Economic Reforms and Regional Development in Coastal China.

Abstract: Scholars disagree over the consequences of economic reforms on regional inequality in China. This article has found that dramatic disparities exist among the provinces in China's coastal region. While coastal provinces like Jiangsu have experienced dramatic growth, the relative position of Liaoning has declined, and Shanghai has experienced a decline and a recent recovery. These changing patterns of growth have contributed to the decline of interprovincial inequality, but led to the rise of the coast-interior divide in China. The analysis of the diverse coastal provinces is critical to improve the understanding of regional inequality in China.]

The change of regional inequality over time has been an issue subject to intense debates since the 1950s. Neoclassical convergence models maintain that free markets and factor mobility eventually equalize regional income differentials (Borts and Stein, 1964), while divergence models argue that the backwash effect and capital accumulation tend to reinforce regional inequality (Myrdal, 1957; Soja, 1980). The inverted-U model maintains that regional inequality tends to rise during the early stages of development and to fall as the economy matures (Williamson, 1965; Friedman, 1966; Alonso, 1980). Some scholars have emphasized the cyclical nature of regional inequality (Amos, 1990). Empirical evidences are inconclusive. While regional inequality declines in some countries, it has persisted or even increased in other countries.

Theories of regional inequality are developed largely based on the assumptions of closed free market economies and the experiences of developed countries. These theories also tend to be competitive rather than complementary, so that each theory only captures a partial truth and all can be negated by empirical evidences. Moreover, globalization and changes of the world economy have made these theories less powerful in explaining regional inequality. Socialist countries are currently undergoing economic reforms that emphasize decentralization, marketization, and globalization. Scholars have been very interested in regional development in these countries (Forbes and Thrift, 1987; Beresford and McFarlane, 1995; Smith, 1996). It is widely held that orthodox theories of regional inequality are inadequate to the understanding of market transition and spatial changes.

Before the establishment of the People's Republic of China (PRC) in 1949, China's regional development was spatially uneven, with the coastal region developed much ahead of the interior. During Mao's era, some efforts were made to develop the interior and to reduce regional inequality. But China's economy was troubled by social unrest and mismanagement, and regional inequality persisted (Coal, 1987; Cannon, 1990; Lyons, 1991; Tsui, 1991; Wei and Ma, 1996). Post-Mao economic reforms since 1978 have dramatically restructured Mao's development policies (Fan, 1995). Since reforms, China's coastal region has experienced more rapid growth than central and western regions (Yang, 1990; Chai, 1996; Wei and Ma, 1996; Zhao, 1996). However, the impact of economic reforms differs dramatically among the provinces in the coastal region.

This article attempts to examine patterns of regional development in coastal China with a focus on the reform period. We argue that, for a better understanding of China's regional policy and interregional relations, we must recognize the considerable disparities existing within the coastal region. We also argue that regional development in China largely depends on the interaction of the three sets of underlying forces - global forces, state policy, and localities. An analysis of these forces is fundamental to the understanding of regional development in China, whose changing patterns of regional inequality supports none of the convergence, divergence or inverted-U models. After this short introduction, we analyze post-Mao development policies and regional inequality. This is followed by an examination of patterns of development through case studies of Shanghai, Jiangsu, and Liaoning. We then discuss the implications of coastal development to China's regional inequality and summaries this research.

Reforms and Regional Policy in China: An Overview

After the death of Mao in 1976 and a short transition period under Hua Guofeng, China launched economic reforms in 1978 and has adopted a more flexible attitude toward socialism and capitalism. Orthodox socialism is no longer seen as appropriate for China, and "socialism with Chinese characteristics" has become the ideology for the nation. The new leadership has stressed political and social stability, and discarded Mao's class struggle and mass movement. The government sees China as a country in the initial stage of socialist development during which facilitating economic growth and raising the living standards of the people are considered as the dominant development objectives. Decentralization, marketization, globalization, and comparative strategies have been promoted to speed up economic growth.

Economic and administrative decentralization to local states and enterprises has been an important theme of reform. Local states have received considerable decision making powers from decentralization and marketization. They have great interests to promote local economic growth as they can obtain more income and power (Oi, 1992). Local states have received greater powers in revenue recollection and local spending, and most of state-owned enterprises (SOEs) have been decentralized for local management. Fiscal and investment reforms have increased the control of local states over financial institutions and investment allocation. From 1978 to 1995, budgetary investment as a percentage of total investment declined dramatically from 77.7% to only 6.6% and the share of industrial output produced by SOEs declined from 77.6% to 34% (SSB, 1996). The central state increasingly focuses on a few large-scale SOEs and investment projects.

