Unravelling Regional Inequality: The Heterogeneous Impact of China’s Great Western Development Program

Building upon empirical analysis of the impact of China's Western Development Program, we suggest that policymakers should not view the targeted region as a homogenous part when designing place-based policies. In a large geographically disadvantaged region, such as western China, we should not expect state-led industrialization to work equally well in all subregions, as the locational fundamentals in some areas might be too poor to support agglomeration economies. The growth effects in other areas would further attract labour and capital from those initially disadvantaged areas, exacerbating regional inequality. A fine-tuned policy approach is needed—one that balances equity with efficiency. Different policy goals should be set for regions based on their initial endowments, considering factor mobility from disadvantaged areas. More specifically, in better-endowed areas or larger cities with favourable location advantages and infrastructure, the focus should be attracting businesses and fostering local agglomerations. This can be achieved through tax incentives, improved access to credit, and enhanced transportation and energy infrastructure. Conversely, in economically disadvantaged areas, greater emphasis should be placed on supporting the provision of essential public goods like education, healthcare, and basic infrastructure through fiscal transfers. These findings emphasized the need for regional policies prioritising technological capabilities and opportunities and addressing region-specific challenges through a participatory approach.