China’s Regional Disparities and the Westward Development
1.0 Introduction
In 1978, Chairman Deng Xiaoping decided to open up China and to reform the Chinese economy. Since then, China has been growing at a rate of about 10 % in average. Economic reform has been a great success, and China has become one of the fastest growing economies in the world. However, most of the rapid development clusters along the eastern coast of China. The socioeconomic difference between the east and the west has been widening significantly over the past 20 years. As a result, in 2000, the Chinese government decided to take a more balanced regional development strategy. As Chairman Deng said in the 80s’, the coastal region will be developed first. When certain level of development is achieved along the coast, the rich coastal region will help the poor interior. The focus of development will shift to the interior region in the west. Therefore, at the end of 1999, the Communist Party of China announced the “Great Development of the West” Program (XiBuDaKaiFa) in the Tenth Five-Year Plan to stimulate development in the western part of China. Development in the western region became the priority of the country. Specifically, five areas of focus are addressed: Constructions of major infrastructure projects, improvement of the ecological environment, economic restructuring, promotions and reforms of science and education, and opening of the region to the outside world.
In addition to the early 1980’s of China, Deng had created a numbers of Financial Special Regions (FSRs) along the coastline of China (e.g., Shenzhen and Xiamen); within which Communism was aborted in the financial aspect and private investment was allowed and protected to some extent in order to encourage foreign investment as well as host entrepreneurs starting businesses in China (Huang and Khanna, 2003). Huang and Khanna, (2003) pointed out that it was Deng’s idea to improve the environment of these FSR’s, first, under the premise of “to let a small portion of the country gets rich first”, and eventually, the whole country economics will also improve.
In the long run, Deng’s model of FSRs has proven successful, since attracting the foreign investments not only helped China improve her GDP (increased by 31.8% from 1987 to 1991) but living standards (Huang and Khanna, 2003). The increase in living standards has raised the purchasing power in the country. China became a low-cost country for production, and this became the bargaining power of the country, making it important for foreign brands that target important consumer markets. Further, Deng’s FSRs had reinforced the country’s importance in the world economic and political environment generally.
One positive outcome is that as compared to the time when foreign invested production facilities started out in the country and manufactured products that were only for export purposes, with the improved economy of China, these foreign production facilities now supply goods domestically as well.
2.0 Objectives of the Study
The main aim of this research is to provide the readers a good understanding of the regional disparities and westward development of China. In this paper, I will first analyze the disparities between the coastal and interior regions. Secondly, I will analyze the contributing factors of east- west disparities. Finally, I will use specific cases in the western region to illustrate the determining factors of development. I will argue that the most critical factors of development of the west, especially in the foreseeable future, are human capital, entrepreneurship, and social networking. Rather then relying on central government policies or foreign investment, local leaders or entrepreneurs are the most reliable assets of the region to initiate strong development.
3.0 Significance of the Study
I am interested in the development of western China because, as the Chinese government addressed in the late 1990s’, regional disparity is now the most critical challenge in China. As the gap between the East and the West widens, discontents from the west grew to a notable level. Large flow migrants are moving eastwards; creating heavy pressure and bringing many urban and social problems to the cities in the east such as Shanghai. Political instability arises in different regions; movements of separation increase. Sovereignty and legitimacy of the Chinese Communist Party may be challenged by this increasing discontented population from the West. The Chinese government realizes it is time to switch to a more balanced developmental strategy for the country.
Furthermore, this study will be a significant endeavour in promoting effective development strategies in China. In addition, this study will provide recommendations particularly in relation to regional disparities and westward development of China.
4.0 Regional Inequalities
Based on the regional division suggested by the Chinese Communist Party in 1985, China is roughly divided into three regions: eastern (or coastal), central, and western (or interior). According to the National Bureau of Statistics, the east includes 11 provinces and less than 14 % of the total land area of China, has about 41% of the total population in 2000. Central China includes 8 provinces, accounts for 16 % of the total land area, and has 31 % of the total population. In contrast with the east, the western region consists of 12 provinces, includes more than 70 % of the total land area, but only has about 28 % of the total population (National Bureau of Statistics, China 2000: 61).
