CHINA today is a study in contrast. Over the last few years, the PRC has been heralded as a major power on the rise which has recorded unprecedented high rates of growth, phenomenally high FDI inflows and a massive jump in share of global trade. During 1978-2002, China’s average annual GDP growth rate was 9.5%, which is much higher than the world GDP growth rate of 2.3% (World Development Indicators). Over the past decade, the growth rate of per capita income has averaged an amazing nine per cent annually (Jones et al., 2003:1). China’s share in world export increased from 0.8% barely two decades ago to more than 4.5% at the turn of the century.

There is another set of statistics which project yet another reality of China. The third session of the tenth NPC in China which concluded in early March 2006, for the third year in succession brought the question of social stability sharply to the fore, as it acknowledged the existence of serious and near system-threatening levels of regional disparities and urban-rural inequality. These disparities or imbalances, which have emerged and strengthened over a period of time, have at one level brought home the realisation that there are major issues concerning our neighbour about which we have little to no understanding or information and, at another, underlined the need for further and systematic academic enquiry into this area. It may be described as a source of the most critical concerns and apprehensions within the current leadership in China as regards national unity and stability with implications for sustained and sustainable development.

There is clear and mounting evidence that the debate on the rise of the People’s Republic of China needs to be revisited given the serious issues that have now emerged. It is also apparent – and this debate is now unambiguously in the public arena – that for every achievement China records, there are accompanying problems indicating the tremendous price that the country as a whole has paid for its phenomenal achievements. Both the Human Development Report 2005 of the UNDP in Beijing, prepared mainly by Chinese economists, as well the OECD Report on income disparities in China (which is part of its series on China in the Global Economy) have underscored that since the eighties, and more particularly since the early nineties, income inequalities, particularly the urban-rural divide, have increased sharply.

 

Income and wealth distribution is extremely uneven both in inter and intra urban and rural areas. As mentioned earlier, the large size of China makes it inevitable that there will be spatial economic variations and disparities. They are both natural and may even be necessary. The predicament arises when these disparities become dysfunctional within the overall developmental strategy, to the extent that they alienate sections of the populations in these regions, leading to resentment and protest which threaten the body fabric of the polity and society. The early nineties in fact saw a profusion of literature from the West predicting the disintegration of China. The collapse of the Soviet Union and the disintegration of the socialist bloc further helped fuel these speculations.

The 2006 Government Work Report (Wen Jiabao, 2006) identifies the promotion of balanced development among regions as a key focus area in the forthcoming period. The repeated calls from the highest levels for the building of a ‘harmonious society’ in the last few years and official admission of an alarming increase in the number of violent protests on a massive scale provides sufficient indication of the seriousness of the problem. The problem is compounded in the case of large countries such as China and India, with huge populations, major regional variations in terms of distribution of resources and levels of development and drastic urban-rural divides.

The ‘continental super state’ (Van Kemenade, 1998:257) called China consists of 30 administrative units, five autonomous regions, 22 provinces and three self-governing mega cities, each with an average of 40 million inhabitants. The economic reforms which were initiated in December 1978 envisaged the transition from a centralised planned economy to a market-oriented one. It is clear that the process is far from being complete. Constitutionally as well, China remains a highly centralised state although the reforms of the last quarter century have imparted many characteristics of a federation. Though this involves a process of the decentralisation of authority and devolution of powers – economic, financial and also some political – to the provincial/ local levels, it has not taken place uniformly or systematically, but in an uneven manner with different provinces benefiting differently.

 

Additionally, there is no structural or institutional framework for political or legislative reform; rather the changes have come about more on the basis of ad hoc or experiential measures. This has led to a wide variety of arrangements, characterised by a relative decline in central power or the state at one end, which again is not evenly spread across its relations with each of the provinces, and a greater assertiveness on the part of some provinces at the other, as local considerations take precedence. As Hu Angang, economic advisor to the PRC government puts it, ‘China’s economic miracle has taken place at the expense of the central government’ (as cited in Van Kemenade, 1998:257).

