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.
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