5.0 Economic Disparities
Since Chairman Deng Xiaoping launched a series of economic reform in 1978, the Chinese economy changed significantly from a central-planned economy to a more market-determined one. China has been growing dramatically. Since then, disparities between the east and the west widen rapidly, both in rural and urban areas.
Since the beginning of the economic reforms, Gross Domestic Product (GDP) share of the east increased while the share of the west decreased. Even the eastern region only accounts for about 14 % of the total area, it contributed to the 58 % of the total GDP in 1998, with an increased of 5.5 % in average from 1978. On the other hand, the western region that consists of the largest land area of the country, only accounted for 14 % of the total GDP in 1998, with an average decrease of 2.7 % from 1978 (Chinese Statistical Year Book 1998).
Changes in GDP per capita of different regions are even more notable; these changes allow us to see how people’s welfare changed in different parts of China over the last two decades. In 1978, GDP per capita in the east was 687 yuan, and it was 309 yuan in the west. After twenty years, GDP per capita in the east increased to 8,681 yuan while it only increased to 3, 786 yuan in the west. The gap between the eastern and the western regions increased from 378 yuan in 1978 to 4, 895 yuan in 1998, an increase of 12 times (Chinese Statistical Year Book 1998).
Regional disparities are more visible in rural areas than in urban areas. In 1978, per capita annual net income of an eastern farmer was CNY 139, which was 120 % of that of a western farmer. In 1995, the gap between the east and the west widened as the per capita annual net income for eastern farmers was CNY 127 or twice as much as the western farmers’ 61 CNY (Yin 2004: 52).
In urban areas, income gap between the east and the west has also been expanding. In 1978, urban residents in eastern region had a per capita annual income of CNY 372, which was 109 % of their western counterparts. However, in 2000 the per capita annual income of the east reached CNY 7,682, which was 140 % of that of the western region. The income gap between regions grew significantly over the two decades (Yin 2004: 52).
As the economic indicators showed above, we can see the widening disparities between the eastern and the western regions since China moved towards a more market-oriented economy. In the following, I will analyze the factors that have been contributing to the expansion of regional disparities.
5.1 Contributing Factors of the East- West Disparities
Basically, there are three contributing factors with regards to East-West disparities namely geography, government policies and Foreign Direct Investment (FDI).
5.1.1 Geography
The most fundamental factor of the great disparities between the east and the west is the geographical characteristics of China. A basic idea of China’s geography is that is it mountainous in the west and composed of plain in the east. Altitude declined from the west to the east. The highest altitude level is in the Tibetan Plateau where it is 4,500 meters above sea level, and the lowest altitude can be found along the eastern coast of China. First, the eastern region enjoys the economic benefits brought by the lowlands and the coast line. Throughout 3000 years of Chinese civilization, this is the region most developed and economically vibrant. Also, with the advantages brought by the Yang-tze River and the Yellow River, ports and harbors were built in cities along the coast such as Shanghai. Trade has been concentrated in the coastal region since the historical times. Compare to the interior region, the east is also more favorable for farming (Yan 2000: 23).
According to Yin (2004: 54), as the east only accounts for 14 % of the total land area, it is a region with the highest density (in terms of population, development, and infrastructure) in China. As a result, all the constructions of infrastructure and economic development are clustered within a relatively small area. Compare to the vast area of the west, therefore, it is relatively easier and more efficient to foster development in the east.
On the other hand, the geography of the west is characterized by its mountainous feature. Most of the western region is classified as mountain areas, hills, or deserts, and only little lowlands or flat plains can be found. Desertification is also another common feature found in many parts of the west. With about 96 % of non-arable land, the west suffers from the poor natural environment. Agricultural development is far behind from those in the east. With superior technological development, American farmers cultivate 1000 mu of land on average, while Chinese farmers only cultivate 4 mu of land.
