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Regional Economic Disparity, Financial Disparity, and National Economic Growth: Evidence from China

Economic Research Institute (82-2-759-5416) 2010.11.25 4087

        Since China began its economic reform and opening up, the Chinese economy has enjoyed steady economic growth.   However, the disparity in regional economic growth and financial development has become a noticeable characteristic of today’s Chinese economy. In the literature on development economics and financial development, it is disputed whether regional economic and financial disparity has any effect on economic growth.   
        In this paper, we examine the dynamic relations among national economic growth, economic disparity, and financial disparity in China.   Specifically, we focus on whether economic disparity or financial disparity affects national economic growth.   As measures of economic and financial disparity across regions and provinces, we use the Williamson coefficient of disparity using both regional data (eastern, central, and western) and provincial data (from 31 provinces).
        Overall, we find that both provincial financial disparity and, to a lesser degree, economic disparity have a negative effect on national economic growth. In addition, financial disparity appears to be exogenous, suggesting that financial disparity is not influenced by either economic disparity or national economic growth. We also find evidence of an inverse U-shaped relation between economic development and economic disparity, in particular, using provincial data. We further examine the implications of these findings.


Contents

1 . Introductio n    1

2 . Literature review     2

2 .1 Econom ic development disparity     2

2 .2 Financial development disparity     4

3 . China’s inter-regional economic and financial disparity     7

3 . 1 China’s regional economic growth and disparity     7

3 . 2 China’s regional financial development and disparity     8

4 . China’s inter-provincial economic and financial disparity     10

5 . Economic and financial disparity and economic growth     11

5 . 1 Regional economic disparity and economic growth   11

5 . 2 Regional financial disparity and economic growth     12

6 . Empirical model and results    13

6 . 1 Empirical model     13

6 . 2 Empirical results     14

6 . 3 Empirical evidence on the inverse U-shape relation    16

6 . 4 Robustness with alternative data     17

7 . Further discussion with policy implications     18

7 . 1 Economic disparity and economic growth    18

7 . 2 Financial disparity and economic growth     19

8 . Concluding remarks    20

Reference    22

Figures    25

Tables    28

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