Infrastructure Development and Economic Growth:
An Explanation for Regional Disparities in China?
Sylvie De´murger
France
Journal of Comparative Economics 29, 95–117 (2001)
Abstract: This paper provides empirical evidence on the links between infrastructure investment and economic growth in China. Using panel data from a sample of 24 Chinese provinces (excluding municipalities) throughout the 1985 to 1998 period, the estimation of a growth model shows that, besides differences in terms of reforms and openness, geographical location and infrastructure endowment did account significantly for observed differences in growth performance across provinces. The results indicate that transport facilities are a key differentiating factor in explaining the growth gap and point to the role of telecommunication in reducing the burden of isolation.
Key Words: infrastructure; economic growth; regional inequalities; panel data; China.
1. INTRODUCTION
In two decades of market-oriented reforms, China has been one of the world’s fastest-growing economies with per capita real incomes more than quadrupling since 1978. Some of the key features of this evolution have been the dramatic growth in international trade and the inflow of huge amounts of foreign direct investment, which have accompanied the open-door policy and are usually high- lighted as main engines of China’s growth performances. However, China’s transition to a market-based economy has created new problems, among which is the growing inequality in per capita income between coastal and interior provinces. Achieving balanced growth so as to reduce those disparities appears to be one of the major policy challenges that China now faces in order to maintain both its current GDP growth rate and social stability.
From this perspective, enhancing the growth potential of inland provinces is necessary either directly, through appropriate economic policies, or indirectly, by facilitating growth spillovers from rapidly developing coastal regions to backward interior provinces. The first issue has been documented extensively in the recent economic literature, which shows that a large part of economic growth in coastal provinces comes from their deeper implementation of industrial and foreign trade reforms. However, the question of how to take the best advantage of all these reform and opening-door policy measures has, up to now, received little attention. Considering China’s huge size, important regional differences arise naturally in geography and in natural resource endowments. These may have a substantial impact on the economic returns of any kind of reform. To compensate for these natural constraints, the availability of an appropriate infrastructure might prove helpful in facilitating communications between provinces and with the outside world. Thus, this issue may be important when we are evaluating provincial growth performance and regional growth spillovers. Using a database covering 24 Chinese provinces and autonomous regions over the period from 1985 to 1998, this paper provides empirical evidence on why economic performance has been so different from one province to another throughout the reform period and on the specific relation between the distribution of infrastructure endowments and the distribution of growth performances.
The paper is organized as follows. Section 2 gives an overview of economic growth and income level disparities among Chinese provinces. Section 3 summarizes the evolution of infrastructure availability at both national and provincial levels. Section 4 describes the conceptual and methodological background for quantitative assessment made in Section 5 on the extent to which economic growth may be accounted for through geography and infrastructure-related characteristics. Section 6 provides and discusses a growth decomposition exercise, which leads to a grouping of provinces according to their economic structure as well as their education level and infrastructure endowment as an explanation for their growth performances. Section 7 concludes with several economic policies related remarks.
2. REGIONAL PATTERNS OF ECONOMIC GROWTH IN CHINA
The issue of rising or declining inequality among Chinese provinces has been debated extensively in recent years. If provincial unequal development is far from being a new phenomenon in China, the renewed interest in this question partly comes from the fact that the redistribution system has been abandoned with the implementation of reforms (Naughton, 1999; Wang and Hu, 1999). Hence, this policy is no longer available to prevent a widening dualism between provinces. China has experienced growing interprovincial inequality during its transition process to a market-based economy. Indeed, large disparities occurred in growth performances among provinces from 1978 to 1998. The gap between the most dynamic province in terms of GDP per capita, Zhejiang, with an annual growth rate of 12.5%, and the least dynamic, Qinghai, is 7.1 percentage points.
A broader regional classification of provinces reveals that, on average, coastal provinces grew faster than in land provinces. This growth concentration along the coastline brought about changes in regional income disparities. First, it led to a slight downward trend in the cross-section dispersion of per capita GDP. However, from the 1990’s onward, it has been accompanied by an increase in the relative disparity between regions. Indeed, the rapid growth of the coastal provinces did not contribute to divergence in incomes until 1990 since the fastest-growing coastal provinces started from a below-average level of per capita income. The convergence process came to an end after 1990, and regional incomes began to exhibit widening trends of divergence as these provinces caught up and growth also accelerated in the richest coastal provinces. Lorenz curves can be used to visualize these trends in Fig. 1. They suggest that, when we exclude municipalities that seem highly atypical, interprovincial inequalities remained rather stable up to the early 1990’s but have tended to increase since then. As a result, inland provinces such as Guizhou and Yunnan remained far behind in terms of GDP per capita in 1998 while most coastal provinces had caught up with the richest municipalities. Thus, due to growth concentration along the coast, the most pronounced disparities have arisen mainly between coastal and noncoastal provinces.These opposite movements, with a catch-up process at the top of the scale and a divergence phenomenon between regional zones from the end of the 1980’s onward, summarize the complex regional development of China since the implementation of reforms. This complexity explains why it is so difficult to discern a convergence relationship between Chinese provinces. Indeed, as suggested by Fig. 2, there is no clear relationship between initial GDP per capita and subsequent growth when considering all provinces but excluding the municipalities.
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