In addition, the western region covers a huge landmass of more than 70 % of the total area of China. The vast, underdeveloped land with mountain terrain in the west hinders communication and transportation systems. Infrastructures are poor. In 1998, the densities of railways and highways in the western region were both less than 20 % of the coastal region (Song 2000: 56). Population is sparse, especially inside the mountain regions. As a result, compare to the smaller and densely-populated east, it is more difficult to develop the west, and it is definitely a long term process which may take decades, or even centuries to complete.
Basically, the geographic characteristics of high altitude and large landmass constrained the west to develop its infrastructures and transportation systems. Even though the western region is rich in natural resources, its backward transportation networks keep the transportation costs high and therefore most of the natural resources in the west are underdeveloped as it is not profitable. After all, it is not as easy or as efficient to stimulate development and growth in the western region as it was to the east; because of its remoteness, backwardness, and lack of basic infrastructures, it will take a much longer time to see accomplishments in developing the west.
5.1.2 Government policies
Based on the two basic geographical characteristics of the eastern region, the low altitude and relatively small area provide the east with better potentials to grow. Its better infrastructure systems also allow the region to response efficiently and sensitively to the government’s reform policies. As the Chinese government aimed to get immediate economic growth in the late 1970s’, the eastern region became the first focus. Since 1978, the Chinese government increased its investment in the east significantly. In 1998, the Chinese government spent 61.7 % of the government investment in the east while only 15.2 % was spent in the west. On top of that, regional policies favoring the east have been adopted. First, special areas are planned to attract foreign investments. For examples, 360 Special export zones (SEZs) are established in the east. Singapore Industrial Area is set up in Suzhou province (in the east region). Special investments areas for Taiwanese are build in different cities in the east. Second, various preferential policies are granted to the eastern region, such as tax concessions, and tariff exemptions for foreign investors. Some provinces along the southeastern coast also enjoyed more authority for approving foreign direct investment (FDI). Lastly, improvement in infrastructures and transportation systems allowed the eastern region became the export base of China (Hu 2000: 312).
Apparently, the economic reforms started in 1978, most the government resources, financial supports, and favorable policies are given to the east rather than the west. In 1998, the government spending invested to the west accounted for 15.2 % only ((Lu 1998: 12). Even after the “Great Development of the West” program is launched in 1999 and the Chinese government greatly increase its spending in the west, I argue, the western region does not response to the changes in government policies as the ways the eastern region did. The west is not as sensitive or as efficient in responding to the increase of favorable policies and increase of investment spending. As the west covers a huge landmass and the range of the territory is wide, the responses to the government’s policies are also different in different regions and changes are uneven. Also, lack of infrastructure and underdevelopment dwarf the effects of favorable government policies.
5.1.3 Foreign Direct Investment
Foreign direct investment (FDI) is an extensive cross-border investment between a direct investor (either an individual or business entity) from a stronger economy and a direct investment enterprise in another country conducted by the previous trial purposes only, but to instead acquire a long-term relationship with the latter in order to serve its domestic markets, make the most of its resources, or create a stage that will serve world markets through exports (Capital Markets Consultative Group [CMCG] Working Group, 2003; Jensen, 2003; United Nations, 2003).
In the long-term relationship, the direct investor is given an important role in the management of the direct investment enterprise activities, which includes the construction of long-term establishments (such as manufacturing facilities, bank premises, warehouses and other long-term organizations) and conducting investments, joint ventures, cross-mergers and / or acquisitions in the less-advanced economy. If the direct investor already gets hold of 10 percent or more of the ordinary shares or voting power of an enterprise abroad, a direct investment is now achieved. In this case, the activities covered include not only the initial transaction that forges the “FDI relationship” between the two parties involved, but extends to all subsequent transactions between them and among affiliated enterprises, reaching beyond the original direct investor and includes foreign subsidiaries and affiliates of the direct investor that are part of the “parent group” (CMCG Working Group, 2003).