Reforms have dramatically restructured the role of planning and markets. In the early and mid-1980s traditional mandatory planning of socialism was gradually discarded in favor of guidance planning to establish a "planned socialist commodity economy." By 1987, Chinese policy was coined as "the state regulates the market, and the market guides the enterprises." This policy was recoined in 1992 as "to develop socialist market economy." A two-track price system (market and state fixed prices) was created to introduce the market mechanism gradually. The state has been changing from one of planning and directing economic resources directly to one where the state manages the policies which adjust the sources and markets (Workd Bank, 1992). The state is more flexible, entrepreneurial, legalistic, and technocratic than its predecessor (Howell, 1991). Marketization and price reforms have led to the decontrol of prices from the state and the emergence of markets. From the late 1970s to 1994, the share of industrial output subject to the plan fell from 95% to 4%. By 1994, 95% of industrial consumers products and 85% of agricultural products were traded at market prices.

The open door policy intends to promote the growth of foreign investment, trade and export-oriented industries. To attract foreign investment, China has relaxed foreign investment control, deregulated foreign exchange policy, opened up many sectors to foreign investors, lowered tariffs and provided tax breaks and many other incentives (Grub and Lin, 1991). Four Special Economic Zones (SEZs) of Shenzhen, Xiamen, Shantou, and Zhuhai were established in 1980, followed by the opening up of 14 open coastal cities (OCCs) in 1984. The three delta areas, Hainan island, and some border cities were also soon opened up for foreign investment. China's effort has been facilitated by global restructuring and the globalization of economic activities. China's large potential domestic market, cheap labor cost, networks, and policy incentives have contributed to increasing foreign direct investment (FDI) in China. FDI increased dramatically from US$ 1.26 billion in 1984 to US$ 37.7 billion in 1995. China has become the world's second largest host country of FDI, only behind the United States.

China since reforms has adopted the policy of "allowing some of the people to get rich first. "The Sixth Five-Plan (FYP) (1981-85) encouraged regions to develop their economies based on comparative advantages. A "three economic regions" strategy was introduced in 1985, in which the coastal region was expected to develop high-technology industries and to actively participate in the international market, while the central and western regions were earmarked for energy, agriculture, and mineral development (Figure 1). The government hopes that the rapid growth of the coastal region will function as a powerful engine to propel national and interior development. The central state continously favored the development of the eastern region during the Seventh FYP (1986-90). A series of reform policies in investment, finance, and trade were implemented that provided more decentralized and open policies for the coastal region.

[Figure 1 ILLUSTRATION OMITTED]

The coastal development strategy (CDS) was officially decreed in 1988 which was designed to facilitate China's open door process and to enable China to compete in the global market through the development of the coastal region. CDS directed that the coastal region should participate more in international markets and to develop export-oriented economies. Industrial production in the coastal region should "putting both ends (sourcing and marketing) towards the global market." The coastal region received favorable policies from CDS, and its foreign investment and trade increased rapidly in 1988. Meanwhile, some special policies were also granted for the development of the backward regions. During the 1980s, China experienced dramatic growth; from 1980 to 1990 per capita GDP increased by 7.8% annually. The growth rates of fixed investment, foreign investment, and export were even higher.

With rising inflation, increasing income gaps, corruption, and student demonstration in the late 1980s, government policies experienced some changes. China's economic reforms and development experienced a short period of retrenchment. In January 1992, Deng Xiaoping toured southern China and pressed for further economic reforms. This was followed by the Fourteenth Party Congress of October 1992 which called for deeper reforms and the development of market economies. Marketization and globalization were further emphasized. Meanwhile, preferential policies have been granted to Shanghai to revitalize its stagnant economy. Since 1992, China has experienced rapid economic growth and opening up. However, issues of inflation, central control and local autonomy, the rich and the poor, and regional inequality remain major points of debate. With the intensification of coast-interior relations, the government reduced policy emphasis on coastal provinces and encouraged the development of the Yangtze River Valley and interregional cooperation. The Ninth FYP (1995-2000) perceived a rising regional inequality and intensified interregional conflicts, and suggested to commit more resources to develop the interior region.

Uneven Regional Development in Coastal China

During the reform period, major policies have favored coastal development: (1) more state investment was allocated to the coast; (2) the coast enjoyed more tax breaks for export, higher foreign exchange retention rates, and lower tariff in import; (3) decentralization gave the coast more autonomy; and (4) policies favoring the coast also attracted labor, capital, and raw materials from the interior (Yang, 1990; Fan, 1995; Wei and Ma, 1996). The coastal region as a whole has experienced more rapid growth than the central and western regions. The coast-interior divide has become more intense in China in the mid-1990s.

However, the coastal region is not homogenous. Indeed, regional disparity in the coastal region is much more greater than other regions. In 1995, coefficient of variation (CV) based on per capita GDP was 0.92 in the coastal region, much higher than the central and western regions (0.3 and 0.26 respectively). While some coastal provinces have experienced dramatic growth (e.g., Guangdong and Jiangsu), others have recorded slow economic growth. In other words, regional development paths during the reform period differ dramatically among the provinces in the coastal region. Four groups can roughly be classified (Table 1).

