peoples Republic cf China. New York: Cambridge Univ. Press, 1978. Lardy, Nicholas R., “Regional Growth and Income Distribution in China.” In Robert F. Denberger, Ed., China S Development Experience in Comparative Perspective, pp. 153- 190. Cambridge, MA: Harvard Univ. Press, 1980. Leung, C. K., and Chan, K. W., “Chinese Regional Development Policies: A Comparative Assessment.” Working paper, 1986. Lyons, Thomas, Economic Integration and Planning in Maoist China. New York: Columbia Univ. Press, 1987. Naughton, B., “The Decline of Central Control over Investment in Post-Mao China.” In David M. Iampton, Ed., Policy Implementation in Post-Mao China, pp. 5 I-80. Berkeley, CA: Univ. of California Press, 1987. Naughton, B., “The Third Front: Defence Industrialization in the Chinese Interior.” China Quart. 115:351-386, 1988. Oksenberg, M., and Tong, J., “The Evolution of Central-Provincial Fiscal Relations in China, 1950-1983: The Formal System.” Working paper, 1987. Paine, Susan, “Spatial Aspects of Chinese Development Issues, Outcomes and Policies 19491979.” J. Develop. Stud. 17, 2:133-195, 1981. People’s University, Statistics Department, Gongye Tongji Xue [Industrial Statistics]. Beijing: People’s Univ. Press, 1987. Riskin, Carl, “China’s Rural Industries: Self-Reliant Systems or Independent Kingdoms.” China Quart. 73:77-98, 1978. Riskin, Carl, China’s Political Economy: The Quest for Development Since 1949. Oxford: Oxford Univ. Press, 1987. Sen, A. K., “The Cpncept of Development.” In H. Chenery and T. N. Srinivasan, Eds., Handbook of Development of Economics. Amsterdam: North-Holland, 1988. Shorrocks, A. F., “Inequality Decomposition by Factor Components.” Econometrica 50, 1:193-21 I, 1982. State Statistical Bureau, Zhongguo Tongji Nianjian [Chinese Statistical Yearbook]. Beijing: Zhongguo Tongji Chubanshe [Chinese Statistics Press], 1984 and 1987a. State Statistical Bureau, Guomin Shouru Tongji Ziliao Huibian 1949-I 985 [A Collection of Chinese National Income Stntistics]. Beijing: Zhongguo Tongji Chubanshe [Chinese Statistics Press], 1987b. State Statistical Bureau, Zhongguo Gongye Jingji Tongji Ziliao [StatisticalMaterials on Chinats Industrinl Economy]. Beijing: Zhongguo Tongji Chubanshe [Chinese Statistics Press], 1987~. Wang, Haibo, Xin Zhongguo Gongye fingjishi [An Economic History of New China k Industries]. Beijing: Jingji Guanli Chubanshe [Economic Management Press], 1986. Williamson, J. G., “Regional Inequality and the Process of National Development: A Description of Patterns.” Econom. Develop. and Cult. Change 13,4(Part 2):3-84, 1965. Wong, Christine, “Material Allocation and Decentralization: Impact of the Local Sector on Industrial Reform.” In Elizabeth J. Perry and Christine Wong, Eds., The Political Economy ofReform in Post-Mao China, pp. 253-280. Cambridge, MA: The Council on East Asian Studies/Harvard Univ., 1985. Wong, Christine, “Between Plan and Market: The Role ofthe Local Sector in Post-Mao China.” J. Camp. Econom. l&3:385-398, 1987. World Bank, China: Socialist Economic Development, Vol. I: The Economy, Statistical System and Basic Data. Washington, D.C.: World Bank Country Studies, 1983. Xiao, Ruiching, and Wu, Guixiu, “Guanyu Jianli Diqu Zonghe Caizheng Ton&i de Chubu Tantao [A Preliminary Investigation of the Establishment of A Regional Statistical System].” Tongji Yunjiu [Res. in Statist.], 6:75-88, 1983.