Meanwhile, flows that make up FDI are capital (either provided by foreign direct investor to an FDI enterprise or received from a FDI enterprise by a foreign direct investor), the three components equity capital (i.e., the foreign direct investor’s purchase of shares of an enterprise in a country other than its own), reinvested earnings (i.e., the direct investor’s share of earnings not distributed as dividends by affiliates, or earnings not paid to the direct investor) and intra-company loans / debt transactions (i.e., the short-term or long-term borrowing and lending of funds between direct investors and affiliate enterprises), and the FDI stock (i.e., the value of the share of their capital and reserves (including retained profits) attributable to the parent enterprise, plus the net indebtedness of affiliates to the parent enterprise) (United Nations, 2003, pp. 231-232).
Apparently, in the paper of Vernon and Davidson (1979), the emergence of the multinational private corporation as a powerful agent of world social and economic change has been a signal development of the postwar era. This evolution has been regarded with mixed opinions by public officials of the investing and the host countries, as well as by observers of international affairs.
Due to the favorable government policies in the east, Foreign Direct Investment (FDI) increased rapidly since the reforms. In 1998, FDI in the east was 85.5 %, but in contrast, only 3.5 % of the total FDI flowed in China was invested in the west. Disparity in foreign investments across regions is extreme (Lu 1998: 12).
Because of the geographical differences, the east has more potential to grow fast and therefore, better infrastructures and transportation networks are established. Government policies and foreign investments have also been playing important roles in developing the east. As both government and foreign investments are significantly higher than in the west, qualified labors, entrepreneurs, and advanced technologies have also been flowing towards the east. As a result, the east has been growing at a faster rate than the west; the gap between the east and the west widened sharply over the last two decades.
With respect to the previous discussion, dramatic increase in foreign investments in the 1980s’ and 1990s’ was the main driving force of the rapid development in the east. However, it is not the case for the western region as foreign investment level remains low even after launching 1999’s “Great Development of the West” program. Even government policies are implemented to attract foreign investors to invest in the western region, the lack of infrastructures and the remoteness of the west keeps the investors away from the region. Before the Chinese government explicitly switched its developmental strategies to the west, foreign investment level was as low as only 3.5 % of the country’s total foreign investment was invested in the west (Lu 1998: 12). After 1999, investment level increased but remains at the level of 5 % in 2002. Foreign Direct Investment, instead of moving westward to the interior part of the country, has been moving northward along the eastern coast of China (Jiang, 2004: 23). As a result, before large-scales constructions of infrastructures are completed, which are expected to take at least a few decades, foreign investment is predicted to remains at a much lower level than the east.
Because of the high altitude and its vast body of land mass, the western region is considered as remote and underdeveloped. Lack of infrastructures weakens the impacts of favorable government policies and foreign investments in the region. As a result, we cannot expect a dramatic growth in the west from favorable government policies and increase in foreign investments before the constructions of basic infrastructures are completed. Different form the massive, macro-scale, dramatic growth in the east, I aforementioned; it is more reasonable for the west to rely its development on a micro-level, local, and gradually developmental approach, especially in the foreseeable, short future when lack of good transportation systems and infrastructures are still a main issue in the west. Compare to the economic boom created in the east for the last two decades, the west will need to take a more balanced, gradual approach for development.
Instead of favorable central government policies or heavy foreign investments, I argue, in this early stage of westwards development, initiatives lead by local government and entrepreneurs is the most important factor in determining the development in the west. I will use two specific cases to illustrate how human capital, entrepreneurship, and social networking can make a difference in the west even infrastructures, foreign investment, and government policies are still lacking behind those in the east.
6.0 Related Studies
6.1 Dayingjie Township, Yunnan Province
Dayingjie is a township located in Yunnan province in Southwest China. It shares a similar physical setting and natural endowment with other townships within the province. Without any significant favorable government policies and any kind of investment from outside, Dayinggjie enjoys a per capita net income of more than 6,000 yuan, while other townships nearby are only making a net income of less than 2,000 yuan. Dayingjie was not different from other townships before three gutsy entrepreneurs Ren, He, and Yang used their social networking skills to establish “guanxi” (relationships) with the fasting growing Hongta Cigrarette Company in Zhoucheung. But since these three entrepreneurs started building their local empire by connecting with the giant enterprise, Dayingjie Township outperformed other rural townships and became the richest township within the region.