The wave of decentralisation measures since 1982 established a system which has essentially endured till the present. The relationships range along a spectrum of maximum centralisation at one end to maximum decentralisation at the other. Studies indicate that provinces with a financial surplus were generally those that demonstrated a greater degree of autonomy compared to those which were mainly dependent on central government grants, though the correlation is not always so simple or direct (Breslin, 1990:150; see also Ferdinand, 1989:41-42). One indication of the nature of the changing centre-province relations is reflected in the sharp fall in the state’s revenues from 32.1% of GNP in 1978 to 14.2% by the early nineties, and the trend is still on the decline.

 

Nonetheless, the surge of growth in the coastal provinces through the eighties, in particular the growth of the economy of Guangdong, in conjunction with the weakening of central state authority, has led to assumptions about the rise of centrifugal tendencies. After nearly two decades of reforms and deregulation packages, Guangdong province was characterised by an unprecedented and unmatched degree of financial independence compared to the rest of the provinces which produced its own set of problems – the migration of millions of rural workers to the urban centres in search of employment and better incomes or even the infamous ‘regional resource wars’ of the late eighties and early nineties in which regions used illegal administrative and military measures to protect their local markets and to restrict inter-regional resource flows (Van Kemenade, 1998:271-73; see also Breslin, 1990:152-53).

 

This paper looks at China’s regional policy in the post-Mao period, specifically since the market reforms gathered momentum, i.e., the late eighties, the debates concerning the role of the Chinese state, central control and the factors behind the policies of decentralisation and/or provincial/local autonomy which have shaped both policy measures and specific outcomes of imbalances. There are studies which have sought to address this issue mainly from the GDP per capita or GDP growth perspective (for instance see, Chen and Fleisher, 1996; Tianlun Jian et al., 1996). This line of enquiry leads us straight into the maze of statistics, as also controversies regarding their unreliability, inaccuracy, irrelevance or inappropriateness. Significant methodological problems also come up in the context of the geographical units of analysis – the notion of a region tends to conflict with the politico-administrative structure of provinces¹ – with the attendant data constraints. These studies show that inequality at the inter-regional scale across China’s eastern, central and western regions differs from inequality at the inter-provincial scale across the provinces. Differentiated patterns of inequality emerge when different scales are used (Fan, 1995, 1997; Goodman, 1989; Wei and Ma, 1996).

Other studies focus on the major determinants of regional imbalances and identify geographical factors, investment patterns, regional income variations, the personal connections of its leaders and additionally, in recent times, globalization (Stern, 1979:260; Solinger, 1982:628; Wan et al., 2004 and Jones et al., 2003). The last factor in particular has played a major role in contributing to the inter-provincial and inter-regional imbalances over the reform period. There is no doubt that the eastern region attracts far greater volumes of FDI and trade than the central and the western regions. Inter-region gaps have thus widened over the years though convergences within the regions appear to have taken place (Jian et al., 1996; Wan et al., 2004).

 

Thus there are substantial differences in the levels of integration with the world economy that the different regions display despite the recent appeals of the central government for local governments to actively embrace globalization. The overall favourable and positive assessment of the forces of globalization in China and the trend of privatization which have considerable political support at various levels, has so far prevented a serious examination of its impact on income inequality, though some preliminary studies have begun to take note of this. Clearly, this would also contribute to exacerbating the imbalances.

Remarkably, assessments of the Maoist period, in the context of regional policy, have been characterised by broad and completely contradictory views. On the one hand pre-1978 China has been evaluated as ‘the paragon of balanced regional development.’ On the other, Deng Xiaoping’s emphasis on prioritising the coastal regions after 1978 has been seen in terms of a reaction to the over-importance accorded to the interior regions by Mao (Yang, 1997:15). It may be pertinent to recall here that apart from the fundamental objective of laying down the foundations of a modern industrial sector, the more significant factor in regional development and industrialization policy from the early 1950s right through to the mid-1970s was the consideration of defence. Moving industrial investment away from the coastal region was dictated by the perceived threat, particularly after 1960, from both superpowers of the time.

 

Hence the decision to ‘furnish the interior provinces with their own basic industrial infrastructure in order that they might stand alone in the event of external attack… The map of China was notionally divided into "three lines" (san xian), or regions. The first of these was the vulnerable eastern seaboard, and the north and northeastern border areas; the second, an intermediate or buffer belt and the third line was the inaccessible redoubts of several interior provinces’ (Kirkby and Cannon, 1989:4-12). Clearly many of the changes in regional policy, particularly with regard to the coast, can be related to the gradual transformation of China’s strategic/security environment and threat perceptions.

