Effects of Free Trade Zone Policy on China’s Income Disparity

Abstract

The income gap between the rich and the poor is growing in China. The Free Trade Zone policy has been adopted in China over the past decade. We analyze whether the Free Trade Zone policy contributes to China’s income disparity based on a panel of provincial level data covering the period from 2009 to 2017. The empirical results show that the implementation of the Free Trade Zone policy has significantly reduced China’s income disparity between provinces, but different regions have different effects. The impact of this policy on the distribution of income has significantly narrowed the income gap in the eastern region. Meanwhile, the policy effect is long lasting, with the influence of the policy increasing over time. In particular, the establishment of Free Trade Zones in provinces with relatively low income, low trade dependence and low innovation capability is more conducive to narrowing the income gap. Furthermore, the establishment of Free Trade Zones in provinces with a relatively high unemployment rate has obviously decreased the income gap; however, in provinces with a low unemployment rate, the income gap has increased. Our empirical results are robust with different model specifications.

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