Preliminary and Incomplete Draft

Economic Geography and Regional Growth in China Sylvie Demurger Centre National de la Recherche Scientifique Centre d'Etudes et de Recherches sur le Developpement International Universite d'Auvergne [email protected] Jeffrey D. Sachs Center for International Development Harvard University [email protected] Wing Thye Woo Economics Department University of California, Davis [email protected] Shuming Bao China Data Center University of Michigan [email protected] Gene Chang Economics Department University of Toledo [email protected] Andrew Mellinger Center for International Development Harvard University [email protected]

April 24, 2001

Paper prepared for the inaugural meeting of the Asian Economic Panel held 26-27 April, 2001 at the Sheraton Commander Hotel, Cambridge, Massachusetts.

April 24, 2001 draft

Economic Geography and Regional Growth in China Sylvie Demurger, Jeffrey D. Sachs, Wing Thye Woo, Shuming Bao, Gene Chang, and Andrew Mellinger

Introduction Substantial disparity in regional incomes is a reality in every geographically large country, and the causes of the disparity are numerous and complex. The enduring character of many cases of regional backwardness is also a reality, for example, the Appalachians in the United States, Northern Shaanxi in China, Chiapas in Mexico, and Madura in Indonesia. The persistence of poverty in these locations has led many prominent social scientists to see the main causes of entrenched regional poverty to be inter-related in a self-reinforcing or self-perpetuating manner. Sociologists talk about the culture of poverty. Psychologists highlight the absence of the drive to achieve. Classical Marxists expound about the systemic need of the capitalist economy for a reserve army of unemployed. Latin American dependenistas see domestic regional disparity to be the inevitable reflection of the neo-imperialistic relationships in the international arena, the global metropolis-periphery arrangement reproduced within the dependent economy. Finally, neo-classical economists explicate the working of local dynamics that produce multiple equilibria, with the "low-income trap" being one of the stable outcomes. Natural scientists too have their own discipline-based explanations for spatial inequality in economic development. The most well-known recent example of which is the book, Guns, Germs and Steel by the physiologist Jared Diamond (1997). One of Diamond's main arguments is that many types of innovation (especially those in agriculture and construction) are not applicable across ecological zones. So, in ancient times, while new improved varieties of crops

1

and beasts of burden can spread from northern Asia in the east to Europe in the west (and viceversa), they cannot be transmitted from the temperate zone in north America to the temperate zone in south America because of the intervening tropics. Biological endowments also matter. Most of Asia and Europe have more naturally-pliable livestock (horses and cows) that can be harnessed to help in war and production. The African-equivalent of those animals, e.g. zebras, hippopotamuses, antelopes and wildebeests, have proved themselves, up to today, resistant to domestication efforts to turn them into beasts of burden. Even the African elephant is temperamentally uncooperative compared to its Asian cousin. There is clearly no shortage of explanations for regional disparity and its, sometimes centuries-long, durability. This surfeit of views is suggestive of ignorance about this phenomenon, and confusion about what to do about it. What is clear however is that the successful development strategies of some countries cannot produce the same salubrious results when implemented in other national settings. When China opened some coastal pockets for foreign direct investment, these Special Economic Zones (SEZs) quickly blossomed into vibrant export platforms and created backward linkages with the immediate hinterland. Whereas, when landlocked Mongolia turned the entire country into a free trade and investment zone in the late 1990s, the inflow of foreign capital was a mere trickle compared to China's experience. The specific lesson in this case is that the time-tested effective growth policy package for a coastal economy, and minor modifications of it, are unlikely to work for an interior economy. Public concern for regional income disparity in China has been increasing quickly since the early 1990s. This concern is rooted in the widening of provincial income gaps that started in the 1988-93 period, with the exact timing dependent on the method of measurement. Figure 4.1 shows that the coefficient of variation of provincial incomes for 29 provinces fell from 0.73 in

2

1978 to 0.63 in 1989 and then rose to reach 0.70 in 1998. 1 By 1995, the obvious rise in regional inequality had caused the international news media to raise the possibility of the political disintegration of China. 2 The "optimistic" scenario for China's breakup is an amicable one. The affluent provinces could now afford to quietly ignore the authority of the central government, or to indirectly control the central government – a situation of de facto political independence for the affluent provinces. The May 11, 1995 issue of the Far Eastern Economic Review carried on its cover the heading "Fragile China: Affluent Regions Go Their Own Way", and it reported that the political scientist Susan Shirk: "knows of a half-dozen provincial functionaries who 'have declined promotions to Beijing and opted to stay at home to get rich and exercise informal political influence.' With regional fortunes so drastically on the rise, Shirk says, national politicians are tempted to play [to] the provinces and outbid each other in pandering to local interests." The "pessimistic" scenario for the political disintegration is a civil war sparked by the resentment of the poor provinces. According to the economist Hu Angang who advocates the abolition of the special economic zones: "If Deng Xiaoping knew the disparities were as big as they are, he would be more militant than I am in trying to eliminate them ... In America, the deep differences between the North and the South more than 100 years ago led to the Civil War."3 "We must cease subsidizing rich coastal cities. Preferential treatment should be reserved for the poor."4

1

Leaving out Beijing, Shanghai and Tianjin, Demurger (2000) used Lorenz curves to determine that regional inequality increased after 1990. 2 This important political backdrop explains why some of the recent outstanding books on China's economic geography are written by, or with, political scientists, e.g. Cheung, Chung and Lin (1998), Wang and Hu (1999), and Yang (1997). 3 "Deng's Economic Drive Leaves Vast Regions of China Behind," New York Times, December 27, 1995. 4 "China: A Chinese New Deal," Newsweek, October 9, 1995. The South China Morning Post ("Clash over shrinking coffers," September 23, 1995) reported that "Mr. Hu slapped the SEZs in the face by accusing them of ripping off the rest of China – and widening the regional gap – by abusing the special policies granted them by the Centre ..[and he] concluded that the zones 'should no longer be allowed to remain special'."

3

Regardless of whether it is concern for social equity or for social stability, China's top leaders have now clearly committed themselves to accelerating the economic growth of the interior provinces. The budget for infrastructure investments in the poor provinces have increased substantially every year, and a Western Region Development Office has just been established under the State Council (the Chinese cabinet) to formulate a comprehensive development strategy and to coordinate its implementation. This paper seeks to integrate some recent advances in regional science, ecology and geography into economics to arrive at some preliminary findings on the barriers to economic growth in China's interior provinces. In particular, we present estimates on the role contributions of preferential economic polices and geographical location to the growth of China's provinces. The quantification and policy suggestions presented here are necessarily tentative and primitive because this is the first phase of our collective efforts to understand this longstanding problem of large regional inequality in China's history.