One section of opinion maintains that during the Mao period, ‘regional inequality declined as a result of the implementation of distributive policies, especially inter-regional transfers to interior regions through centralised fiscal and investment systems as also central control over income redistribution’ (Lardy, 1975). Yet another argues that Mao’s policy of ‘decentralisation and self-reliance produced regional autarky and a "cellular economy" that weakened the effectiveness of resource transfers and as a result regional inequality continued to be pronounced for a long period of time’ (Donnithorne 1972, 1976).

The debate on the precise extent of regional variations and imbalances that Deng Xiaoping inherited in many ways continues among scholars. For our purposes it is enough to establish that the Deng reforms heralded a fundamental and major shift in regional development policy and practice, particularly in terms of the decentralisation of power, increasing the scope of market forces and opening China up to the outside world. This was accompanied by a set of ‘preferential policies’ (or ‘deregulation policies’, as Demurger et al, 2002 have termed them) which were formally adopted in the seventh five year plan of 1986-1990 – ‘greater fiscal autonomy, tax breaks, favourable terms in loans, credits and subsidies, higher foreign exchange retention and faster financial and legal approval.’

 

Cumulatively, this package led to a reduction of central fiscal control that Lardy had earlier identified as a positive discriminatory central policy to ameliorate the imbalances and a considerable dilution in the earlier regulatory regime, particularly with regard to privatisation and foreign trade and investment liberalization.

Deng’s strategy was founded on the logic of enabling the regions with the most favourable economic conditions to develop and get rich faster, constituting the ‘engine of growth’ as it were, which would spur growth in the less advanced regions and eventually lead to a general and more balanced situation. China was now to be divided into three economic regions on the basis of this logic – eastern or coastal, central and western regions. The coastal region, with the most favourable factors – industrial base and activity, vastly superior human and technological capital – would be prioritised over the natural and mineral resources rich central and western regions.

The results clearly justified the initial objective. The GDP per capita in the coastal/eastern regions was 1.53 times larger than in the central regions, and 1.80 times larger than that in the western regions. In 1990, these figures grew moderately to 1.62 and 1.90 to reach 2.08 and 2.63 in 2002 respectively. But then, the divergence between rich and poor provinces also increased. The GDP per capita in the most prosperous province of Zhejiang was 2.16 times larger than that of the poorest province of Guizhou in 1980; this ratio increased to 5.0 in 2002 (A Statistical Survey of China, 2002).

 

As the number of studies on the question of regional imbalances proliferate, it is interesting that there are contrasting conclusions regarding the nature and extent of the imbalances. On the whole, there seems to be little difference over the root cause of divergences. The government’s policies which give preferential treatment – whether to regions, provinces or cities – account for a major portion of the differences in growth rates and relative prosperity. The policy packages influence growth directly by enabling the creation of an environment more conducive to production and by encouraging the flow of foreign direct investment to these areas (Jones et al, 2003). More significantly, bargaining between the central and local government during the 1990s became more intense as a consequence of the poorer regions considering themselves as less favoured by the central government (Wong, 1991).

The case of Guangdong province is illustrative of both the manner in which the coastal provinces took advantage of the preferential policies as well as their increasing assertiveness or even intransigence vis-a-vis central directives. In 1984, Guangdong transferred only 3% of its total revenues to the central government, in sharp contrast to Shanghai which handed over 81% of its revenues to Beijing (Yang, 1997:103-04). On the other hand, in 1979, Guangdong received 80% of its investment funds from Beijing; by the early 1990s, this had dropped to only 2% (Van Kamenade, 1997:284).

 

In addition to deregulation, coastal provinces were also encouraged to look towards external capitalist economies such as Hong Kong, Taiwan, Singapore and South Korea as part of the policy of opening up to the outside world and inviting foreign direct investment. By this time the PRC leaders were also in the process of encouraging the vast numbers of wealthy Chinese diaspora scattered in the adjoining regions to invest in their ancestral lands. In the context of intra-provincial disparities, research revealed that Guangdong’s richest city, Zhuhai, was 34 times richer than Heping, its poorest county (Wang Shaoguang and Hu Angang, 1993; as cited in Van Kemenade, 1998:286).

