Caixin
Jan 02, 2021 09:30 AM
WEEKEND LONG READ

Weekend Long Read: Why China’s North-South Economic Gap Keeps Getting Bigger

It’s growing increasingly clear that there is an economic gap between China’s north and south.

The north’s share of China’s economic output plunged from 42.9% in 2012 to 35.4% in 2019. There are many factors behind this widening gap. One of the most important to understand is rooted in geography and history.

During China’s planned economy period in the mid-20th century, the north’s economy experienced a boom in heavy industry due to its rich natural resources. But a blessing can sometimes turn out to be a curse. The northern economy grew to depend on capital investment and factor inputs and lacked the incentive or urgency to introduce market reforms.

Meanwhile, the south developed river and marine transportation along its long coastline. Reforms were ushered in, and the region grew thanks to a vibrant export economy. The role of the market became a major difference between China’s north and south.

As the country’s economy shifted toward innovation-driven, high-quality growth after 2012, the change highlighted the disparity between the two growth models, with the south growing quickly while the north lost momentum.

The north-south economic gap illustrates why a market-driven economy is preferable to a planned one. To close the gap, it is crucial to speed up market-oriented reforms and encourage urbanization.

Some of the policies to better guide China’s urbanization can be found in the strategy whose name has become a policy buzzword — “dual circulation” (双循环). There are three keys to achieving it: building new infrastructure, creating urban clusters and loosening family planning policy.

Reversal of fortunes

In general, China’s regional development gap has been narrowing since the reform and opening-up era began in the late 1970s. However, since 2014, the gap has been widening.

In the 1950s, most of the Soviet Union’s aid programs were launched in northeastern China. The north took a lead at that time. The so-called “Third Front Movement,” an industrial development initiative based on national defense, aimed to have areas in western China catch up to the north’s higher economic growth. From 1960 to 1977, the gap in per capita GDP between northeastern China and the western regions narrowed.

The tide shifted with reform and opening-up. After 1978, China’s east rose to be the leading region in economic growth. In 1991, the east’s per capita GDP was the highest of China’s four major regions. Since then, several campaigns have been launched to boost growth in the north and the west. With coastal areas transferring industries to the inland regions after the 2008 financial crisis, the relative gap in per capita GDP among the regions gradually narrowed, though it began widening again at the end of 2014.

Currently, the north-south gap is the most significant. From 2012 to 2019, the aggregate economic gap between the two regions widened from 14 percentage points to 29 percentage points.

WEEKEND 2

In the reform era, China has seen large-scale migration from the central-western region to areas near the coastal such as the Pearl River Delta, the Yangtze River Delta, and the Beijing-Tianjin region. Between 1978 and 2019, the share of China’s population living in the east rose from 34% to 38.6%. Over the same period, however, the difference between the populations in the north and south has changed little.

Until the last decade, northern China’s per capita GDP had long been higher than the south’s. But the gap gradually closed during the reform era, and in 2014, the south overtook the north. The gap has been widening ever since.

WEEKEND 1

Who’s left in the top 10?

Chinese people like to rank parts of the country by their economic output. In 1978, there were five northern provincial-level regions in the top 10. This year, there are two — Shandong and Henan provinces.

If you look at cities, you can see the same trend. The number of northern cities on the top 20 list by economic output fell from 11 in 1978 to five in 2020, with Beijing the only one in the top 10.

WEEKEND 3

As Shenzhen, Wuxi, Ningbo, and other coastal cities climbed into the top 20, the number of northern cities declined. The export-oriented coastal regions have been integrating themselves into the global economy since China joined the World Trade Organization in 2001. Cities like Foshan and Dongguan emerged as manufacturing hubs while Harbin, Shijiazhuang and Daqing fell out of the top 20.

Behind the widening gap

Over China’s 5,000-year history, the inhabitants of its north were often at war with neighboring tribes of nomads, leading slow but steady migration south to the warmer areas along Yangtze River, whose middle and lower reaches have grown more and more densely populated.

The Silk Road that crossed Northwest China was replaced by the maritime silk road in the south. By the middle of the Qing Dynasty (1644-1912), Guangzhou was the only trade port as the government pressed ahead with its policy of isolation.

During the planned economy era that lasted from 1950 into the 1970s, the north’s economy had once again elapsed that of the south. Rich in coal, oil, iron ore, the north — with the help of Soviet aid — formed an economy based on resources and heavy industry. In addition, the construction of railways used mainly for freight in the region gave the north an advantage in transportation infrastructure.

By the time the reform era began, the south, with its convenient access to shipping, began to rise again through an export-oriented economy advanced by market reforms. Still, the north maintained its fast economic growth for a while due to investment amid growing demand for heavy industry. That was an advantage, but also created a lack of incentives to pursue more market reforms.