Table 1: The Grouping of Coastal Provinces

Group   Feature                     Provinces

I       Decline-Recovery            Shanghai, Beijing, Tianjin
II      Decline-Consolidation       Liaoning
III     Emergence                   Jiangsu, Zhejiang, Guangdong,
                                     Fujian, Shandong
IV      Poorer, Mixed Economies     Hebei, Hainan, Guangxi

During Mao's era, traditional industrial bases of coastal China, including the three municipalities of Shanghai, Beijing, and Tianjin (Group I) and Liaoning (Group II) generally experienced more rapid income growth. Since economic reforms, however, these provinces have had difficulty to adjust to market transition. On the other hand, a few coastal provinces, including Guangdong, Fujian, Zhejiang, Jiangsu, and Shandong (Group III) have experienced dramatic growth. Among the remaining provinces (Group IV), while the growth rate of Hainan since its establishment in 1988 has been rapid, patterns of growth in Hebei and Guangxi resemble very much the provinces in the interior region.

An analysis of growth rates of national income per capita (NIPC) can shed some light on uneven regional development in the coastal region. As shown by Table 2, growth rates varied considerably during Mao's era as well as the reform period. In the 1952-78 period, NIPC of seven provinces increased by more than 4%, of which five were coastal in location (Beijing, Shanghai, Tianjin, Liaoning, and Shandong). The three municipalities and Liaoning that had the highest NIPC achieved the highest rates of income growth: ranked respectively first, second, third and fourth in the nation.

Table 2: Regional Per Capita National Income, 1952-92

                                             1952-78      1978-92
                                              Annual       Annual
                  1952     1978    1992     Growth (%)   Growth (%)

Average           98.7     314.5   1712.0      3.9          7.5
Eastern Region   117.5     404.3   2332.9      4.6          8.0
Shanghai         594.7    2248.3   6562.4      5.9          6.3
Beijing          265.0    1044.2   4619.6      7.1          6.5
Tianjin          266.5    1040.1   3765.4      5.3          5.4
Liaoning         195.8    6100.0   2649.7      5.0          5.7
Jiangsu           96.4     359.1   2467.5      3.8         10.1
Zhejiang         103.0     289.7   2538.7      3.6         11.8
Fujian            96.1     236.0   1904.8      2.7         10.1
Shandong          85.6     274.2   1962.3      4.1          9.2
Guangdong         88.7     320.0   2767.0      3.1         10.8
Hainan             -       254.0   1633.2        -            -
Hebei            110.6     314.6   1520.3      3.6          6.5
Guangxi           61.9     189.5   1111.7      2.8          6.5
Central Region    95.8     271.9   2088.5      2.9          6.5
Western Region    68.6     221.6   1165.0      3.4          6.9

Note: Per capita data in current price, growth rates based on comparable data

Source: SSB 1990 and 1994.

During 1978-92, however, growth rates of NIPC in Shanghai, Tianjian, Beijing and Liaoning were among the lowest in the nation, and their relative positions in the national economy declined. On the other hand, the coastal provinces of Zhejiang, Guangdong, Jiangsu, Shandong, and Fujian were growing the fastest. Thus the per capita income gap between the four traditional leading provinces and the five emerging coastal provinces was reduced. Meanwhile, the poorest provinces of Guizhou, Guangxi, Yunnan and Sichuan had growth rates higher than the four leading provinces. These patterns of development led to the decline of interprovincial inequality, although the coast-interior gap has been rising.

A comparison of provincial location quotients (LQs) of NIPC from 1952 to 1992 clearly shows the changing patterns of uneven development (Figure 2). From 1952 to 1978, the LQs of the provinces in Groups I and II (represented by Shanghai and Liaoning) increased rapidly, indicating that during Mao's era their economies were better off than others. The LQs of other coastal provinces, except Shandong, declined, particularly during 1952-60 (represented by Jiangsu). From 1978 to 1992, the LQs of the three municipalities and Liaoning declined while that of the five coastal provinces (represented by Jiangsu) increased. The status of most interior provinces has declined further.

[Figure 2 ILLUSTRATION OMITTED]

During the 1990s, the five coastal provinces had growth rates of per capita GDP of more than 15%, ranked the top in the nation (Table 3). The growth rates of the three municipalities were higher than the poorest provinces, most of them had growth rates much lower than the national average. As a result, the trend of declining interprovincial inequality slowed down. Meanwhile, the growth of the five coastal provinces has speeded up, while the positions of poor provinces lost further. As a result, the coast-interior divide in China has been intensified. By 1995, coastal provinces of China except Guangxi clearly dominated the nation's economy (Figure 3), with Guangdong, Zhejiang, Jiangsu, Shandong and Fujian moving up quickly. Guizhou remained the poorest in the nation.