The post-Tiananmen circumstances induced reassertion of political control and between 1989 and 1993 and there was a major move to bring the provincial leaders back in line. It was not an easy process and reports of virtual showdowns between the Guandong governor and Beijing encouraged more doubts regarding state capacity (Van Kemenade, 1998: 284-85). Compounding the problem was the extent to which the market and foreign sectors had penetrated the Guangdong economy, making it difficult for even the provincial authorities to control the local economy (Breslin, 1990:151). The issue for further investigation and analysis here is clearly the role of the state in terms of its controlling and intervening capacity in the maintenance of a balanced macroeconomic picture, as also its ability to regulate and exercise some check on the specific sectors wherein finance capital/foreign investment is operating.

The post-Tiananmen political trends were widely assessed as strengthening anti-reform forces and the beginning of a reversal. That this did not happen testifies in part to Deng Xiaoping’s own position and continuing commitment to high growth (Deng, 1994:358-70). It was also partly a consequence of the emergence of different interest groups both at the Centre and provincial levels. This is particularly striking in those regions with the highest growth, and with considerable independent sources of revenue, authority and political support, as amply reflected in the changing social base and composition of the Communist Party.

 

Government policy thus is by and large blamed for the rise of regional gaps and conflicts and there is clearly a demand from the poorer regions for a more assertive central role in favour of reducing this gap by committing greater proportion of resources to the poorer interior provinces. Competition among the provinces though appears to continue unabated. A recent study in the nineties highlighted a development that has been termed ‘development zone fever’. Under the efforts of several local authorities, development zones mushroomed – from 117 in 1991 for the whole country, they had increased to 2,700 within a year, only 95 of which were approved by various departments of the central government. The rest of these ‘zones’ were established by different township (including even local) authorities (Montinola et al., 1995:79).

 

The transition process in China is clearly poised at a very critical and complex moment. Chinese economists have commented on how the tensions between the necessity for decentralisation measures and the equally compelling logic of clear central authority tend to become circular and shape Chinese politics. Excessive decentralisation ‘will inevitably result in everybody going their own chaotic way’, whereas a high degree of centralisation would impart rigidity across the board and make it difficult if not ‘impossible to suit measures to local conditions’ (Liu Guoguang et al., 1987:438-39; Riskin, 1987). Developments suggest that even as the centrifugal forces in the reform period are playing a significant role, considerable economic leverage and initiative is still exercised by the Centre.

This paper attempts to highlight the fault lines in the current regional development policies and their impact on the political and socio-economic relations in China. The complications, complexities and negative fallouts of a single-minded focus on growth and strengthening of the productive forces have only now emerged. The authorities in Beijing have begun to respond to the challenges – the ninth FYP of 1996-2000 basically abandoned the uneven development strategy and urged the development of the interior provinces instead. After 1992, the preferential policies were extended to all major cities in the central and western regions. In 1999, the Chinese government unveiled their ambitious western development strategy – increased government input, fiscal support and introduced major tax cuts – to attract investors to these regions.

 

Leaders from time to time have stressed the need to slow down, re-centralise, and urged that this not be seen as a backward move. The votaries of central planning are being heard again. This is not to suggest that the great reversal is about to begin. This is also not a case for the break-up of China – the argument is more about the consequences of the past quarter century of market reforms in China with the stress on high growth at any cost. It appears at present that the costs outweigh the benefits. The Chinese leadership has probably decided to pause and consider where exactly it is headed.

 

Footnote:

1. The Seventh Plan (1986-90) considered the Chinese economy in terms of three regions. The eastern region covers eleven provincial-level units having direct access to the coast and a population of some 400 million, the central region has eight provinces and the autonomous region of Inner Mongolia accounts for over 370 million people and the western region embraces nine provincial-level units, including five autonomous regions, involving a population of about 230 million. The western region has an area of more than half of the other two regions combined. (Goodman, 1989: 14-5) The Ninth Plan (1996-2000) and the long term development programme upto the year 2010 divided the country into seven economic regions or zones, which were different from the earlier regions. For details see Van Kemenade, 1998, pp. 258-60.

 

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