Many studies of regional disparity in China have focused on the preferential policies received by the coastal provinces. We decomposed the location dummies in provincial growth regressions to obtain estimates of the effects of geography and policy on provincial growth rates in 1996–99. Their respective contributions in percentage points were 2.5 and 3.5 for the province-level metropolises, 0.6 and 2.3 for the northeastern provinces, 2.8 and 2.8 for the coastal provinces, 2.0 and 1.6 for the central provinces, 0 and 1.6 for the northwestern provinces, and 0.1 and 1.8 for the southwestern provinces. Because the so-called preferential policies are largely deregulation policies that have allowed coastal Chinese provinces to integrate into the international economy, it is far superior to reduce regional disparity by extending these deregulation policies to the interior provinces than by re-regulating the coastal provinces. Two additional inhibitions to income convergence are the household registration system, which makes the movement of the rural poor to prosperous areas illegal, and the monopoly state bank system that, because of its bureaucratic nature, disburses most of its funds to its large traditional customers, few of whom are located in the western provinces. Improving infrastructure to overcome geographic barriers is fundamental to increasing western growth, but increasing human capital formation (education and medical care) is also crucial because only it can come up with new better ideas to solve centuries-old problems like unbalanced growth.


This paper benefited tremendously from the comments of the participants at the following meetings: the inaugural meeting of the Asian Economic Panel, held 26–27 April 2001 in Cambridge, Massachusetts; the Third International Conference on the Chinese Economy, “Has China Become a Market Economy?” held Sylvie Démurger 17–18 May 2001 at CERDI, Clermont-Ferrand, France; the symposium on “The Opportunities and Challenges of China's WTO Accession,” held 28–29 May 2001 at the State Development Planning Commission, Beijing, China; the International Conference on “Urbanization in China: Challenges and Strategies of Growth and Development,” held 27–28 June 2001 at Xiamen University, China; and the Development Workshop of the Research School of Pacific and Asian Studies, Australia National University, Canberra, Australia. We are especially grateful to Françoise Lemoine, Leonard Cheng, Fan Gang, Wang Xiaolu, Richard Wong, Thierry Pairault, Du Ping, Shunfeng Song, Ligang Song, Wei Men, Prema-Chandra Athukorala, and Peter Drysdale for many detailed suggestions.

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