Sources Of Divergence Between Coastal And Interior Regions In China

This paper decomposes the income divergence between coastal and interior regions into three components: a part due to the differences in the labor transfer rate between the coastal and interior regions, a second part due to the nationwide relative income gap between the nonagricultural workers and agricultural workers, and a third part due to the coast-noncoast differentials in incomes for nonagricultural and agricultural workers. We find that this third component, the coast-noncoast differentials in incomes for nonagricultural and agricultural workers, explains most of the divergence in the pre-reform period. In the post-reform period, both the regional difference in labor transfer rate and the coast-noncoast income gap for agricultural and nonagricultural workers play significant roles in explaining the divergence between the interior and the coast. Between 1978 and 1990, the different labor reallocation between the coast and interior accounted for most of the divergence. The nationwide income differentials between nonagricultural and agricultural sectors played little role in explaining the growing divergence between regions. Finally, after 1990 the largest contributor to the widening coast-noncoast income gap was the coast-noncoast divergence in incomes within the nonagricultural sector. Thus, I conclude that the removal of interregional obstacles to factor mobility, especially labor mobility, is important for reducing regional income divergence.