[Figure 3 ILLUSTRATION OMITTED]

Table 3: Regional Per Capita GDP, 1978-95

                                      1978-90   1990-95
                                       Annual    Annual
                                       Growth    Growth
                 1978   1990   1995      (%)       (%)

Average           364   1555    4892     7.7      12.5
Eastern Region    483   2099    7187     8.0      14.5
Shanghai         2498   5700   17774     5.9      11.7
Beijing          1289   4754   11741     7.1       9.2
Tianjin          1150   3582    9804     5.8      10.0
Liaoning          663   2463    6847     6.7       9.4
Jiangsu           430   1978    7319     9.0      16.8
Zhejiang          329   1998    8185    10.7      18.4
Fujian            273   1551    6731     8.7      17.4
Shandong          321   1599    5758     8.3      15.1
Guangdong         333   2263    7939    10.6      16.9
Hainan            -     1589    5030     -        -
Hebei            364    1389    4444     6.5      13.2
Guangxi          225    1066    3543     5.2      15.0
Central Region   307    1265    3664     7.0      10.4
Western Region   251    1083    2961     7.6       8.9

Note: Per capita data in current prices, growth rates and LQ calculated from data in comparable prices.

Source: SSB 1990 and 1996.

The Decline and Recovery of Shanghai

The change of LQs shows that during the last four decades, the status of the three municipalities rose under Mao but has declined since reforms, although their income levels have always been among the highest in China. It is interesting to note that Shanghai and Beijing were better off during the 1950s. During that decade, as they were China's major industrial and political centers, the central government provided them with preferential policies. Though their status declined in the early 1960s when Chinese cities experienced a severe damage due to the Great Leap Forward (GLP), they soon recovered and their relative positions in the Chinese economy were improved. Since the launch of economic reforms, however, their status has declined steadily.

From 1978 to 1990, the growth rates of Shanghai, Beijing and Tianjin were among the lowest in the nation. The dramatic slowdown in growth is related to the drastic reduction of state-subsidized energy and raw materials, the tight central control over local budget, the dominance of SOEs (Table 4), and the slow start of "open door." The competitive edge of their economies that they had enjoyed for years through large-scale state support of the urban economy has been eroded swiftly by the more rapid growth of several coastal provinces. But since the early 1990s, their positions in the national economy, particularly Shanghai's, has been recovering.

Table 4: Gross Industrial Output by Ownership, 1995

                                Volume (Billion Yuan)

                     Total    State   Collective   Individual

China                 9189    3122         3362         1182
Eastern Region        6065    1658         2398          712
Beijing                191     103           39            2
Tianjin                209      69           67            6
Hebei                  400     145          150           67
Liaoning               498     219          150           76
Shanghai               513     203           95            6
Jiangsu               1161     250          709           52
Zhejiang               809     114          373          226
Fujian                 280      50           89           43
Shandong               846     260          387          107
Guangdong              954     171          294           85
Guangxi                167      67           42           39
Hainan                  19       8            2            3
Central Region        2188     952          727          356
Western Region         935     512          238          114

                                 Share (%)

                 Other   State   Collective   Individual   Other

China             1523    34.0       36.6         12.9      16.6
Eastern Region    1298    27.3       39.5         11.7      21.4
Beijing             47    53.8       20.7          1.0      24.6
Tianjin             67    33.1       32.2          2.8      32.0
Hebei               38    36.2       37.5         16.9       9.4
Liaoning            52    44.0       30.2         15.3      10.5
Shanghai           209    39.5       18.5          1.1      40.8
Jiangsu            170    21.1       60.0          4.4      14.4
Zhejiang            96    14.1       46.1         27.9      11.9
Fujian              97    18.0       31.9         15.5      34.6
Shandong            92    30.8       45.7         12.6      10.9
Guangdong          404    17.9       30.8          9.0      42.3
Guangxi             19    40.2       25.2         23.4      11.2
Hainan               7    40.8       9.6          14.8      34.7
Central Region     154    43.5       33.2         16.2       7.0
Western Region      72    54.7       25.4         12.2       7.6

Source: SSB 1996.

When PRC was established in 1949, Shanghai was the most developed economic center in China with a strong industrial base and well-established urban infrastructure. Moreover, as Shanghai was the largest contributor to the state coffers, the state provided the city with generous financial support and low-cost energy and raw materials for its SOEs. In the absence of international competition for its products in the domestic market, Shanghai was able to function as the nation's leading economic center. From 1952 to 1978, the growth rate of NIPC in Shanghai was 5.9%, ranked the second in the nation (only behind Beijing).

Economic reforms, however, severely eroded the city's dominant economic role in China's economy. First, Shanghai missed the initial opportunity of economic reforms and open door policy (Tian, 1996). During the early 1980s, preferential policies were granted to SEZs in Guangdong and Fujian, followed by a series of open door policies. These policies have greatly contributed the dominance of Guangdong in foreign investment and trade. Shanghai was opened up for foreign investment and trade much later than the four SEZs and lagged behind in globalizing its economy. Only in the early 1990s, favorable policies were provided to Shanghai Pudong.

Second, while several coastal provinces enjoyed decentralized fiscal policies, Shanghai was still tightly controlled by the central government. For example, the 1980 fiscal reform provided provinces such as Guangdong and Fujian with more fiscal powers in revenue sharing and expenditures, but Shanghai, as well as Beijing and Tianjin, shared total revenues with the center and their revenue sharing rates were adjusted every year. During the 1980s, the amount of Shanghai's financial contribution to the state coffers was not reduced, and Shanghai had the lowest local retention rates of revenue-sharing with the central government (White, 1989; Jacobs and Hong, 1994).