The Importance of Geography On a global scale, the wealth of nations is well characterised by two geographical divides. The first geographical divide emphasizes differences in ecological conditions, the temperate zone versus the tropical zone. The second geographical divide emphasizes differences in the ability to conduct international trade, the coast versus the interior. As we will show, both of these geographical divides are a combination of independent causes of economic wealth and of proxies for some important determinants of economic prosperity. The empirical validity of the temperate-tropical divide is well-vouched for by the fact that over 90 percent of the world's poor lives between the Tropic of Cancer and the Tropic of

4

Capricorn. The result is a GDP per capita (PPP-adjusted) of $3,326 in 1995 for tropical economies, and $9,027 for nontropical economies. This strong correlate between ecological zone and income level is not a new observation in economics, e.g. Lee (1957) and Kamarck (1976), but it has not been a major analytical organizing principle in development economics. The incorporation of new insights from physical geography and societal dynamics have led Jared Diamond (1997), David Landes (1997), Stanley Engerman and Kenneth Sokoloff (1997) and Gallup, Sachs and Mellinger (1998) to focus on physical geography as an over-arching explanation of economic performance. Because most of Africa lies in the tropical zone, Bloom and Sachs (1998) have identified the virulence of diseases and the limited potential for large gains in agricultural productivity in the tropics to be the key obstacles to economic development there. This biology-based analysis of Bloom and Sachs is of course not the only recent attempt to explain the upward income gradient that begins at the Equator. Hall and Jones (1997) have suggested that the distance from the Equator proxies for the relative penetration of European economic institutions, and European-style economic institutions are the ultimate engines of growth. The coast-interior dichotomy highlights the importance of transportation cost in determining a country's participation in the international division of labor. In the industrial age, water transportation has the lowest cost for extended distance. 5 The growth effects of trade are well-known, beginning with Adam Smith's observation that productivity improvements are enabled by the greater division of labor that, in turn, is enabled by the expansion of the market.

5

For example, the industrialization of central Europe was helped by the navigability of the Danube.

5

The clear policy lesson here is that investments in physical infrastructure and transportation technology can change the comparative advantage of a region. 6 The temperate-tropical dichotomy will not be a major analytical organizational principle in this paper. This is because China, unlike Brazil and Australia, does not have a substantial part of its territory within the tropical zone. The southern border of China extends only a little miles beyond the Tropic of Cancer. This feature is of interest in itself because it is more than coincidental that after centuries of steady southward expansion, the Chinese empire stopped at approximately where the tropical zone begins. While we will not dwell on the temperate-tropical divide, the general point about differences in the development potential of different ecological zones is an important one. The appropriate development package for the arid plateaus of northwestern China has to be different from the grain-growing plains of central China, and the relevant development package for the wet, warm southwestern provinces has to take disease vectors into greater account.

China in Time and Space China covers 9.6 million square kilometers and stretches from the temperate to subtropical zones. It is similar in size and climate to the United States but its topography is quite different. The most important difference being that the U.S. has coastlines running the length of its eastern and western borders, whereas western China is landlocked. China is also more mountainous and hilly, with plains at less than 500m elevation making up only 25 percent of the total land area, and mountains and plateaus accounting for 60 percent. These topographic features of China imply higher transportation costs and a greater requirement for physical

6

For example, the connecting of the Great Lakes to the Atlantic by the Saint Lawrence Seaway accelerated the industrialization of the northern part of the American Midwest.

6

infrastructure construction. The task of economic development in China is hence more challenging than in the U.S.. Physically, China resembles a three-step staircase running downward from west to east. It begins with the 4,000 meters high Qinghai-Tibet Plateau in the west, proceeds to the highlands and basins in the center which are about 1,000 to 2,000 meters above the sea level, and ends with hilly regions and plains that are less than 1,000 meters high. The combination of higher precipitation, warmer climate, and access to navigable rivers and the sea have made the central and eastern provinces more conducive for farming and trade, and, hence, the population centers of China. The Qinghai-Tibet Plateau was traditionally the poorest region. The location of China's economic center has changed over time, moving eastwards from the Loess Plateau and the Yellow River Valley in the northwest (where Chinese civilization began in 2000 BC), which is about 1000 kilometers away from the coast. The reason for this original location is because, in ancient times, high agricultural productivity and land-based trade was much more important than sea-based trade. The bulk of China's international trade at that time was conducted through the famous Silk Route that went through the northwestern corner of China. The southeastern coastal region, where Guangdong and Fujian (two of today's most dynamic provincial economies) are located, was largely remained uncultivated and sparsely populated in early Chinese history. Although the natural conditions in the southeast were favorable for agriculture, farming was undeveloped because malaria ('zhangqi' in Chinese) and other subtropical diseases checked population growth, and the high temperature sapped human energy faster, resulting in lower labor productivity. Guangdong was considered an almost uninhabitable place in ancient times. 7

7

The great Chinese poet of the 11th Century, Su Dongpo (1037-1101), who was banished by the emperor to Guangdong wrote that the only saving grace living there was the abundance of the lichee fruit: "Having three

7

Over time, the pressure of expanding population and the frequent invasions by the northern tribes caused more of the population to move south and into the mid-coastal and southeastern regions. By the 12th century, the Yangtze River valley had become very developed and densely populated. The economic importance of the coastal region increased dramatically after the Opium War in 1840 when the Western powers forced China to first open several ports and then the whole country for trade. China's economy and subsequently politics were quickly (by historical standards) transformed. International trade expanded, foreign direct investments flowed in, and local industrialists made their appearances, especially in the mid-coastal and southeast regions. The Qing dynasty was overthrown in 1911, followed by a long chaotic period of protracted civil wars and Japanese colonialism, that ended with the declaration of the People's Republic of China on October 1, 1949 by the Communist Party of China (CPC) under the leadership of Mao Zedong. Table 1 summarizes some key geographical and economic characteristics of China in the six regional groupings that are useful for analyzing the post-1978 period 8 . 1. The municipalities of Beijing, Tianjin and Shanghai that have province-level status (Chongqing was granted province-level status in 1997, but we have included its data under Sichuan province). These are the richest pockets of China, and have had high growth in the 1990s. These cities are highly industrialized, and over 71 percent of their population lives within 100 kilometers of the coast or navigable waters. Beijing, Shanghai and Tianjin are the exceptionally rich (city) provinces.

hundred lichees daily, I do not mind to be a person living in the south of Nanling Mountain (where Guangdong is located)." 8 As to be noted later, the geographical delineation of China has varied from one study to another. As the same term (e.g. coastal) can refer different subsets of provinces, we shall try to indicate to the reader whenever the regional term changes meaning in our discussion of the literature.

