Subsidising inequality: Economic reforms, fiscal transfers and convergence across Chinese provinces

Abstract

The article investigates per capita income convergence across Chinese provinces over the 1978–92 period. It confirms previous studies which find a reduction in inter‐regional income inequality over the course of economic reforms. However, the rate of convergence has declined since 1985 as a result of two factors. First, the shift from rural to industrial reforms has disproportionately benefited the relatively wealthier coastal provinces. Second, the system of inter‐provincial fiscal transfers has prevented convergence among interior provinces, as transfers have gone to the richer among them. Further fiscal decentralisation and an acceleration of reforms in the interior provinces is thus unlikely to increase regional income inequality.