Regional convergence has stalled, says The Economist

John Parker of The Economist talked to me for a story on regional inequality in China, which is now out in the latest edition. It’s a nice overview of some of the questions I’ve written about on this blog, here’s a sample:

There are three reasons why convergence has stalled. The main one is that the commodity boom is over. Both coal and steel prices fell by two-thirds between 2011 and the end of 2015, before recovering somewhat this year. Commodity-producing provinces have been hammered. Gansu produces 90% of the country’s nickel. Inner Mongolia and Shanxi account for half of coal production. In all but four of the 21 inland provinces, mining and metals account for a higher share of GDP than the national average.

Commodity-influenced slowdowns are often made worse by policy mistakes. This is the second reason for the halt in convergence. Inland provinces built a housing boom on the back of the commodity one, creating what seemed at the time like a perpetual-motion machine: high raw-material prices financed construction which increased demand for raw materials. When commodity prices fell, the boom began to look unsustainable. …

Investment by the government is keeping some places afloat. Tibet, for example, logged 10.6% growth in the first half of this year, thanks to net fiscal transfers from the central government amounting to a stunning 112% of GDP last year. Given the region’s political significance and strategic location, such handouts will continue—Tibet’s planners admit there is no chance of the region getting by without them for the foreseeable future.

Tibet is an extreme example of the third reason why convergence is ending. Despite oodles of aid, both it and other poor provinces cannot compete with rich coastal ones. In theory, poorer places should eventually converge with rich areas because they will attract businesses with their cheaper labour and land. But it turns out that in China (as elsewhere) these advantages are outweighed by the assets of richer places: better skills and education, more reliable legal institutions, and so-called “network effects”—that is, the clustering of similar businesses in one place, which then benefit from the swapping of ideas and people.

 

Leave a Reply

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

WordPress.com Logo

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

Twitter picture

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

Facebook photo

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

Google+ photo

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

Connecting to %s