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

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. Although we find evidence of a non-linear relation between economic development and economic disparity, in particular, using provincial data, we do not find evidence of an inverse U-shaped relation between the two. We further examine the implications of these findings.