Ren, He, and Yang are local villagers; just as other traditional Chinese villagers accustomed to a collective life, they give the highest priority to interpersonal connections. They worked for the Dayingjie Brigade Construction team in the 70s’, and they gained the trust of the Hongta Cigarette Company when the team successfully completed a new factory for the company. Ren’s exceptional social networking skills allowed him to build a marketing network for the company. In the late 1970s’, the enterprise moved one of its cigarette filter factories to Dayingjie. Since then many other village industries have taken off. The relationship between Ren and the Hongta Cigarette Factory was mutually benefitial; Ren gained the financial capital from the giant enterprise, while the company benefited from the market and the low labor cost provided by Dayingjie Township.
Since the three rural entrepreneurs began to build rural industries in Dayingjie Township by establishing relationships with the Hongta Ciagrette Factory, the living standards and the welfare system in the township greatly improved. Besides cigarette filters, the township also produce furniture, aluminum foil, and solar panels. Dayingjie earned the reputation as a model village (Xu 2004: 810).
The Dayingjie success illustrated that development in western China can be achieved in a local scale without significant help from the central government or foreign investment. “Guanxi” or social networking skill is especially important in the Chinese society. Entrepreneurship is also critical. The question of how to promote the growth of entrepreneurship and human capital on a larger scale is essential to the development of the western region as a whole.
6.2 “Glory Project” in Tibet
Many private entrepreneurs in China are interested in the economic opportunities offered by the west. They also committed themselves to the social obligations of development in western China. For example, a program called “Glory Project” started by the Chinese Association of Private Scientists, Technicians, and Entrepreneurs in 1995 have completed more than 100 investment and assistance projects in cities such as Lhasa, Xigaze, and Shannan in Tibet.
Since the beginning of the program, more than 40 members of the associations visited Tibet with the assessment tours. Millions of yuan have been invested to the constructions of two pharmaceutical plants, two modern farms, several timber mills, a cooking oil plant and real estate development. Entrepreneurs make profit by taking advantages of the unique resources and the low production cost in Tibet; while the enterprising spirits and the managerial skills brought by the entrepreneurs inspired the people in Tibet (Mo 1997, 33).
7.0 Conclusion
Since the economic reforms took place in 1978, the coastal region of China in the east gained sharply from a more market- oriented economy. Gap between the east and the west is widened rapidly as the east has been growing at a faster rate than the west. The geographical differences are the fundamental explanations of disparities between the east and the west. Equipped with better infrastructures, favorable government policies and increased foreign investments stimulated economic growth in the eastern region at a significantly fast rate over the past two decades. However, in the west in contrast, the vast landmass and lack of infrastructures are obstacles of development in the region. Favorable government policies and foreign investments are not likely to generate a similar, sharp economic boom as they did in the east. At this early stage of “Great Development of the West” Program, as I suggested, human capital, entrepreneurship, and social networking initiated by local leaders or entrepreneurs are essential for development. A more balanced, gradual approach for development in western China is advisable.
Additional References:
Capital Markets Consultative Group (CMCG) Working Group. (2003). Foreign Direct Investment in Emerging Market Countries. Washington, DC: International Monetary Fund (IMF).
Huang, Y. and Khanna, T. (2003). Can India Overtake China? In Foreign Policy, July / August 2003.
Jensen, N.M. (2003). Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment. In International Organization, Vol. 57 (Summer), pp. 587-616.
United Nations. (2003). World Investment Report 2003—FDI Policies for Development: National and International Perspectives. Switzerland: United Nations Publications.
Vernon R. and Davidson W.H. (1979), Foreign production of technology intensive products by US based multinational enterprises, Working Paper 79-5, Harvard Business School, Cambridge MA.
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