In the south, the Pearl River Delta region took advantage of its proximity to Hong Kong and Macao to develop a manufacturing industry early in the reform era. Guangdong’s economy rose to No. 1 on the top 10 list in the late 1980s. In 1990, the creation and development of Shanghai’s Pudong New Area gave a boost to the Yangtze River Delta region.

In the 1990s, however, the once strong economies in the Northeast fell into decline due to the lingering influence of the planned economy. Many state-owned companies closed. Still, China’s massive infrastructure building endeavor provided boost to heavy industries such as steel, cement, petrochemicals and coal. That’s how the north’s economy maintained its high growth rate for so long without much in the way of market reform.

Differences in market development came to light after China unleashed a 4 trillion yuan ($612.2 billion) stimulus package in late 2008 to counter the fallout of the global financial crisis.

The south upgraded quickly and focused on hi-tech industries, while the north’s growth began to weaken. With China’s economy shifting to becoming more innovative, the central government starting pushing supply-side structural reforms in late 2015, and in 2020 the dual circulation strategy gave a bigger role to market forces in driving economic expansion. Excess capacity was eliminated rapidly in the southeast, promoting its transformation and upgrading. Interior provinces along the Yangtze River received relocated industries from coastal areas. Provinces like Guizhou, Yunnan, Jiangxi and the Tibet autonomous region have been frontrunners in economic growth in recent years. Meanwhile, with its lagging market reforms and poor business environments, it was hard for the north to develop new economic growth drivers.

For a while, inflated data covered up some of the widening gap.

In 2014, the central government uncovered a notorious case of data manipulation in the Northeast and began looking more closely at the real numbers of the north’s economy. In 2016, Liaoning province made a revision to its data that led its GDP to shrink by 22.4% from the previous year. After the economic census in 2018, the country’s GDP was revised up by 2.1%, but there was a huge difference in the regions where the added growth came from. In the south, 14 of 16 provincial-level regions revised their GDP figures higher. In the north, 12 of 15 regions revised their GDPs figures lower.

WEEKEND 4

Lesson from abroad

Compared with China, developed country have smaller regional disparities in per capita GDP. In the U.S., such regional disparities have shrunk over the long term.

In the U.S., traditional manufacturing has been in decline since the 1970s. Since then, more and more people have been moving from the Great Lakes “rust belt” region to southern and coastal areas where modern manufacturing and services drive economic growth. In 1970, the economic contribution of eight rust belt states accounted for 37.9% of U.S. GDP. By 2019, that figure had fallen to 25.8%. Meanwhile, the contribution of the southern and coastal states of California, Florida and Texas to U.S. GDP grew from 18.7% to 27.4%.

WEEKEND 5

Reform is the remedy

The north-south gap can be addressed in two ways. First, the north should accelerate market reforms that target its weaknesses. The north should deepen reforms on property rights and factors. It should transform government functions and improve the business environment.

Secondly, local governments should respect the defining trend of migration from regions in decline to those that are prosperous. Local governments should give play to each region’s respective strength, break administrative segmentation and barriers of factor flow. We can improve mechanisms of transfer payments and ecological compensation, and build more metropolitan circles and city clusters.

After more than 40 years of reform and opening-up, China’s product market has developed well, with at least 97% of goods and services priced by markets. The next step is to accelerate reform of the so-called factor market — free movement of land, labor, capital, technology and data. For instance, a unified pension system is important to promoting fair competition and free movement of labor among businesses. We should speed up the construction of a pension system with unified standards and mutual aid among regions.

Besides, we should deepen reform of the land allocation system. Among various factors, land is the one that has lagged the most in market-based reforms, despite its huge potential.

In regard to land use, we should improve the allocation of its quota distribution between regions and cities through the market mechanism. In western and northeastern China, there is greater potential for farmland reclamation while the demand is mainly from the east. Although people, capital, and technology can move freely in general, the transfer of land use rights is still limited to within provinces, or even cities.

It’s natural for people and industries to move from declining regions to prosperous ones. People prefer to migrate to metropolitan areas and urban clusters around big cities. They relocate to regions with faster growth, higher incomes and more jobs. Governance of Chinese cities has failed to keep up with rapid urbanization.

Last but not least, there is the fiscal transfer system. We should improve the transfer payment system and guarantee equitable access to basic public services. There should be a good mechanism to compensate people for ecological costs, making sure those who benefit from ecological damage pay those who deserve proper compensation.

Ren Zeping is the chief economist and director of Evergrande Think Tank. Xiong Chai and Yu Jiajun are analysts at Evergrande Think Tank.

Huang Runan, a Ph.D. student at Renmin University, contributed to this article.

Translated by Guo Xin.

Contact editor Michael Bellart (michaelbellart@caixin.com)

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