Growth could widen east-west divide in China

By | 29 March 2006

China's development as an economic force throws up comparisons between the developed economies of the western world and that of the most exciting developing market on the planet. However, China's rapid economic advancement could widen the disparity between east and west within the vast country itself. Laurence Yuen reports.

After 15 years as a candidate, China was finally accepted as a member of the World Trade Organisation (WTO) in 2001. China was keen to be an active member of the WTO. It was estimated that WTO accession would put an extra 1% on the country's economic growth rate, creating 3m more employment opportunities within a decade.

And although experts warned that the necessary economic and structural change could mean that employment would fall in the first few years, membership would allow its economy to integrate with the world economy, while also introducing the rules of the global market to China, precipitating reform, competition and market liberalisation. However, this kind of competition produces economic and technological pressure and, should regional policies prove ineffective, it could increase the inequality between the eastern and western regions of the country.

Most developing nations have an abundant labour supply, so the bottlenecks for growth are a lack of capital and technology. The mobilisation of capital is important, as is the productivity of capital. Economic and trading co-operation between the eastern and western regions of China could complement technological advances that allow firms in the west of the country to produce more with less. This could also improve the mobility of factors of production between the two regions.

Today, the Chinese economy is based on its primary cities, particularly in coastal regions such as the Yangtze delta, Pearl delta and Beijing-Tianjin. These areas account for 18%, 10% and 9% of GDP respectively. If these economies in the east continue to expand so much faster than other less developed regions, the inequality of growth will affect China's long-term economic development.

The differences between China's eastern and western regions stem from their local resources, as well as from their histories of economic reform. There is a clear distinction in economic structure between the regions. The east has privatised many of the factors of production that previously absorbed significant amounts of capital and labour. The west depends on agriculture and this state of affairs will continue if the current economic structure remains unchanged and is affected by market forces alone. This lack of development stems from insufficient investment. Economic theory suggests that, without external intervention, the west's agricultural sector will continue to be based on subsistence farming, and will be characterised by low productivity, low income, low savings and underemployment.
The differences between east and west may also be affected by the comparative advantages of the two regions. The west has an advantage in its supplies of energy, land and natural resources. It contains about 140 minerals, for example, some of which are rare metals that are highly valued in the global marketplace.

Around 25% of the Chinese population lives in the middle and western regions. After development, this area could provide huge consumer demand. Furthermore, the western region's inland border and the eastern seaboard can offer reciprocal advantages in foreign trading. Labour-intensive industries, on the other hand, are likely to concentrate on the west in order to benefit from low employment costs there.

Because the state has encouraged investment in the east, the region has benefited from a relatively high degree of openness. Its economic growth has involved significant technological advances. Assuming that the current trading structure is not affected by significant interventions in the short term, and that it continues to rely on a policy of openness to support growth, it seems that the eastern region will soon reach the bottleneck.

The west is still a long way behind. Its GDP growth could be encouraged by economic and trading co-operation between the two regions. The east could improve its export structure for example, it could move from labour-intensive exporting to technology-intensive exporting. The west needs to focus on the logistics of foreign trading and on improving export conditions. Collaboration between the regions could allow the west to acquire the east's trading know-how and use its marketing network. Although it would have to pay for such services, the cost would be worthwhile if it expedited development.

It's also important that trade barriers are lowered progressively as the result of China's WTO membership. This will allow the benefits of the west's lower labour costs to take effect. It could also create jobs by increasing foreign and domestic investment. The west needs to use its abundant labour resources, to encourage foreign and domestic investment, and to develop specialised industries that will aid economic growth.

Although other parts of the country have enjoyed higher economic growth than the east in recent years, the east has increased its share of GDP. Investment in the east increased materially and, in the past two years, 12 coastal provinces accounting for 41.3% of China's population created 68.7% of its GDP. The future development of the western region has a direct relationship with the development of the whole nation. Applying common competitive terms and conditions to both developed and developing regions will limit the west's progress and force investors back to coastal areas. This will prevent developing regions from utilising their resources.

But growth in foreign and domestic trading in the western region could heighten domestic demand for products and services from the east. In addition, the western region could accommodate industries relocating from the east and could develop specialisations and industrial structures. This would promote mobility of factors of production particularly IT, human capital and the investment now attracted to the east. China's economic growth over the past 25 years has been rapid. But, if the country relies too heavily on a few regions and cities to lead its GDP, it will not be able to continue its progress. Economic co-operation and trading can facilitate the western region's development to realise a balanced country-wide market economy.

Source: Soft Drinks International
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China’s development as an economic force throws up comparisons between the developed economies of the western world and that of the most exciting developing market on the planet. However, China’s rapid economic advancement could widen the disparity between east and west within the vast country itself.

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