Third, SOEs dominated Shanghai's economy, but they were severely challenged by nonstate enterprises and failed to generate growth in income and jobs. From 1978 to 1995, share of industrial output produced by SOEs in China declined from 77.65 to 34%. However, in Shanghai, as shown by Table 4, in 1995 65.6% of industrial output was still produced by SOEs. Although policies have been introduced to revitalize SOEs, reforming China's SOEs has not made significant progress largely due to the problem of the property right, higher tax and administrative fees, heavy welfare and service charges, the vague role of the state in management, and poor risk management and competition abilities (Project Group, 1994). On the other hand, nonstate enterprises, such as TVEs in Jiangsu and private enterprises in Zhejiang, have grown much faster than SOEs. The decontrol of price that raised the cost of energy and raw materials, and the reduction of state support for SOEs greatly reduced the city's competitive edge.

Fourth, the old and overburdened urban infrastructure and industrial equipment have been deteriorating steadily (Wang, 1991). Urban policy controlling the growth of large cities also limited the expansion of Shanghai. In short, the drastic reduction of state-subsidized energy and raw materials, dominance of SOEs, deterioration of urban infrastructure, and the slow start of reform program have all contributed to the decline of Shanghai. The dominant role of Shanghai as a leading producer declined during the reform period. While many coastal provinces registered rapid income growth, Shanghai even experienced revenue decline during the 1980s. Patterns of economic growth in Beijing and Tianjin resemble very much that of Shanghai.

The declining status of Shanghai in the national economy eventually caught the attention of the central leaders as Shanghai is critical to state coffers. Since the early 1990s and with the emerging power of Jiang Zemin, preferential policies have been granted to Shanghai, in the hope of revitalizing Shanghai's economy and improving its revenue contribution to the center. Tightly controlled financial and investment systems were decentralized. With the opening up of Shanghai's Pudong district, domestic and foreign investments in Shanghai have increased dramatically. Shanghai is recapturing its vigor and is ambitious to become a global city. During the three years between 1991 and 1993, the city invested 31 billion yuan to improve its urban infrastructure, an amount larger than the total of such investment from 1979 to 1990 (Cai et. al., 1995). During the 1992-95 period, fixed-asset investment increased from 35.7 billion yuan to 160.2 billion yuan, an annual growth of 64.9%, much higher than the national average (35.6%). Shanghai's growth rate of GDP also surpassed the national average. Shanghai's economic growth has been speeded up and its status in the national economy is recovering.

The Emergence of Coastal Provinces: Jiangsu

The five coastal provinces (Guangdong, Fujian, Zhejiang, Jiangsu, and Shandong) were not favored by Mao's regime but they are the biggest winners of economic reforms. During much of Mao's era, these provinces were the least favored in development policies. They received few key-point investment projects from the central state due partially to their coastal location, as possible foreign invasion would come from the sea, particularly from Taiwan (Ma and Wei, 1997). While Mao did not totally ignore coastal development, the emphasis was placed on traditionally leading industrial bases, particularly Shanghai, Beijing and Liaoning. During the 1950s with the implementation of the First FYP which favored the interior and the traditional industrial bases, the status of these provinces in the national economy declined. Devoid of the preferences of the central government, these provinces developed their strong abilities in using local resources and market forces to improve their economies. Their status was improved during the late 1950s with the implementation of the decentralization program and the establishment of some township and village enterprises (TVEs), and began recovery during the early 1970s when a pragmatic leadership emerged and decentralization policy was implemented in China for the second time.

Since economic reforms, these coastal provinces have registered the fastest income growth. Their status has been advanced dramatically, with Zhejiang, Guangdong and Jiangsu moving up most rapidly, followed by Fujian and Shandong. They have actively bargained with the central government for more decentralized policy and for allowing them to initiate bolder local policies. Guangdong and Fujian in particular have been very much benefited from fiscal reforms by introducing lump-sum income transfers and obtaining higher local retention rates of revenues (Wei, 1996). Moreover, SEZs in Guangdong and Fujian were opened up for foreign investment and trade in 1980, soon followed by the opening up of OCCs in other coastal provinces. These cities attracted a large amount of foreign investment and international trade surged, particularly in Guangdong (Vogel, 1989). Meanwhile, localities have aggressively launched new initiatives and dramatically restructured their economies by developing private and collective enterprises. Services and rural enterprises have flourished there and have become important sources of income growth. All these changes have contributed to their phenomenal economic growth in the reform period. Their economic growth was greatly speeded up in the 1990s with the implementation of bolder economic reforms.

The development path of Jiangsu well represents the experiences of these provinces. When PRC was established in 1949, Jiangsu had already established numerous modern enterprises and was among the more developed provinces of China. During the 1950s, however, the coastal provinces in Group III were ignored in industrial allocation. Among the 156 key point projects imported from the former Soviet Union, none was allocated in Jiangsu. But Jiangsu still had to contribute huge revenue to the central government coffer. For example, in 1955, local expenditure in Jiangsu was only 289 million yuan, much lower than local revenue (847 million yuan). Moreover, some industrial equipment and technicians in Jiangsu were moved to poor interior provinces for the consideration of national defense and interior development. Jiangsu's economic growth in the 1950s was among the lowest in the nation.