8

2. The northeastern provinces of Heilongjiang, Jilin and Liaoning, which are collectively called Manchuria, and was the industrial heartland of China in 1949 (because of the Japanese control of the economy that started in 1905 9 ). During the central planning period, their early start in industrialization was consolidated, making these provinces the part of China that most resembled the Soviet Union in industrial organization and production structure. In the national ranking of per capita GDP, omitting the three municipalities, Heilongjiang and Liaoning ranked first and second, respectively, in 1978, and ranked seventh and fifth, respectively, in 1998. Heilongjiang and Liaoning are the traditionally rich provinces. 3. The coastal provinces of Hebei, Shandong, Jiangsu, Zhejiang, Fuijian, Guangdong and Hainan (Hainan was separated out from Guangdong in 1988). These seven provinces have 82 percent of their population living with 100 kilometers of the sea or navigable rivers. They have grown the fastest of these six groupings in the 1978-1998 period, an annual average of 10.7 percent. The result is that Zhejiang and Guangdong have soared to the top of the per capita GDP ranking, omitting the municipalities, from fourth and sixth, respectively, in 1978 to first and second, respectively, in 1998. Zhejiang and Guangdong are the archetype of the nouveau riche provinces. 4. The central provinces of Shanxi, Henan, Anhui, Hubei, Hunan, and Jiangxi, through which the plain runs relatively unimpeded from the north of the Yellow River to the south of the Yangtze River. The temperature and rainfall make this region the agricultural heartland of China, which explains why its population density is almost twice that of the northeaster and southwestern regions. The two large rivers and their many tributaries endow 57 percent of

9

The Japanese started its economic penetration into Manchuria in 1895 after defeating China over the control of Korea, began its economic domination from 1905 by taking over Russian economic interests, rendered Manchuria a puppet state after 1911, and formally annexed Manchuria in 1935.

9

the population with easy water transportation. The Yangtze between Wuhan and Shanghai has the industrial potential of the Rhone Valley multiplied several times. 5. The northwestern provinces of Inner Mongolia, Shaanxi, Ningxia, Gansu, Qinghai, Xinjiang and Tibet (data of Tibet omitted) are truly isolated. The center of the land mass is 1,400 kilometers from the coast. This region is more arid and steeper compared to the four previous groupings, and it is marked by desert on its western and northern borders. Furthermore, 5 percent of the land has a slope of greater than 10 percent compared to 2.5 percent for the northeastern, coastal and central provinces. The general lack of water makes the region difficult for agriculture, only 8 percent of the land is arable, which helps explain why it has the lowest population density in China in 1998, 46 persons per km2 versus 126 persons per km2 in the southwestern region, which has the next lowest population density. A large number of residents are of Turkic origin, and are practicing Muslims.10 The Han people are in the minority in Xinjiang and Tibet. 6. The southwestern provinces of Sichuan, Yunnan, Guizhou, and Guangxi have rainfall and temperature conditions that are ideal for crop cultivation but they suffer from being too mountainous. The average elevation is 1,400 kilometers, the average slope is 5.2 degrees, and 14 percent of the land has a slope of greater than 10 degrees. The proportion of arable land of 10 percent is barely above that of the arid northwestern provinces. Lacking the mineral resources of the northwestern provinces, the southwestern provinces have the lowest

10

In the 1950s, 3.5 million of Xinjiang's population of 5 million were Muslims Uighurs, with Han Chinese accounting for less than 200,000. It is estimated that 6 million Han Chinese have settled there since then, bringing the total population to about 16 million in 1994, with 62 percent over half belonging to non-Han ethnic groups. Data are from "Wang Enmao, 87, Who Ruled a Rebellious Chinese Province," The New York Times, April 23, 2001, and "Xinjiang's Minorities Feel Torn Between Desire for Independence, Benefit of Economic Reform," The Asian Wall Street Journal Weekly, September 5, 1994.

10

GDP per capita in 1978, and the lowest growth rates in the period of market-oriented reform. A significant proportion of the population belongs to non-Han ethnic groups.

Regional Economic Policy, 1949-1978 Industrialization was shallow in 1949, and a largely coastal phenomenon. 11 In 1952, the secondary sector produced 8 percent of GDP and employed 7 percent of the labor force compared with the primary sector, which produced 74 percent of GDP and employed 84 percent of the work force. The coastal provinces had 72 percent of fixed assets, and accounted for 69 percent of the gross value of industrial output. Naturally, just like the Communist Party of the Soviet Union in 1917, CPC saw its most important economic task to be industrialization. China adopted the two key sets of guiding principles behind the Soviet development strategy: (a) the Marxist principles of common ownership with the state as trustee, and of generalized egalitarianism; and (b) the Stalinist practices of central planning for resource allocation, suppression of light industries and services in favor of heavy industries, and minimizing trade and financial linkages with the capitalist economies. Mao added a third guiding principle to China's economic policy-making, the principle of regional economic self-sufficiency, a region should be self-sufficient not only in food production but also in industrial goods as well. This third principle had unquestionably the greatest impact on regional economic outcomes. The self-reliance principle had several virtues. The first was that it overlapped with the egalitarian principle because it reduced provincial inequality, which 11

In this section, we use Dali Yang's (1997) classification of coastal, central and western provinces, which is the one commonly used in official publications. Yang defined coastal provinces to be Beijing, Tianjin, Hebei, Liaoning, Shanghai, Zhejiang, Fujian, Guangxi, Jiangsu, Guangdong, Hainan (separated out from Guangdong in 1988), and Shandong. The central and western provinces are collectively called interior provinces. The data are from Table 2.2 in Yang. Shaoguang Wang and Angang Hu (1999) used two schemes: (a) metropolitan cities, eastern provinces, central provinces and western provinces (e.g. Table 3.1), and (b) coast, central and west (e.g. Table 6.1). Wang and

