The main causes of the faster growth in China's eastern coastal area, and thus for the rise in income disparity between eastern and western regions, are the rapid increases in foreign trade and foreign investment resulting not only from the government's coastal development strategy but also from inherent advantages of the eastern coastal area. Since 1999, the development strategy for western China has focused on the injection of large amounts of capital, but fiscal constraints make this strategy unsustainable. China's government should allow mobility of the labor force across regions to play a bigger role in solving the income disparity problem.
I thank Wing Thye Woo, Cyril Lin, Maozu Lu, Guy Liu, and Zhichao Zhang for insightful discussion on this topic. I also benefited from discussions during the Asian Economic Panel conference on 9–10 October 2003 in Seoul, South Korea. The views expressed in the paper are those of the author and should not be interpreted as reflecting the views of those who have helped with the paper. I thank Nancy Hearst at the Fairbank Center of the East Asia Institute at Harvard for her help.