Provincial Income Level Convergence

An important issue in economic research is whether the poor countries can catch up with the developed countries? If it is true, it means that the invisible hand of market economy can prevent the society from more and more unfair in income distribution by promote economical convergence. Hidden-hand mechanism will be verified again, and income inequality will not be a problem. Unfortunately, although China has experienced a rapid growth and is becoming more and more powerful since the policy of reform and opening in 1978, problem of income inequality gets worse and worse so that it has even influenced the normal development of china economy. As a result, it is very important for us to study the convergence hypothesis. A traditional approach is cross-section analysis, originated from neo-classical growth model. Baumol(1986) first studied absolute convergence and Barro and Sala-i-Martin(1990) improved this approach later. However, this approach experiences some problems, such as variables missing and endogeneity.Recently, a new approach becomes more and more popular. The new way to implement the regression approach is via time series methods in which the definition of convergence relies on the notions of unit roots and co-integration. This paper adopts this kind of approach. Based on income data of both urban and suburban people of china in 1978-2008, we test the neoclassical prediction that the growth rate of an economy is inversely related to the distance from its steady state. Four different unit root tests are introduced clearly and applied separately to make sure our conclusions are robust. To study the dynamic process, we also test 12 different time periods. We find that the convergence hypothesis is rejected in China. However, if we divide China into three regions——east,middle and west, convergence hypothesis can be accepted in all these three different regions, known as club convergence. Also, we find that the income inequality tends to become larger with the development of economies. Based on our analysis, we recommend some advices for the economic development.