This paper shows that under increasing returns, devoting resources to develop some regions strategically ahead of other regions make sense, but this does not imply that the other regions have to wait until the benefits of economic growth to trickle down. Fiscal equalization can and should be more aggressive, with the central government incurring a deficit to help the poorer regions, and the national debt thus caused to be repaid by higher taxes on the fast growing regions. Optimal fiscal equalization should also involve central government’s investment in certain kinds of public infrastructure in the local economies of the backward regions based on social cost benefit analysis. China’s increasing regional income disparity is therefore unnecessary.
Ho, L. S. (2008). Strategic regional and national economic development with fiscal equalization (CPPS Working Paper Series No.191). Retrieved from Lingnan University website: http://commons.ln.edu.hk/cppswp/90/