11

Mao had identified to be one of the key social contradictions to be eliminated in the new China. 12 The second virtue was that the biggest beneficiaries of the self-reliance principle were the poorest provinces (because they were overwhelmingly agricultural), and this was in accordance with the gratitude that many veteran party leaders felt toward these provinces. Many of the poorest provinces were where CPC had retreated to and rebuilt their strength after the Kuomintang had driven it out of the urbanized areas. 13 The third, and most decisive, virtue of self-sufficiency was that, beginning in 1963, it coincided with the national security considerations of China. The worsening Sino-Soviet political relationship and the growing military presence of the United States in Vietnam convinced Mao that regional economic self-sufficiency was key to China being able to engage in protracted defense of the motherland. Mao and his generals envisaged three lines of defense (coastal, central and western), and they decided in 1964 on a massive construction of militaryindustrial complexes in western China, the third line of defense, popularly translated as the "third front." To minimize the vulnerability of the third front industries to air attacks, Lin Biao, then the Defense Minister and Mao's designated successor, instructed that these projects be located "in mountains, in dispersion, and in caves."14 The first two virtues of the self-sufficiency principle helped to ensure that the First FiveYear Plan (1953-1957) allocated 56 percent of state investment to the interior provinces, and that the Second Five-Year Plan (1958-62) allocated 59 percent. As the concern for national security grew in the early 1960s, the Third Five-Year Plan (1966-1970) allocated 71 percent of state

Hu's definition of coast corresponds to that of Yang, and it equals, in their first classification, metropolitan cities plus eastern provinces plus Guangxi (a western province). 12 Mao (1956). 13 According to Kevin Lane (1998): "Yan'an [in Shaanxi] became the cradle of the Chinese revolution and earned a lasting place in the hearts of party members who lived there.... The First Five-Year Plan (1953-1957) targeted the province as a key site for industrial development, and 24 of the plan's 156 major projects undertaken with Soviet assistance was located there."

12

investment in the interior provinces, with the bulk of it in Sichuan, Hubei, Gansu, Shaanxi, Henan, and Guizhou. Furthermore, many companies in Shanghai and other coastal cities were relocated to the mountains in Guizhou, Sichuan, and Hubei, where highways and railroads were deficient or non-existent, water and electricity were in shortage, and the sources of raw materials were far away. A significant proportion of the relocated factories could not produce anything for many years, with the equipment rusting into junk. Post-mortem studies of the third front industries concluded that: "only half of the factories built performed to design specifications and the rest were either only partially completed (30 percent) or not completed at all (20 percent). Fully onethird of the total investment was wasted..."15 One such example of wastage was the Second Automobile Company built in the mountains of Hubei. The part and assembly plants were scattered over the mountainous region, transportation among the plants was poor, and they were long way away from their input suppliers and the final consumers of their products. Given the large amount of wastage that occurred in the industrialization of the interior provinces, it is no wonder that even though the interior share of fixed assets went from 28 percent in 1952 to 57 percent in 1983, its share of gross value of industrial products only went up from 31 percent to 41`percent. The primary cause of the higher productivity of coastal industries was that the coastal provinces had deeper pools of management and technical expertise, better linkages between the industrial enterprises and the local economies, and more developed infrastructure. It was been estimated that 100 yuan of fixed asset investment in 1978 yielded 70 yuan of output from the third front enterprises compared to 141 yuan from the coastal

14 15

Quoted in Yang (1997, pp. 19) Yang (1997, pp. 19)

13

enterprises. The profit rate in 1978 was 9 percent for the third-front enterprises compared to 23 percent for coastal enterprises. 16 The pouring of investment funds into the interior provinces was a clear violation of the comparative advantage principle. The growth of the interior provinces not only occurred at the expense of the coastal provinces, it also lowered the overall growth rate of the economy. The discrimination against the coastal region was so severe that although Shanghai provided more 40 percent of the state revenue during the Cultural Revolution period, it was not even allowed to retain enough funds money to cover depreciation of its capital stock. The wastage that occurred with this discrimination against coastal investments was further increased because of the poor planning, poor execution and poor management of the investments in the interior provinces. As we will argue later, the appropriate development strategy for the interior provinces should not be focussed on making the production structure of interior provinces identical to the production structure of the coastal provinces. For example, given the strong extractive capacity and implementation ability of the government under Mao, it would have been more efficient to have located the investments in the coastal provinces, taxed the profits, and used the tax revenue to benefit the interior benefits. What should have been important for the government was not where the investments were located but whether the dividends from the investments were used to enhance the development of the interior provinces. It is interesting to note that by 1972, China was reducing its discrimination against investments in the coastal provinces and increasing its economic interaction with the capitalist economies. This policy shift occurred because the government realized that China's economy and technological capacity was falling further behind the rest of the world. If this negative trend were not reversed, China might not be able to defend itself. Furthermore, because the Soviet 16

Data from Yang (1997).

14

Union was fast becoming a bigger threat than the United States, an invasion by the traditional land route was therefore much more likely than a coastal landing. The national security justification for the third front industries was hence undermined. Economic modernization required the import of foreign technology, and this necessitated that China increased its export earnings. With the improvement of Sino-US relations on course after Kissinger's secret visit in July 1971, the coastal enterprises, especially those in Guangdong, were expanded in order to increase their export capacity. Total export earnings jumped from US$2.6 billion in 1972 to US$3.4 billion in 1973, and continued soaring to reach US$9.8 billion in 1978. Just as national security considerations in the 1950s and 1960s have played a large part in justifying the bias in favor of investments in the interior provinces, national security considerations in the face of changes in international politics in the 1970s helped to reverse this bias.

Regional Economic Policy, 1978-98 The process of increased economic interaction with the outside world accelerated at the end of 1978 upon the decisive political victory by the rehabilitated cadres over the remnants of the Maoist establishment at the Third Plenum of the 11th Party Congress. The emphasis on the domestic front was the decentralization of agricultural production, the decentralization of the fiscal system, and the deregulation of prices; and the emphasis on the international front was the Open Door Policy. Fiscal decentralization took the form of tax contracting between the central government and the provinces. 17 Each fiscal contract was individually negotiated, and it ranged from fixed lump-sum contracts for five years like in the cases of Guangdong and Fujian to highly

