Reducing China's regional disparities: Is there a growth cost?

While China's growth has been spectacular over the past 30 years, it has masked growing underlying disparities in the regional distribution of income with coastal provinces growing at a much faster rate than the rest of the country, exacerbating already marked differences in per capita income. Policy focused on addressing these growing disparities has had to face the possibility that spreading growth more evenly around the country will require a sacrifice of the national growth rate. Yet there is almost no empirical evidence that this is so and, if it is, how big the required sacrifice is. This paper contributes to filling this gap by analyzing the relationship between aggregate growth and the inequality of regional output distribution. We use a VAR model to simulate the effects over time on growth of a reduction in inequality and also the effects on inequality of an increase in growth. We find, first, that in the long run a more equal distribution can be obtained without a growth sacrifice. Second, in the short run a reduction in inequality reduces growth. Third, in the short and long runs an increase in growth actually reduces inequality.