THE growing income gap between the coastal and inner provinces has attracted a great deal of attention and, if not tackled, will sooner or later affect the China's stability. Although first highlighted in the mid-1980s, the problem continued to worsen in the past decade. Indeed, there are reasons to believe the trend will continue. Consider the different stages of economic development between the coastal and inner provinces: because the coastal region has a stronger economic base, it is better placed to capitalise on the country's economic growth. If the country's economy is growing at, say, nine to 10 per cent, the growth in the coastal region will exceed this level, while that in the inland will be lower. Naturally, this contributes to the income gap. There is also a vast difference between the ownership structure of enterprises in the two regions. In the coastal stretch, there is a greater reliance on shareholding companies, township enterprises and Sino-foreign joint ventures - the more dynamic sector of the economy. In the inner region, however, the state-owned corporations continue to account for the bulk of the enterprises. As the state sector tends to expand less rapidly than the non-state sector, inland provinces, which count on the former to stimulate economic growth, will inevitably see their income growth fall behind the coastal region. In addition, the industrial sector tends to expand faster than the agricultural sector, which accounts for as much as a third of the gross national product today. This makes it more difficult to stimulate growth in the inner region, where the agriculture sector remains a bulwark of the economy. Foreign capital plays an extremely vital role in China's cash-starved economy. Because of its natural and socio-economic advantages, the coastal region will continue to attract the bulk of foreign capital, with a smaller share going to the inner provinces. To exacerbate the situation, capital and expertise from the poorer inner cities, lured by the better prospects in the coastal region, are finding their way to the east, aggravating the situation in the cash-strapped inner region. In the short term, not much can be done to reverse the inner region's capital and labour outflow. Indeed, it can only worsen because of the rapid economic growth in the coastal cities. But that does not mean the Government can do nothing to slow the gap in the longer term. A two-pronged approach could be adopted to address the problem. First, a more aggressive policy could be taken to promote the growth of the non-state sector in the inner region, allowing the more dynamic sector to become the engine of growth. A fast-growing economy will alleviate not only the outflow of capital and labour from the inner region to the coast but also poverty in the countryside. Second, reforms in the state enterprises should be expedited by encouraging them to opt for the shareholding system or to set up joint ventures with foreign investors. That way, there is a good chance state enterprises could lift themselves out of dire financial straits to become powerful economic forces in the region. It was once popular to see the Government launch a few colossal infrastructure projects in the inner region as a panacea for economic problems. True, the inner region does need some huge projects to help exploit its abundant natural resources. However, as state funds are limited, there is no way the country can afford these gargantuan investments. Besides, these projects alone are not necessarily enough to bring about the kind of growth rates needed to narrow the income gap. Which brings us back to the question: when will the growing income gap between the coastal and inner regions be checked? My guess is probably in the 2020s. By then, the inner central and western regions are sure to have become a vital source of economic growth. It is on these regions that China is pinning its hopes for the 21st century. Professor Li Yining is head of Beijing University's department of economics and management and is a standing committee member of the National People's Congress.