15

complicated (province-specific) revenue-sharing formulae. The provincial governments in turn negotiated individual revenue contracts with the local governments. Since the marginal tax rate set by the central government varied tremendously across provinces, the incentive of the provincial and local governments to engage in local economic development in order to generate tax revenue also varied tremendously. Given the importance of Shanghai to the central coffers, its marginal tax rate was set higher than that of most coastal provinces until the early 1990s. The fiscal decentralization might have helped economic growth18 , but this led to state revenue declining from 35 percent of GDP in 1978 to 14 percent in 1992, producing a near fiscal crisis for the state. The state lacked the funds to invest in infrastructure projects to remove production bottlenecks, and to undertake poverty alleviation programs. The practice of each provincial government covering more of its expenditure from local revenue necessarily meant reduced development expenditure in the poorest provinces that had been receiving fiscal subsidies from the center. The tax reform of 1994 that had the value-added tax as its centerpiece has reduced the discriminatory elements of the fiscal system, and restored the fiscal capacity of the state to help the poorer provinces. The deregulation of prices in the industrial sector mainly took the form of a dual track price system for industrial inputs. Since the central and western provinces were the main suppliers of raw industrial materials, the continuation of artificially low prices for these industrial inputs meant that the dual track pricing system was in effect transferring income from the interior producers to the coastal factories. The elimination of the dual-track price system in the 1990-91 period was an equitable move from the viewpoint of regional disparity.

17 18

For details, see Wong, Heady and Woo (1995). The evidence on this front is mixed, e.g. Chen (2001), see the critical review in Woo (forthcoming).

16

The Open Door Policy was initially limited to two southern provinces (Guangdong and Fujian), then gradually extended to larger geographical units: first along the coast, then in the inland provinces. The distributional consequence of this selective opening-up process was a heavy concentration of foreign investment flows and international trade activity in the coastal provinces, particularly Guangdong. The dominance of Guangdong is a natural consequence of the fact that this province is one of those having received the greatest benefit from the open door policy, notably through the establishment of the three Special Economic Zones of Shenzhen, Zhuhai and Shantou as early as the beginning of the 1980s. The implementation of regional preferential policies has gone through 3 broad stages during which open economic zones have been settled to provide investors with various preferential tax treatments, exemptions on duties, etc 19 .: 1. Early 80s: limited extent to Guangdong and Fujian provinces, with the establishment of Special Economic Zones (SEZ) in 1979-80. 2. Mid to end of the 80s: coastal preference strategy enforcement, with the designation of Coastal Open Cities (COC), entitled to settle their own Economic and Technological Development Zones (ETDZ), in 1984, followed by the establishment of Coastal Open Economic Zones (COEZ) in 1985, an Open Coastal Belt (OCB) in 1988 and the Shanghai Pudong New Area in 1990. 3. Early 90s: further extension towards whole China, after Deng Xiaoping southern tour in 1992. During this year, new open economic zones were officially started in Major Cities along the Yangtze River (MC), Border Economic Cooperation Zones (BECZ), Capital Cities of inland provinces and autonomous regions (CC), ETDZ and Bonded Areas (BA).

19

Details on the different preferential policies applied in these zones can be found in Yang (1997, chapter 3), Ma (1999, chapter 7), Wang and Hu (1999, chapter 6), Chen (2000) and Démurger (2000, annex 1).

17

Table 2 gives additional details of the establishment of these various types of economic zones over time. As pointed out by Yang (1997) and Ma (1999), the acceleration in the openingup process in 1992 led to an inflated number of so-called open economic zones set up by local official without proper authorization. Besides the official policy launched by the State Council, the 30 provinces, as well as hundreds of counties and townships indeed started to formulate their own preferential policies for foreign investment in specific “development zones”. As a consequence of this “zone fever” (Yang, 1997, p. 53), there were around 2,000 open economic zones of any kind at and above the county level by 1993 (and probably even more below the county level), offering tax exemptions and reductions of all sorts in order to attract investment. Following the implementation of the austerity program in 1993, most of these unapproved zones have been closed 20 , and regional policies have tended to equalize over time (at least up to the end of the 90s). The gradual geographical extension of the reforms brought about a highly unequal regional distribution of foreign capital flows throughout the period. In 1983, nearly 93 per cent of foreign direct investment went to the coastal provinces, including 69 per cent for Guangdong alone. This imbalance decreased slightly over time, but 88 per cent of foreign direct investment (FDI) flows still went to the coastal region in 1996; however, the share of Guangdong had dropped sharply (to 28 per cent) in favor of other coastal provinces such as Fujian, Jiangsu and Shanghai, which attracted approximately 30 per cent of total FDI. If we reason in terms of disparities, as above, these developments indicate a trend towards equalization within the coastal zone. In the inland provinces there are inverse trends, however, between an increase in the

20

For example, the central government closed 1000 of the 1,200 economic development zones (EDZs) that it had not authorized in the coastal provinces of Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fuijian, Guangdong and Guangxi; "State closes 1,000 EDZs to better efficiency," China Daily, August 13, 1993.

18

central region’s share of FDI over time (from 1.1 percent in 1983 to 9.5 percent in 1996) and a decrease in the western region’s share (from 6 percent to 2.5 percent). The cumulative FDI flows for the 1983-96 period was 88.3 percent to the coastal provinces, 8.3 percent to the central provinces, and 3.4 percent to the western provinces. Guangdong received 30 percent of it. Examination of international trade reveals the same inequalities between coastal provinces and inland provinces. At the national level, exports grew at an average annual rate of 17 per cent over the 1978-96 period 21 , but once again it was Guangdong that derived the greatest benefit from this growth. In 1978, Guangdong was the third-ranking province in terms of exports, after Shanghai and Liaoning, but in 1996 it was far ahead of the other provinces and accounted for 34 per cent of China’s exports. As in the case of FDI, the coastal provinces were much more export-oriented than the inland provinces, and although the coastal region’s share of total exports fell over the period (87 per cent in 1996 versus 93 per cent in 1978), it remains very high. 22 The share of exports in GDP is also four to five times higher in the coastal region (30 per cent in 1996) than in the two other regions (around 6 per cent each). The geographical distribution of imports has changed very little since 1978, and the figures for 1996 are very similar to those for exports: 87 per cent, 8 per cent and 5 per cent respectively for the coast, the center and the west. As was the case for exports, the structure of imports within the coastal region changed in favor of Guangdong province (whose share in total imports rose from 26 per cent in 1978 to 40 per cent in 1996) to the detriment of the municipality of Shanghai in particular.

