Regional convergence versus regional aid

A few recent reports have noted that some of China’s poorer western provinces are still enjoying GDP growth of more than 10%, years after the country as a whole said goodbye to double-digit growth rates. In the first half of 2016, Tibet notched up 10.6% growth and Guizhou, in the southwest, 10.5%. Jan Zilinsky (briefly here, and at more length here) interprets this data optimistically, as a sign that the convergence process (aka catch-up growth) is still operating: incomes in poorer provinces are rising to close the gap with wealthier provinces.

The official narrative emphasizes how the poorer provinces are benefiting from investment flows taking advantage of their lower labor costs–Guizhou for instance is supposedly in the midst of a big-data boom, while Chongqing is emerging as a new manufacturing hub. It is definitely true that, since Foxconn opened a facility, Chongqing has risen in the export rankings. But overall there is not actually a massive shift of export-manufacturing activity to the Chinese inland.

A simpler explanation for the continued fast growth of poor western provinces is, in my view, that they just get lots of direct and indirect government subsidies, which are not subject to the cyclical vagaries of the rest of the economy. Tibet is in a class of its own: in 2014, it received 103 billion yuan in net fiscal transfers from the central government, a sum larger than its annual GDP of 92 billion yuan (for more detail, see this previous post on Tibet’s Potemkin economy). In other words, Tibet’s GDP growth is more or less whatever Beijing wants it to be. Guizhou, which is actually poorer than Tibet on a per-capita GDP basis, also gets most of its local budget from the center, though its dependence is not as extreme as Tibet’s. Most of the poorest provinces are in a similar situation:


And here’s another chart, just because I can. Fiscal transfers are not the whole story in China, since a lot of government influence on the economy occurs not through the formal budget but through state-owned enterprises. In the chart below is the same data on central transfers as a share of provincial revenue, plotted against the share of state-owned enterprises in fixed-asset investment. Aside from the wealthiest coastal provinces, these two channels of government support seem to move together for most provinces. And the remote western provinces are notable for both receiving large fiscal transfers and for having very SOE-dominated economies.


There’s nothing wrong with regional aid of course: one of the benefits of having a national government is that it can spread resources around the country and help even out living standards. The political salience of regional redistribution seems to be particularly strong in China, part of its socialist heritage. Regional aid programs are certainly part of the process by which poor regions can converge with richer ones, but they are not generally thought to be all of it. So the large scale of state aid to China’s western provinces for me raises the question of how much of their income convergence is due to that support and how much to other drivers. It could even be the case that the state presence is so overwhelmingly large in some places that it crowds out the private-sector activity that would drive more market-based forms of convergence.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.