Government transfer payments and regional development

Abstract

A prominent feature associated with the rapid economic growth in China is the worsening regional disparity. As shown in Figure 1, the income gap between China's coastal and inland regions 2 has been widening since the economic reforms in 1978. Of the three regions, the richest eastern coastal region experienced the fastest economic growth in the past two decades. The average per capita GDP in the eastern region increased seven-fold, while per capita GDP in the poorest western region increased by less than five times. Consequently, the gap in per capita GDP between the eastern and western regions increased from 380.6 yuan in 1978 to 3 354.9 yuan in 2000 in real terms. This phenomenon has been well documented by many authors, e.g. Wu (1999), Sun (2000), Sun and Parikh (2001) and Jiang (2002). One way to tackle this problem is using inter-governmental transfer payments.