21

Measure in constant yuan. The center's share of export went from 5.6 percent in 1978 to 9.3 percent in 1996, and the west's share increased 1.7 percent to 3.9 percent. 22

19

The high level of foreign trade activity in the coastal provinces is generally linked to that of FDI, since foreign enterprises are supposed to be inherently more export-oriented than domestic firms. Indeed, the contribution of foreign firms to China’s total foreign trade has grown since the mid-1980s. Exports by firms with foreign ownership amounted to 41 per cent of total exports in 1996, as against 1 per cent in 1985. Enterprises established in the coastal region accounted for nearly all of these (98 per cent on average in 1994). Moreover, the share of foreign firms in total imports rose from 5 per cent in 1985 to 54 per cent in 1996, since such firms on the whole imported more than they exported. As in the case of exports, the import share of foreign firms is highest in the southern coastal provinces.

Provincial Growth Experiences, 1952-1998 The distribution of per capita GDP growth rates is given in Tables 3 and 4. The periodisation follows the following policy episodes: -

1953-58: the normal centrally-planned economy

-

1959-65: the Great Leap Forward, the economic collapse and recovery

-

1966-1978: the Cultural Revolution

-

1979-1984: first reform phase, emphasis on agriculture

-

1985-1991: second reform phase, Oskar Lange-inspired reforms

-

1992-1998: third reform phase, ultimate goal is a market economy with substantial diversification of ownership structure Figure 2 shows that there is no evidence of any unconditional β-convergence across

Chinese provinces, during the planned and reform periods. This is confirmed by cross-section regressions on the whole period and by sub-periods (not reported here) which all indicate that

20

there is no significant relationship between the per capita GDP annual growth rate and its initial level, except for the last sub-period (1992-98) during which a β-divergence phenomenon emerged 23 .

Provincial Income Disparity, 1952-1998 The movements of the coefficient of variation of provincial income summarized in Figure 1 show that: 1. China experienced much greater fluctuations in income disparity in the planned period of 1952-1978 than in the reform period after 1978. During the planned period, the coefficient moved up 0.13 in 1952-60, down 0.16 in 1960-62, and then up 0.29 in 1962-78 compared with the 0.05 decline in 1978-87, and the 0.09 rise in 1987-98. 2. Periods of extremely low inequality were economically difficult periods when much of the population were brought to subsistence level. 1952 was right after a warring period that lasted over twenty-five years, and 1962 was the depth of the famine caused by the Great Leap Forward. To put it cynically, poverty is always distributed equally because those with extremely low income will not be around to be counted. 3. The overall increase of 0.26 in inequality during the planned period greatly exceeded the 0.03 increase in inequality during the reform period. Market economics may not have decreased inequality, but economic planning certainly increased it faster. Table 5 shows the ranking of provincial income in key years of China's economic history, and Table 6 summarizes the changes in the relative fortune of each province in the planned period of 1952-1978, and in the reform period after 1978. They show that:

23

The corresponding cross-section regression is g92-98 = -0.022 [0.059]+ 0.016 [0.007] * Ln(p.c.GDP91 ). The values shown between brackets are robust standard errors. The number of observations is 29 and the R-squared is 0.1.

21

1. The chief beneficiaries of the planned period were Beijing, Qinghai and Ningxia, and the biggest losers of the reform period were Qinghai and Ningxia . The rise of Beijing's relative standing, and its maintenance of the attained income rank, reflects its paramount political status in the country. The initial large gains of Qinghai and Ningxia (up 10 and 8 places respectively), and the subsequent large reversals (15 and 10 respectively) showed the tremendous transfer of resources under the third front industrialization program. 2. There has been basically no change at the very top and the very bottom of the scale. Indeed, the three municipalities remained the richest throughout the whole period and Yunnan, Shaanxi, Gansu and Guizhou remained the poorest provinces. Mobility, both upward and downward, is a middle-class phenomenon. 3. The significant winners of the reform period were generally the coastal provinces, especially Fujian, Shangdong, and Hainan. The traditional industrial bases of northern China (Heilongjiang, Jilin, Liaoning) and western provinces experienced a decline in the relative scale of regional per capita income. Table 7 looks at inequality by focusing on the two tails of the income distribution, the movements in the gap between the five richest provinces and the five poorest provinces. The absolute income gap has increased tremendously over both the planned and reform periods. When we examine the gap in relative terms first by normalizing the absolute gap with the average national income, and second by the ratio of the two incomes, the evidence is mixed. The relative gap decreased from 1.5 in 1978 to 1.4 in 1998, but the income ratios rose from 3.4 to 3.6. In any case, the widening of relative income in the reform period is small compared with the widening in the planned period, confirming the conclusions drawn from the movements of the coefficient of variation.

22

Provincial Differences in Growth: Geography and Policy We are presenting this section in telegraphic form because we are out of time. Please accept our apologies. (Wing Woo is responsible for this situation, the other co-authors completed all their contributions in good time.) Regional inequality in China has been extensively studied in recent years. 24 The reform pogrom has increased growth rates of the coastal provinces by (a) allowing them to take advantage of their locations to participate in the international division labor, i.e. pure geography effects, (b) giving them preferential tax policies which enable them to have more retained funds to invest more and hence grow faster, i.e. fiscal subsidies (c) giving them preferential access to foreign capital which increased total capital formation, and hence income. i.e. foreign funds So coastal dummy proxies for two effects: geography and preferential policy To organize the discussion, Table 8 reproduces some regression results from the literature. Jian, Sachs and Warner (1996) Unconditional convergence in 1978-93, but convergence disappears with addition of agricultural share of GDP and coastal dummy. One interpretation is that the convergence is temporary. Since coastal provinces were initially discriminated against, and in the middle-income group, the reform program allowed them to grow faster to catch up with the traditionally rich Manchurian provinces, so provincial inequality falls. But if the coast effect is constant, the growth of the coastal provinces need not slow down once they reach income level of the Manchurian provinces. If so, then inequality will increase. If the coast effect comes from the preferential policies, then their removal will slow down the coastal provinces and maintain existing inequality. If the coast effect represents geographical advantage, removal of preferential policy would slow increase in provincial inequality but would not reduce it. Problem: geographical and policy effects not disentangled. Wang and Hu (1999) 24

To cite but a few, Lyons (1991), Tsui (1993, 1996), Lee (1994), Chan et al. (1996), Chen and Fleisher (1996), Jian et al. (1996), Zhao (1996), Fleisher and Chen (1997), Gundlach (1997), Mody and Wang (1997), World Bank (1997), Li et al. (1998), Raiser (1998), Tian (1999), Wang and Hu (1999), Wu (1999) Berthélemy and Démurger (2000), Chen and Feng (2000), Dayal-Gulati and Husain (2000), Démurger (2000, 2001), Aziz and Duenwald (2001), Fujita and Hu (2001), Tian (2001), Jian et al. (1996), Wu, (1999), Wei, (2000), Fleisher and Chen (1997), Mody and Wang (1997), and Démurger (2001).

