Economic Growth and Regional Inequality

Douglas J. YoungProfessor of Economics

Montana State University, USA& Fulbright Scholar

University of International Business and Economics, Beijing

The Fulbright Program

• Senator J. William Fulbright, USA• Purpose: Promote mutual understanding

through educational exchange• 1948 – 2003; 225,000 Fulbright Scholars;

140 countries• China: 50 Chinese to USA; 50 Meiguoren

to Zhongguo

Outline1. China

• Growth• Inequality between Regions

2. The USA Experience• Inequality Between Regions• Convergence: Diminishing Inequality• Transformation of Agriculture

China: Real GDP per Capita

1000

2000

3000

4000

5000

6000

7000

800020

01 R

MB

/Cap

ita

1978 1983 1988 1993 1998WDI (2003)

China’s Growth Since 1978

• Income/Capita Increased 5 Fold• World’s 2nd Largest Economy (PPP)• 9th Largest Trading Nation• Largest Recipient of FDI in the

Developing World • Never Before in History Have So Many

Millions of People Been Lifted Out of Poverty in Such a Short Time

Rich Man, Poor ManThe Economist October 3, 2003

China’s Regions• Metro: Beijing, Tianjin, Shanghai• NE: Liaoning, Jilin, Heilongjiang• Coast: Hebei, Jiangsu, Zhejiang, Fujian,

Shandong, Guangdong, Hainan• Central: Shanxi, Anhui, Jiangxi, Henan,

Hubei, Hunan• NW: Mongolia, Shaanxi, Gansu, Qinghai,

Ningxia, Xinjiang• SW: Sichuan, Guizhou, Yunnan, Guangxi

Income Inequality: 2000(GDP/Capita)

0

5000

10000

15000

20000

25000

RM

B/C

apita

Metro NE Coast Central NW SWChen (2002)

Income Inequality: 1978-2000

0

5000

10000

15000

20000

25000

Metro NE Coast Central NW SW

2000 1978

Chen (2002), Demurger et al. (2002)

GDP/Capita Growth: 1978-1998Demurger et al. (2002)

0

2

4

6

8

10

12

Metro NE Coast Central NW SW

Urban-Rural Income Ratio

1.8

2.0

2.2

2.4

2.6

2.8

3.0

1978 1983 1988 1993 1998Chen (2002)

Income and Urbanization

0

5000

10000

15000

20000

25000

30000G

DP

/Cap

ita (

2000

)

10 20 30 40 50 60 70 80 90Urban Population (%)

SHA

BEITIA

ZHEJSUFUJ GDNLIA

SDN HEIHUBHEB XIN JILHAI

MONHUNHEN QINANH SAXJIASIC NINSAAYUN GXITIBGANGUI

Chen (2002)

Income and Urbanization

2000

4000

6000

8000

10000

12000

14000G

DP

/cap

ita (2

000)

10 20 30 40 50 60Urban Population (%)

ZHE

JSUFUJ GDNLIA

SDN

HEI

HUBHEBXIN

JILHAI

MONHUNHENQINANH SAXJIASIC NINSAAYUN GXITIB

GAN

GUI

Chen (2002)

Income and Urbanization: USA

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000P

erso

nal I

ncom

e/C

apita

20 40 60 80 100Metropolitan (%)

ALAZ

AR

CACO

CT

DE

FLGA

ID

IL

INIAKS

KYLA

ME

MD

MA

MI

MN

MS

MO

MT

NE

NV

NH

NJ

NM

NY

NC

ND

OH

OK

OR

PA RI

SCSD TN

TX

UT

VT

VA WA

WV

WIWY

US Bureau of Census (2000)

Income and Urbanization Around the World

$100

$1,000

$10,000

$100,000

GD

P/C

apita

(Lo

g S

cale

)

0 20 40 60 80 100Urbanization (%)WDI (2003)

Income and Agricultural Employment

$1,000

$10,000

$100,000

GD

P/C

apit

a (L

og

Sca

le)

0 10 20 30 40 50 60Agricultural Employment (% of Total)WDI (2003)

Education and Income

$100

$1,000

$10,000

$100,000

GD

P/C

apita

(Log

Sca

le)

0 2 4 6 8 10Public Education Spending (% of GDP)WDI (2003)

Causes of Regional Inequality

• Preferential Policy• Geography

– Access to cheap transportation

• Urbanization and Industrial Structure (Agriculture v. Manufacturing & Services)

• Education

The USA Experience

• Is there Regional Inequality in the USA?• How Has It Changed Over Time?• What Role for Government Policy ?

