Fundamental causes of inland-coastal income inequality in post-reform China

This paper investigates the fundamental causes of the widening inland-coastal inequality in China during the post-reform period 1978-2004 within a systematic framework of economic development theory. We highlight the roles of three policy variables, namely globalization, decentralization and marketization, in determining the income gap between the inland and coastal regions. The results derived from both time-series and panel data provide strong evidence that these policies are thus far inequality-enhancing. This finding is robust to the use of different estimation methods, alternative proxies for policy variables and regional income, as well as the inclusion of other controls. We also find significant but economically small spillover effects from the coastal to inland provinces. Our results suggest that more efforts should be made to improve the policies to reduce regional inequality in China.