In the late 1950s, while China experienced chaos and economic crisis, decentralization did give Jiangsu considerable decision-making powers in developing local economies. Some small-scale rural enterprises were established, particularly in Sunan (southern Jiangsu). However, the failure of the GLF forced the closure of numerous enterprises and many urban workers were sent back to the countryside. In the 1960s, heavy industry received a high priority in state investment and the developement of light industry was largely overlooked. Light industry stagnated and Jiangsu recorded a slow economic growth in the 1960s. But compared to many other provinces, urban industries in Jiangsu were less damaged by the Cultural Revolution, partially due to a pragmatic leadership.

During the early 1970s, China's regional development policy began to shift to the coastal region. Several large-scale investment projects were allocated in Jiangsu, particularly in Nanjing. These investment projects partially improved the economy of Jiangsu. Meanwhile, during the late 1960s and early 1970s, the central government encouraged the development of rural enterprises. Hundreds of TVEs were established in Jiangsu, especially in Sunan. Rural industrial output increased from 0.96 billion in 1970 to 2.33 billion in 1975. As a result, Jiangsu's economy experienced a recovery and industrial output surpassed agricultural output. However during Mao's era as a whole, growth rates of major economic indicators were low, as compared to the provinces in Groups I and II.

Jiangsu has experienced dramatic economic growth during the post-Mao period (Tables 2 and 3). Rural reforms, urban industrial reforms, financial reforms, open door policies, and numerous other reform programs have brought profound changes to Jiangsu. Like other coastal provinces, Jiangsu has received favorable development policies from the central government. First, fiscal reforms have provided incentives for the growth of local economies. Jiangsu has traditionally had heavy revenue burden because of its strong economic base. A new fiscal system of "fixed rate contracts" was implemented in Jiangsu in 1977 which provided the province more fiscal autonomy and incentives (Oksenberg and Tong, 1991). In 1981, this fiscal system was slightly changed into "incremental contracts." As Jiangsu's fiscal burden remained heavy, a system of "basic sharing with growth adjustment" was implemented in 1988 to provide more fiscal incentives. Under this new system, Jiangsu could retain an increasing portion of increased revenue.

Second, economic reforms have given localities greater autonomy in investment decision making, including sources of capital and investment allocation strategies. Regions experiencing more rapid economic growth are allowed to channel more funds for investment. Moreover, localities have greater access to investment from different sources, such as bank credits, private investment, and foreign capital. From 1978 to 1995, fixed-asset investment in Jiangsu increased from 6.23 billion yuan to 706 billion yuan, an annual increase of 29.1%. Local authorities are also motivated to invest in more profitable regions and sectors to achieve higher economic returns. Sunan, in particular, has experienced rapid economic growth and dramatic opening up, and has been able to accumulate a large amount of capital for investment.

Third, while Mao's development policy in general favored the development of SOEs, post-Mao economic reforms have provided favorable conditions for the development of nonstate enterprises, including TVEs. Among policies benefiting the TVEs are low tax rates, decontrol of prices, budget bonus for growth, new labor policies (which abolish the "iron rice bowl"). Jiangsu had a larger proportion of nonstate enterprises to begin with, and is therefore quickly capitalizing on the reform policies which favor the nonstate sector. Sunan, in particular, with a large TVE sector, is able to take advantage of these reform policies. Local governments in Jiangsu have actively promoted the development of TVEs (Zweig, 1995). The development of Jiangsu, particularly Sunan, has also benefited from the markets in and technical know-how provided by nearby cities, particularly Shanghai, Suzhou, Wuxi, and Changzhou. Local resource endowments are important to TVEs. Rural reforms stimulated agricultural development, which in turn provided capital, raw materials, and labor for rural industrialization. With the support of macro policies and urban economies, TVEs have expanded dramatically in Sunan, well known to the nation as the Sunan model.

Last, China's open door policy has favored the more developed regions in the coast. Preferential policies, such as in taxation, infrastructure, tariffs, and currency, have been provided to attract foreign investment. China's effort to attract foreign investment has been facilitated by the globalization of economic activities in which an increasing amount of foreign investment has been allocated to developing countries to take advantages of cheap labor and large markets. Foreign investment is concentrated in China's coastal provinces due largely to favorable state policy and local conditions. These provinces have captured the opportunities provided by global restructuring and China's economic reforms to stimulate economic growth. Jiangsu is among the coastal provinces of China which enjoyed preferential open door policies. Favorable state policy and local conditions have stimulated the increase of foreign investment and international trade in Jiangsu. FDI in Jiangsu increased from US$ 11.9 million in 1985 to US$ 4.78 billion in 1995. Numerous multinational firms have been established there, particularly in Sunan. Export increased from US$ 9 million in 1978 to US$ 5 billion in 1995, an annual increase of 21.7%.

