LESSON7LESSON7WehavepreviouslylookedatsomeissuesrelatingtoregionaldisparitiesinChina.Previousdiscussionwillnotberepeatedbutsomemajorpropositionswillbereviewedbeforeweproceedfurther.WehavepreviouslylookedatsThefirstpointtonoteisthatasdevelopmenthasoccurredinChinaoverthelastthirtyyears,growthhasbeenquiteunevenwhenlookedatinregionalterms.Thegreatestgrowthhasbeeninthecoastalprovinces,notintheinterior.Growthinthecoastalprovinces,infact,hasbeenthedrivingforceforthenationalgrowthexperiencedsince1980.ThefirstpointtonoteisthaThus,asignificantgaphasopenedupbetweentherichestregionandtherestofthecountry.ThisgapcanbeseeninthelevelofGDP/capitaindifferentregionsaswellastherateofgrowth,employmentlevels,migrationpatterns,infrastructuredevelopment,etc.Thesegapsaresignificantandtheyareimportant.Thus,asignificantgaphasopIn2007,percapitaGDPinvariousprovinceswas–Qinghai 14257yuanZhejiang 37411yuanJiangsu 33928yuanFujian 25908yuanGuandong 33151yuanIn2007,percapitaGDPinvarPartofwhatmakestheseregionaldisparitiesimportantisthattheyindicatetheunevennessofthegrowthanddevelopmentthathastakenplaceandthefactthatafailuretoaddressthemcouldcreateorcontributetoarisinglevelofcitizendissatisfactionwiththegainsfromgrowthoratleastthewaythosegainsaredistributed.PartofwhatmakestheseregioThehukousystem,whichisthehouseholdregistrationsystem,isapotentiallyimportantpointtoconsiderinlookingatregionaldisparities.Whenwelookedattheso-calledneo-classicalmodelofregionaladjustment,wesawthatinaperfectlyfunctioningmarketsystem,withperfectlabourmobility,regionaldisparitieswillbeeliminatedbyworkersmovingfromlowwageregionstohighwageregions.Thehukousystem,whichistheThisadjustmentmechanismdoesnotsolvetheproblembecausemarketsarenotperfectandalsobecausenotalllabourrespondsjusttoeconomicincentives.ButintheChinacase,thehukousystemaddsanotherlayerofdifficultytotheanalysisbecauseitmeansthatworkersarenotcompletelyfreetomove.ThisadjustmentmechanismdoesInpractice,workersnowaremorefreetomovethanwaspreviouslythecase.Butunregisteredworkersstillhaveproblemsintermsofaccesstoschoolsforchildrenandbeingabletoworkforgovernment,etc.Thismeansthatthemarketadjustmentmechanismcannotworkevenifitwasotherwisecapableofsolvingtheproblem.Inpractice,workersnowaremTheChenandGroenewoldpaperthathasbeenassignedconsidersthisquestionoftheimpactofreducingthecostofmigration.Basicallythehukousystemmakesmigrationmoreexpensive.Relaxingtherulesabouthouseholdregistrationwillmakeiteasierforworkerstomigrateandtotaketheirfamilieswiththem.TheChenandGroenewoldpaperChenandGroenewoldfindthatReducingthecostsofmigrationwillreduceregionaldisparities BUTThiswillbeattheexpenseofthealreadyleadingregion,whichforChinaisthecoastalregion.ChenandGroenewoldfindthatRememberthatthewaythemigrationsolutionworksisthatasworkersmovefromthelowwageregiontothehigherwageregion,thesupplyoflabourinthelowwageregionfallsandthesupplyoflabourinthehighwageregionrises.Thesesupplychangeswillcausewagesinthelowwageregiontoincreaseandinthehighwageregiontodecrease.RememberthatthewaythemigrSothehighwageregionwillexperienceafallinincome.Thelowwageregiongainsbutpartofthatgainisattheexpenseofthehighwageregion.SothehighwageregionwilleThismeansthattheregionthatstartsoutaheadhasalottolosefromreducingregionaldisparitiesinthisway.Thismeansthatthebetteroffregionswillargueagainstchangingthehukourulesbecauseitisintheirinterestsforthingstostayastheyare.ThismeansthattheregionthaThereisalsoanotherconsideration.Thepresentsystemgivesthebetter-offregionsaccesstoacheapersourceoflabourtosupplementtheirlocallabourforce.Partofthiscomesfromthefactthatmigrationunderthepresenthukousystemistypicallynotpermanentformanyworkers,i.e.,theyareitinerantworkers.Changingthehukourulestomakemigrationeasierwillchangethis.ThereisalsoanotherconsiderItinerantworkersaretypicallywillingtoworkforlowerwagesthanresidentworkers.Sorelaxingthehukourulestoallowformorepermanentmigrationwillincreaseproductioncostsforfirmsinthemoreadvancedregions.ItinerantworkersaretypicallChenandGroenewolddevelopasimulationmodeltoexaminetheeffectsofvariousgovernmentpoliciesonregionalincomedifferences.Thedetailsofthemodelwillnotbereviewedhere.Basicallyitisatworegionmodelthatassumesacoastalregionandaninteriorregion.Thecoastalregionischaracterizedaspredominatelymanufacturingbasedandtheinteriorregionasprimarilyagriculturebased.Agriculturehereisusedtodenoteallprimaryindustries,suchasfarming,fishing,mining,forestry,etc.ChenandGroenewolddevelopaLookingattheirresults,theyfindthefollowing:Anincreaseininteriorgovernment-providedconsumptiondoesnotreducetheincomegapineithertheshortrunorthelongrun.Thegapactuallyworsensasincomepercapitarisesslightlyinthecoastalregionandfallsintheinteriorregion.Thisisprimarilybecausetheyassumethatthegovernmentbudgetmustbebalanced,sotheincreaseinconsumptionspendingisattheexpenseofinfrastructurespendingandthenegativeconsequencesofthelatteroutweighthestimuluseffectsoftheformer.Lookingattheirresults,they2.Anincreaseininteriorgovernmentinfrastructurespendingreducesthegapbyincreasingpercapitaincomeintheinteriorregionandreducingitinthecoastalregion.Again,thebudgetisassumedtobebalancedbutnowconsumptionspendingisreducedtocoverthenewinfrastructurespendingandasbefore,thelatterhasagreaterincomeeffectthantheformer.2.Anincreaseininteriorgo3.Acutinagriculturaltaxeshelpsagricultureintheinteriorregionbuttheoverallimpactattheendisthatalthoughtheoutputgapgetsreducedsomewhat,theoutputpercapitagapincreases.Thisisbecausetheextraagriculturaloutputcausesafallinthepriceofagriculturalgoods,toputitinrelativelysimpleterms.3.Acutinagriculturaltaxes4.Animprovementinagriculturalproductivityreducestheoutputgapandtheoutputpercapitagap.Capitalwillflowfromthecoastalregiontotheinteriorandmigrationwillbefromthecoastalregiontotheinterior.Overallwelfareincreasesinbothregions4.Animprovementinagricultu5.Arelaxationofthehukouregulations,asalreadymentioned,resultsinasubstantialincreaseinmigrationtothecoastalregionandthissignificantlyreducestheoutputpercapitagap.Butitdoesthisbyactuallyloweringoutputpercapitainthecoastalregion,whileraisingitintheinterior.Hence,itinvolvesaredistributionofincomebetweenthetworegionsthatmeansthecoastalregionhasavestedinterestinpreventinganychangeinthehukouregulations.5.Arelaxationofthehukour6.Anincreaseinthecentralgovernment’sspendingintheinteriorregiondoesnotchangethepercapitaoutputgap.Becauseofthebalancedbudgetassumptionstheybuildintotheirmodel,morespendingintheinteriormeanslessspendinginthecoastalregion.Theoutputgapdoesnotimprovebecauseultimatelymigrationflowsoutweighoutputeffectsandthepercapitaoutputgapincreases6.Anincreaseinthecentral7.Afiscaltransferfromthecoasttotheinteriordoesnotreducethepercapitaoutputgap.7.AfiscaltransferfromtheTheresultsofthispaperaresomewhatartificialasanysimulationexercisewillbe.Someoftheassumptions,especiallythebalancedbudgetassumption,alsoclearlyaffecttheresults.Solookingatwhichpoliciesworkandwhichdon’tmustbeevaluatedwiththeseconsiderationsinmind.TheresultsofthispaperareNonetheless,asignificantfindingisthatpolicesaimedatimprovingagriculturalproductivityareamongstthemosteffectiveinreducingregionalincomedisparitiesintermsofoutputpercapita.Asecondsignificantresultisthatredistributionpoliciesdonotworkverywell.Nonetheless,asignificantfinAndathirdsignificantresultisthatallowingmoremigrationfromtheinteriortothecoast,i.e.,fromthepoorerregiontothericherregion,canbesignificantinreducingdisparities.Ontheonehand,thisconclusiontellsusthatwhatwealreadyknowisconfirmed.Noonedoubtsthatmigrationwillhelpsolvetheproblem.AndathirdsignificantresultButthisbeingsaid,twopointsmustbemade:Theevidencefromothercountriessuggeststhatmigrationalonewillnotcompletelysolvetheproblem;andMigrationisnotnecessarilythebestwaytosolvetheproblembecausetheremaybecostsinthisthatarenotreflectedintheC-Gmodel.Butthisbeingsaid,twopointThesecondpaperbyChenandGroenewoldaskstowhatextentpoliciesdesignedtoattackregionaldisparitiesrepresentatrade-offagainstnationaldevelopment.Theyconcludethatsomepolicesfaceatrade-offandsomedonotandforsome,theremaybeadifferenceintheshort-runtrade-offversusthelong-runtrade-off.ThesecondpaperbyChenandGGenerally,theconclusionsofthispaperareessentiallythesameasfortheotherpaperbutwhatisdifferentisthattheydrawadistinctionbetweentheoutputgap,theincomegapandthewelfaregap,showingthatsomepoliciesmayimpactthesedifferentvariablesindifferentways.Butoveralltherearenosurprisesintheirresults,givenwhatwealreadyknowfromtheirfirstpaper.Generally,theconclusionsofLESSON7LESSON7WehavepreviouslylookedatsomeissuesrelatingtoregionaldisparitiesinChina.Previousdiscussionwillnotberepeatedbutsomemajorpropositionswillbereviewedbeforeweproceedfurther.WehavepreviouslylookedatsThefirstpointtonoteisthatasdevelopmenthasoccurredinChinaoverthelastthirtyyears,growthhasbeenquiteunevenwhenlookedatinregionalterms.Thegreatestgrowthhasbeeninthecoastalprovinces,notintheinterior.Growthinthecoastalprovinces,infact,hasbeenthedrivingforceforthenationalgrowthexperiencedsince1980.ThefirstpointtonoteisthaThus,asignificantgaphasopenedupbetweentherichestregionandtherestofthecountry.ThisgapcanbeseeninthelevelofGDP/capitaindifferentregionsaswellastherateofgrowth,employmentlevels,migrationpatterns,infrastructuredevelopment,etc.Thesegapsaresignificantandtheyareimportant.Thus,asignificantgaphasopIn2007,percapitaGDPinvariousprovinceswas–Qinghai 14257yuanZhejiang 37411yuanJiangsu 33928yuanFujian 25908yuanGuandong 33151yuanIn2007,percapitaGDPinvarPartofwhatmakestheseregionaldisparitiesimportantisthattheyindicatetheunevennessofthegrowthanddevelopmentthathastakenplaceandthefactthatafailuretoaddressthemcouldcreateorcontributetoarisinglevelofcitizendissatisfactionwiththegainsfromgrowthoratleastthewaythosegainsaredistributed.PartofwhatmakestheseregioThehukousystem,whichisthehouseholdregistrationsystem,isapotentiallyimportantpointtoconsiderinlookingatregionaldisparities.Whenwelookedattheso-calledneo-classicalmodelofregionaladjustment,wesawthatinaperfectlyfunctioningmarketsystem,withperfectlabourmobility,regionaldisparitieswillbeeliminatedbyworkersmovingfromlowwageregionstohighwageregions.Thehukousystem,whichistheThisadjustmentmechanismdoesnotsolvetheproblembecausemarketsarenotperfectandalsobecausenotalllabourrespondsjusttoeconomicincentives.ButintheChinacase,thehukousystemaddsanotherlayerofdifficultytotheanalysisbecauseitmeansthatworkersarenotcompletelyfreetomove.ThisadjustmentmechanismdoesInpractice,workersnowaremorefreetomovethanwaspreviouslythecase.Butunregisteredworkersstillhaveproblemsintermsofaccesstoschoolsforchildrenandbeingabletoworkforgovernment,etc.Thismeansthatthemarketadjustmentmechanismcannotworkevenifitwasotherwisecapableofsolvingtheproblem.Inpractice,workersnowaremTheChenandGroenewoldpaperthathasbeenassignedconsidersthisquestionoftheimpactofreducingthecostofmigration.Basicallythehukousystemmakesmigrationmoreexpensive.Relaxingtherulesabouthouseholdregistrationwillmakeiteasierforworkerstomigrateandtotaketheirfamilieswiththem.TheChenandGroenewoldpaperChenandGroenewoldfindthatReducingthecostsofmigrationwillreduceregionaldisparities