23

Preferential policies generated the high growth of the coastal provinces. Proof is that foreign capital has flowed most to the provinces that received preferential policies. Conducted horse-race between economic model and policy model. Economic model says foreign funds flow to areas with best growth potential (indicated by adequacy of infrastructure, availability of educated workforce, and size of market) Policy model says foreign funds flow to areas with most preferential tax treatment. Addition of preferential policy index removes statistical significance of variables championed by economic model. Since provincial FDI is highly correlated with provincial GDP growth, Wang and Hu regressions could be interpreted as provincial growth regressions. Coastal growth is thus more the result of preferential policies than of their more favorable economic conditions. Wang and Hu talks in detail in Chapter 4 about importance of physical terrain in determining economic growth. They also note that their "policy variable may also reflect a province's geographical location." Yet, their policy discussion ignores the geography factor as the main reason for the success of the coastal provinces. Debatable assumption is that if coastal region did not have preferential policies, then more of FDI would have flowed into interior provinces. If FDI was aimed at producing for China's market, FDI might have moved to central provinces. If FDI was aimed at export-processing activities, then FDI could have gone to Southeast Asia instead. Given existence of preferential tax policies in other developing countries, absence of it in China would have reduced exportoriented FDI, and hence growth. Problem: geographical and policy effects not disentangled. Bao, Chang, Sachs and Woo (2001) Assumes that each province is a small economic unit (a price taker), and there is adequate labor and capital mobility within China. So individual growth not constrained by own amounts of L and K. Finds that geographical determinism fits the data well. Problem: Did not show that policy does not matter, especially if policy stance is collinear with geographical location. Demurger (2000) Specification based on conventional growth model fits the data well. Significance of FDI represents presence of externalities because total investment is already in equation, albeit not significant. If FDI had come in for export-processing activities, was FDI geographically-induced or policyinduced?

24

Zhang (2000) Export (more generally, international integration) reached critical mass to become important boost to China's economy only after 1985, which explains why coastal dummy and export variable are insignificant in 1978-84 and significant in 1985-95. Same problem: geographical and policy effects not disentangled.

Our approach in this paper We replace the black box of coastal dummy with two variables: (a) transportation cost and pure geography effect represented by the proportion of provincial population in 1994 living within 100 kilometers of the coast or navigable rivers (excluding coastline above the winter extent of sea ice and the rivers that flow to this coastline) [Pop100km] (b) a preferential policy index for each province [Policy] We also try other geographical variables like: Distance from the coast [Distf = 1/(1+distance in km)] Percentage of area within a province with a slope greater than 10% [Slope10] Average slope of a province [Slavge] Average elevation [Elavge] Note that topography indicators can be considered as measuring both agricultural feasibility (important up to the end of 70s) and market accessibility (from the 80s onward). Two sets of regressions are run: one including all provinces, but Tibet; the other excluding municipalities (considered as potential “outliers” due to their particular size, economic structure, administrative role, etc.). Constructing the “preferential policy” index The is based on the number of designated open economic zones in a province, and the extent of the preferential treatment The construction of this index relies on available information on designated “open economic zones” across China, gathered from different sources, as well as a subjective classification according to their importance in terms of special treatments given to investors and industrial enterprises. The information in Table 2 is converted into Table 9. Given the various degrees of preferential policies open economic zones offer, we gave to their host provinces the following weights: Weight = 3: SEZ and Shanghai Pudong New Area. Weight = 2: ETDZ and BECZ. Weight = 1: COC, COEZ, OCB, MC, BA, and CC. Weight = 0: No open zone. Results of this scaling are given Table 10.

25

First set of regressions: cross-section on 1979-98 average per capita GDP growth rate See Table 11. Topographical variables not significant and hence omitted final specification. Pop100km and Policy always statistically significant. Amount of SOEs negatively related to growth, albeit not statistically significant. Municipalities don't fit into equation well, which explains why Eq 4 is better than previous three. Use of Coast (instead of Pop100km and Policy) worsens the results, suggesting that its inclusion results in misspecification. Eq 7 is preferred equation. Being a coastal province yields a higher growth rate of 1.4 percentage points.

Second set of regressions: pooled data for 3 period averages (1979-84, 1985-91, 1992-98) See Table 12. Topographical variables not significant and hence omitted final specification. Pop100km and Policy always statistically significant. Eq 6 is preferred equation. Being a coastal province yields a higher growth rate of 1.6 to 1.9 percentage points.

Conclusion By verifying the presence of a large positive geographical effect that is separate from the positive effect of the preferential policy extended to the coastal provinces, we would venture the opinion that the faster growth of the coastal provinces in the post-1978 period did not occur too much at the expense of the interior provinces. This situation is opposite to that in the 1950s, where the evidence suggests that the growth of the interior provinces was almost entirely at the cost of the coastal provinces, engineered by the fiscal transfers of the state. Table 3 shows that the growth of the coastal region was the lowest of the six regions in the 1953-58 period. Because the growth of the interior provinces in the reform period has not only been higher than in the planned period but also in any of the sub-periods of the planned period, it is hard to argue that the interior provinces have been subject to the same fiscal squeeze that the coastal provinces experienced in the 1950s.

26

It is true that in the reform period, the coastal region went from being discriminated against by the central government to being pampered by it. This situation is almost redressed now, the right of the interior provinces to open economic development zones has been greatly expanded in the last two years. The central government acted correctly when it reduced its preferential treatment of the SEZs not by removing the various tax and foreign exchange exemptions that they could grant to FDI but to allow the inland economic zones to extend these same exemptions to FDI. The claim that the preferential policies extended to SEZs in the 1980s and 1990s might have deprived the interior provinces of their natural share of FDI is likely to be untrue. Given the presence of the tax holidays and land concessions in many Southeast Asian countries, the absence of SEZs in Guangdong would not have meant that the FDI would have flowed into inland China instead. The presence of only conditional convergence and not unconditional convergence in China stands in marked contrast with the Barro and Sala-Martin's finding of unconditional convergence in the United States. This difference may be partly the creation of China's household registration system and its inefficient state banking system, which have impeded the flow of labor and capital. The restraining of factor movements to equate rates of return nationally must have made regional disparities bigger than they should be. The reform of these two components of China's economy is needed not only to attenuate regional inequality but also to improve economic efficiency. Even if it is true that geography has given higher levels of steady-state income to the coastal provinces, it does not follow that it is futile to attempt to reduce regional inequality. The right conclusion is that the development strategy for the interior provinces will have to be more creative than simply creating a clone of Shenzhen in, say, the northwestern provinces. For