Enterprise reforms, fiscal and investment reforms, "open door," and many other reform programs have facilitated the growth of Jiangsu's economy. From 1978 to 1995, rural industrial output increased from 6.24 billion yuan to 778.9 billion yuan, an annual growth rate of 31%, much higher than the growth rate of agricultural output (7% annually). Output of TVEs alone increased from 6.23 billion yuan to 706 billion yuan. The growth has been speeded up in the 1990s. Between 1990 and 1995, GDP per capita grew at an annual rate of 16.8%, among the highest in China, and total and rural industrial output increased annually at 31.5% and 42.3% respectively.

The Decline and Restructuring of Liaoning

Before 1949, northeastern provinces of China (Liaoning, Jilin and Heilongjiang) were among the provinces with the highest per capita industrial output. During Mao's era, Liaoning's leading role in China's development was even strengthened, due largely to Mao's emphasis on industrialization through the development of heavy industry. In the First FYP period, Liaoning was emphasized in the development of heavy industry due to its rich resources and establishments in heavy industry. A large number of investment projects, particularly in iron and steel industries, were allocated there. For example, Anshan alone received 52% of China's total investment in the steel industry during the FYP period (Xia and Li, 1993). Among the 156 key-point projects imported from the former Soviet Union, one third was allocated in northeastern provinces (Li and Li, 1996), and Liaoning alone took 24 projects. Liaoning was benefited greatly from its resource endowments, industrial bases, and Mao's industrialization policy.

As shown by Table 2, the economy of Liaoning under Mao experienced a growth rate among the highest in China. From 1952 to 1978, per capita national income growth rate in Liaoning was 5%, ranked the fourth in the nation (only behind the three municipalities). Liaoning's growth rate was much higher than other provinces of China, including Jilin and Heilongjiang. Liaoning's economy was dominated by SOEs and heavy industry. By 1978, heavy industry and SOEs produced 73.7% and 82.5% of industrial output respectively.

The northeastern provinces of China, including Liaoning have been losing their competitive edges in the post-Mao period. Their growth rates were among the lowest in the nation. From 1978 to 1992, annual growth rate of NIPC for Liaoning was 5.7%, the second lowest among the coastal provinces (only higher than Tianjin) (Table 2). During the 1990-95 period, annual growth rate of per capita GDP was 9.4% in Liaoning, only slightly higher than Beijing (9.2%) (Table 3).

Liaoning's problems to certain extent resemble that of Shanghai. First, Liaoning's access to economic reform policies, such as the open door policy, was much more limited than many coastal provinces. Liaoning's local revenue-retention rate, although higher than the three municipalities, has been lower than other coastal provinces. Though the central government has raised local revenue retention rates for Liaoning and the prices of heavy industrial products, Liaoning and other northeastern provinces have lost the opportunities created by economic reforms and have fallen behind in economic development.

Second, due to heavy taxes for and strict state control over SOEs, reduced subsidies for raw materials, and price control for key industrial products such as steel, provinces with a large amount of SOEs and with heavy industry as their economic bases, such as Liaoning, have been in a disadvantageous position (Ding, 1996). In 1995, SOEs and heavy industry in Liaoning produced 41.9% and 75.6% of industrial output respectively, much higher than other coastal provinces. These enterprises are tightly controlled by the state and almost half of SOEs lost money in operation. Liaoning is troubled by problems with SOEs and has had difficulty to adjust to the emerging market economies.

Third, Liaoning's outdated industrial equipment and overburdened urban infrastructure are difficult to improve in a short period of time. Most of Liaoning's industrial equipment was built in the 1950s and 1960s. Although the amount of investment for equipment updates has increased rapidly, much more funds are still needed. The northeastern provinces of China experienced slower growth during the reform period and have gradually lost their strong economic positions that they enjoyed in Mao's era.

A comparison of Liaoning and Jiangsu may shed more light on the structural differences between declining and emerging provinces (Table 5). While these two provinces enjoy similar level of per capita GDP Jiangsu is better positioned in China's transition to market economies. In 1995, SOEs only produced 23.5% of industrial output in Jiangsu, while Liaoning's economy was still largely dependent on SOEs that are less profitable and struggle to survive. In addition, Liaoning is lagging behind in attracting foreign investment and promoting international trade. From 1978 to 1995, Liaoning's economy grew much slower than Jiangsu, due partially to its problems with SOEs and its slow pace in marketization and globalization.

Table 5: A Comparision of Liaoning and Jiangsu

Indicator               China    Liaoning   Jiangsu

Population (Millions)   211.2      40.9      70.7
GDP (Billion Yuan)       5826       279       516
GDP Per Capita (Yuan)    4810      6829      7291
SOEs Output (%)          34.0        44      21.1
FDI Per Capita (USS)     31.2      34.8      73.4

Source: SSB 1996

The Chinese government since the mid-1990s has stressed the reform of SOEs in an attempt to rescue the declining state sector which is considered as the corner stone of socialism. Numerous reform program have been announced to revitalize SOEs, including the introduction of the shareholder system (gu feng zi). Some preferential policies have also been provided to improve heavy industry, such as the increase of investment in renovating old industrial equipment. Liaoning has also actively promoted foreign investment and trade, and Dalian even intends to build into one of the "global cities" in the world. While the restructuring process is slow, Liaoning is adjusting to the emerging market mechanism.