BUTThiswillbeattheexpenseofthealreadyleadingregion,whichforChinaisthecoastalregion.ChenandGroenewoldfindthatRememberthatthewaythemigrationsolutionworksisthatasworkersmovefromthelowwageregiontothehigherwageregion,thesupplyoflabourinthelowwageregionfallsandthesupplyoflabourinthehighwageregionrises.Thesesupplychangeswillcausewagesinthelowwageregiontoincreaseandinthehighwageregiontodecrease.RememberthatthewaythemigrSothehighwageregionwillexperienceafallinincome.Thelowwageregiongainsbutpartofthatgainisattheexpenseofthehighwageregion.SothehighwageregionwilleThismeansthattheregionthatstartsoutaheadhasalottolosefromreducingregionaldisparitiesinthisway.Thismeansthatthebetteroffregionswillargueagainstchangingthehukourulesbecauseitisintheirinterestsforthingstostayastheyare.ThismeansthattheregionthaThereisalsoanotherconsideration.Thepresentsystemgivesthebetter-offregionsaccesstoacheapersourceoflabourtosupplementtheirlocallabourforce.Partofthiscomesfromthefactthatmigrationunderthepresenthukousystemistypicallynotpermanentformanyworkers,i.e.,theyareitinerantworkers.Changingthehukourulestomakemigrationeasierwillchangethis.ThereisalsoanotherconsiderItinerantworkersaretypicallywillingtoworkforlowerwagesthanresidentworkers.Sorelaxingthehukourulestoallowformorepermanentmigrationwillincreaseproductioncostsforfirmsinthemoreadvancedregions.ItinerantworkersaretypicallChenandGroenewolddevelopasimulationmodeltoexaminetheeffectsofvariousgovernmentpoliciesonregionalincomedifferences.Thedetailsofthemodelwillnotbereviewedhere.Basicallyitisatworegionmodelthatassumesacoastalregionandaninteriorregion.Thecoastalregionischaracterizedaspredominatelymanufacturingbasedandtheinteriorregionasprimarilyagriculturebased.Agriculturehereisusedtodenoteallprimaryindustries,suchasfarming,fishing,mining,forestry,etc.ChenandGroenewolddevelopaLookingattheirresults,theyfindthefollowing:Anincreaseininteriorgovernment-providedconsumptiondoesnotreducetheincomegapineithertheshortrunorthelongrun.Thegapactuallyworsensasincomepercapitarisesslightlyinthecoastalregionandfallsintheinteriorregion.Thisisprimarilybecausetheyassumethatthegovernmentbudgetmustbebalanced,sotheincreaseinconsumptionspendingisattheexpenseofinfrastructurespendingandthenegativeconsequencesofthelatteroutweighthestimuluseffectsoftheformer.Lookingattheirresults,they2.Anincreaseininteriorgovernmentinfrastructurespendingreducesthegapbyincreasingpercapitaincomeintheinteriorregionandreducingitinthecoastalregion.Again,thebudgetisassumedtobebalancedbutnowconsumptionspendingisreducedtocoverthenewinfrastructurespendingandasbefore,thelatterhasagreaterincomeeffectthantheformer.2.Anincreaseininteriorgo3.Acutinagriculturaltaxeshelpsagricultureintheinteriorregionbuttheoverallimpactattheendisthatalthoughtheoutputgapgetsreducedsomewhat,theoutputpercapitagapincreases.Thisisbecausetheextraagriculturaloutputcausesafallinthepriceofagriculturalgoods,toputitinrelativelysimpleterms.3.Acutinagriculturaltaxes4.Animprovementinagriculturalproductivityreducestheoutputgapandtheoutputpercapitagap.Capitalwillflowfromthecoastalregiontotheinteriorandmigrationwillbefromthecoastalregiontotheinterior.Overallwelfareincreasesinbothregions4.Animprovementinagricultu5.Arelaxationofthehukouregulations,asalreadymentioned,resultsinasubstantialincreaseinmigrationtothecoastalregionandthissignificantlyreducestheoutputpercapitagap.Butitdoesthisbyactuallyloweringoutputpercapitainthecoastalregion,whileraisingitintheinterior.Hence,itinvolvesaredistributionofincomebetweenthetworegionsthatmeansthecoastalregionhasavestedinterestinpreventinganychangeinthehukouregulations.5.Arelaxationofthehukour6.Anincreaseinthecentralgovernment’sspendingintheinteriorregiondoesnotchangethepercapitaoutputgap.Becauseofthebalancedbudgetassumptionstheybuildintotheirmodel,morespendingintheinteriormeanslessspendinginthecoastalregion.Theoutputgapdoesnotimprovebecauseultimatelymigrationflowsoutweighoutputeffectsandthepercapitaoutputgapincreases6.Anincreaseinthecentral7.Afiscaltransferfromthecoasttotheinteriordoesnotreducethepercapitaoutputgap.7.AfiscaltransferfromtheTheresultsofthispaperaresomewhatartificialasanysimulationexer