<= 50 50 - 100100 - 140 140 - 200

US Incomes in 1930Percent of National Average

Bureau of Economic Analysis 10/03

<= 50 50 - 100100 - 140 140 - 200

US Incomes in 2000Percent of National Average

Bureau of Economic Analysis 10/03

Convergence: US State IncomesBarro and Sala-I-Martin (1992)

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%G

row

th R

ate

of In

com

e pe

r Cap

ita

$6,000 $10,000 $14,000Per Capita Income (1959)

AL

AZ

AR

CA

CO

CT

DE

FL

GA

ID

IL

IN

IAKS

KYLA

ME

MD

MA

MI

MN

MS

MOMT

NE

NV

NH

NJNM

NY

NC

ND

OH

OK

ORPA

RI

SCSD

TN

TX

UT

VT

VA

WA

WV

WI

WY

Convergence: 1959-79

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%G

row

th R

ate

of In

com

e pe

r C

apita

$14,000 $18,000 $22,000 $26,000Per Capita Income (1979)

AL

AZ

AR

CA

CO

CT

DE

FL

GA

ID

ILIN

IA

KS

KY

LA

MEMD

MA

MI

MN

MS

MO

MT

NE

NV

NH

NJ

NM

NYNC

ND

OH

OK

OR

PA

RISC

SD

TN

TXUT

VT VA

WA

WV

WI

WY

Convergence? 1979-99

Divergence Across CountriesBarro and Sala-I-Martin (1992)

China: 1978-99

4%

6%

8%

10%

12%A

nnua

l Gro

wth

Rat

e

100 200 300 400 500 600 7001978 GDP/Capita

ZHE

JSUFUJ GDN

LIA

SDN

HEI

HUB

HEB

XIN JIL

HAI

MON

HUN

HEN

QIN

ANH

SAX

JIA

SIC

NIN

SAAYUNGXI

TIBGAN

GUI

Data from Bao (Demurger et al 2002)

Forces toward Convergence

• Equalizing Education

Illiteracy

0

5

10

15

20

25P

erce

nt o

f Adu

lts

1900 1950

South Rest of USA

Forces toward Convergence

• Equalizing Education• Migration

– Rural to Urban– Changing Industries & Occupations– Both Labor and Capital

Urban and Farm Populations

0

20

40

60

80

Per

cent

of P

opul

atio

n

1790 1840 1890 1940 1990

New Old Farm

Forces toward Convergence

• Equalizing Education• Migration• Agricultural Transformation

Number and Size of Farms(Statistical Abstract of US: 1999)

1743822,1911998

563846,4541920

HectaresPer Farm

Total Size(106 ha)

Farms(103)

Farm Output(Statistical Abstract of US: 1999)

13.8

13.4

Cotton(106

bales)

1,5302,5509,7611998

1,5098432,6951920

Tobacco(106 lbs)

Wheat(106 bu)

Maize(106 bu)

Average Farm Values (1997)Statistical Abstract of the US: 2000

• Sales: $102,970• Assets: $550,000• Debt: $86, 500• Debt/Asset Ratio: 15.7%

Farm Household Income

60%

80%

100%

120%

140%

160%

Per

cent

of N

onfa

rm In

com

e

1960 1970 1980 1990 2000Mishra (2003)

Farm Household Income Sources

Other (6)

Int/Div (8)

SocSec (11)NetRent (1)

Wages (51)

Farm (9)

Business (14)

What Caused the Transformation of Agriculture?

• As Other Industries Created Better Opportunities, People Left Agriculture

• With People Free to Migrate, Agriculture Must Provide a Reasonable Standard of Living (Or Else Everyone will Leave!)

• Government: Research & Development, Income Support

Development Causes Divergence

• Development is NOT Naturally Equal Across Industries and Geographies:

• Manufacturing & Services v. Agriculture• Coast v. Interior• => Development Creates Inequality• But Over Time …

Convergence Occurs If

• Legal and Economic Institutions are Similar• Government: Education and Public Health• People and Capital are Free to Migrate

Questions?

More Info:Fulbright: www.cies.org

Agriculture: www.ers.usda.govDevelopment: www.worldbank.org

This Presentation: djyoung.orgClick on “Papers”

E-mail:djyoung@montana.edu