Among the rest of the provinces in the coastal region, Hainan since its establishment in 1988 has experienced rapid growth. Its growth pattern very much resembles the five coastal provinces, although Hainan's economic base is much weaker than those provinces. The growth rate of Hebei during the 1980s was among the lowest in the nation, resembling most provinces in the interior. In the 1990s, however, its economic growth has been speeded up. Guangxi has been one of the poorest provinces in China. Indeed, many people tend to classify Guangxi as an interior province, as its growth pattern is similar to the poorest western provinces of China.

Conclusion

Issues of equality and inequality have been important to Chinese leaders since the establishment of PRC in 1949. During Mao's era, some efforts were made in allocating state investment in a spatially more balanced way to reduce coast-interior disparity. Since the launch of economic reforms in 1978, rapid growth and dramatic changes have taken place in China. A spatially balanced pattern of development is no longer emphasized, though the idea has never been totally discarded and has been reemphasized lately.

Post-Mao economic reforms have promoted decentralization, marketization, globalization, and comparative advantages. The control and capacity of the central state have declined, and global and local forces have emerged as important forces underlying China's regional development. During the reform period, the coastal provinces in general have received more favorable reform policies. Local states there have also actively initiated policies favorable to local economic development. Moreover, foreign investment and trade are largely concentrated in coastal provinces. As a result, the coast-interior divide has risen since economic reforms and has been intensified in the 1990s. The core-periphery structure established during China's semi-colonial period has persisted after four and a half decades of socialism.

Post-Mao economic reforms have dramatically restructured China's regional economies and a new form of uneven regional development has emerged in coastal China. During the reform period, the four traditionally leading provinces of Shanghai, Beijing, Tianjin, and Liaoning that had the highest per capita income have experienced slower growth, while the five coastal provinces of Guangdong, Jiangsu, Zhejiang, Shangdong, and Fujian have recorded rapid growth. The growth rates of the four industrial centers are even lower than poorest provinces, leading to the decline of overall inequality among the provinces. The slow growth of Shanghai, the leading economic center of China, in particular, has greatly contributed to the decline of interprovincial inequality (Wei and Ma, 1996). As we have explained previously, the slow growth was caused mainly by the tight control and heavy tax by the central state, the failure of reforming SOEs, the slow start of "open door," and the deteriorating industrial facilities and urban infrastructures.

On the other hand, the coastal provinces of Guangdong, Jiangsu, Zhejiang, Fujian, and Shandong have grown dramatically during the reform period. Economic reforms have provided them with more favorable policies in finance, investment, sectoral adjustment, and foreign investment and trade. These coastal provinces have better functioning local states, more non-state enterprises, and better local resource endowments. They were able to take advantages of economic reforms to facilitate their economic development. The rapid growth of these five coastal provinces has contributed to the faster growth of the coastal region as a whole, leading to the increase of interregional inequality. But it also caused the relative declined of the four traditionally leading provinces (Shanghai, Beijing, Tianjin and Liaoning), leading to the decrease of interprovincial inequality.

Reforms in the early 1990s have further stimulated the trend of decentralization, marketization, and globalization. The five coastal provinces, which have been more competitive in the market, are able to capture these new opportunities to stimulate their economic growth. Local states have aggressively participated in the development of TVEs and private enterprises. They have actively created local policies to attract foreign investment and to promote international trade. During the early and mid-1990s, the five coastal provinces have experienced dramatic economic growth, much faster than the rest of China. Meanwhile, with the emergence of the leadership of Jiang Zemin, the former Mayor of Shanghai, the development of Shanghai was speeded up. The coastal region as a whole has grown much faster than the interior region, and China in the 1990s recorded the fastest rise of interregional inequality.

The rise of interregional inequality has intensified intergovernmental relations and social problems in China. Poor regions argue that the tilted state policy towards the coast is the fundamental force driving regional inequality. They have bargained in. tensely with the central government to obtain more preferential policies. They have also used their administrative powers to duplicate investment projects, to restrict the outflow of resources, and to protect local consumer markets (Beresford and McFarlane, 1995; Wei, 1996). The central government has stressed interior development and the reduction of regional inequality, as stated by the Ninth FYP. However, with the declining capacity of the central state, the resources which can be committed to interior development are limited. Moreover, local agents and global investors are also playing important roles in China's regional development. Regions can no longer rely on the policies of the central state for their economic development. Rather, localities and foreign investors are exerting a great impact on regional development. And this seriously challenges the recent drive of the central government to reduce poverty and regional inequality in China. Whether the interior region can catch up with the coastal region remains questionable.

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