27

instance, one must be realistic about the possibility of changing the comparative advantage of a region through large-scale infrastructure projects like roads and railways. Better communications in the northwestern provinces may end up facilitating the relocation of their residents to the coast rather than the migration of coastal firms to the northwest. Since the bulk of the population of the northwest (the center and the southwest as well) are still engaged in agricultural production, infrastructure investments in the form of regional centers of biological science research can prove to be more useful. These science centers should be given the incentives to: 1. develop and propagate new varieties of local crops that have higher yield, are more disease-resistant, and require less water to grow; 2. improve the local livestock through cross-breeding, and better veterinarian services; and 3. develop new processed food products from the local agricultural base. A successful infrastructure investment project is one that lowers the cost of production, and raises the demand for the product, and in this example, it means investing in new knowledge than in physical facilities. The relevant general point is that there should be greater attention to increasing human capital formation than to increasing physical capital formation. The first is a harder task to do well because it requires more creativity, but its achievement is what that makes for a dynamic market economy in the long run.

28

References (incomplete) Aziz, Jahangir, and Duenwald, Christoph, “China’s Provincial Growth Dynamics”, IMF Working Paper WP/01/3, Jan. 2001. Berthélemy, Jean-Claude and Démurger Sylvie, “Foreign Direct Investment and Economic Growth: Theoretical Issues and Empirical Application to China.” Rev. Dev. Econ. 4, 2:140155, June 2000. Chan, Roger C.K., Hsueh, Tien-Tung, and Luk, C. (Eds.), China’s Regional Economic Development. Hong Kong Institute of Asia-Pacific Studies, Chinese University of Hong Kong, 1996. Chen, Baizhu, and Feng, Yi, “Determinants of economic growth in China: Private enterprise, education and openness.” China Econ. Rev. 11, 1:1-15, 2000. Chen, Jian, and Fleisher, Belton M., “Regional Income Inequality and Economic Growth in China.” J. Comp. Econ. 22, 2:141-164, April 1996. Chen Yisheng, “On the Development of Economic and Technological Zones in China”, Beijing: Chinese Academy of Sciences, 2000. Available online: http://www.ced.bg/eng/projects/project11/calendar/iasp2000/index.html. Chen, Yu, 2001, “Decentralization, Local Provision of Public Goods and Economic Growth: The Case of China,” in Ross Garnaut and Ligang Song (eds.), Sustainability of China's Economic Growth in the 21st Century, Asia Pacific Press: Canberra, Australia, 2001. Cheung, Peter T.Y., Jae Ho Chung, and Zhimin Lin, editors, Provincial Strategies of Economic Reform in Post-Mao China: Leadership, Politics, and Implementation, M.E. Sharpe. Cheung, Peter. T.Y., 1998, "The Guangdong Advantage: Provincial Leadership and Strategy Toward Resource Allocation since 1979," in Peter T.Y. Cheung, Jae Ho Chung, and Zhimin Lin, editors, Provincial Strategies of Economic Reform in Post-Mao China: Leadership, Politics, and Implementation, M.E. Sharpe. Dayal-Gulati, Anuradha, and Husain, Aasim M., “Centripetal Forces in China’s Economic Takeoff”, IMF Working Paper WP/00/86, June 2000. Démurger, Sylvie, Economic Opening and Growth in China. Paris: OECD Development Centre Studies, March 2000.

29

Démurger, Sylvie, “Infrastructure Development and Economic Growth: An Explanation for Regional Disparities in China?” J. Comp. Econ. 29, 1:1-23, March 2001. Fleisher, Belton M., and Chen, Jian, “The Coast-Noncoast Income Gap, Productivity and Regional Economic Policy in China.” J. Comp. Econ. 25, 2:220-236, Oct. 1997. Forster, Keith, 1998, "The Political Economy of Post-Mao Zhejiang: Rapid Growth and Hesitatnt Reform," in Peter T.Y. Cheung, Jae Ho Chung, and Zhimin Lin, editors, Provincial Strategies of Economic Reform in Post-Mao China: Leadership, Politics, and Implementation, M.E. Sharpe. Fujita, Masahisa, and Hu, Dapeng, “Regional disparity in China 1985-94: The effects of globalization and economic liberalization”, Ann Reg. Science 35, 1: 3-37, 2001. Gundlach, Erich, “Regional Convergence of Output per Worker in China: A Neoclassical Interpretation.” Asian Econ. J. 11, 4: 423 – 442, Dec. 1997. Jian, Tianlun, Sachs, Jeffrey D., and Warner, Andrew M., “Trends in Regional Inequality in China.” China Econ. Rev. 7, 1:1-21, Spring 1996. Lane, Kevin, 1998, "One Step Behind: Shaanxi in Reform, 1975-1995," in Peter T.Y. Cheung, Jae Ho Chung, and Zhimin Lin, editors, Provincial Strategies of Economic Reform in PostMao China: Leadership, Politics, and Implementation, M.E. Sharpe. Lee Jongchul, “Regional Differences in the Impact of the Open Door Policy on Income Growth in China.” J. Econ. Dev. 19, 1:215-234, June 1994. Li, Hong, Liu, Zinan, and Rebelo, Ivonia, “Testing the Neoclassical Theory of Economic Growth: Evidence from Chinese Provinces.” Econ. Planning. 31, 117-132, 1998. Lyons, Thomas P., “Interprovincial Disparities in China: Output and Consumption, 1952-1987.” Econ. Dev. and Cult. Change, 39, 3:471-506, April 1991. Ma, Jun, The Chinese Economy in the 1990s. Basingstoke: Palgrave Publishers Ltd, 1999. Mao Zedong (1956) "On Ten Major Relationships" in Selected Works of Mao Tsetung, Volume 5, Beijing People's Press. Mellinger, Andrew D., Sachs, Jeffrey D. and Warner, Andrew M., forthcoming, "Population Distribution in a World of Open Borders." CID Working Paper.

30

MOFTEC, http://www.moftec.gov.cn/moftec_en/. Mody, Ashoka, and Wang, Fang- Yi, “Explaining Industrial Growth in Coastal China: Economic Reforms... and What Else?” The World Bank Econ. Rev. 11, 2:293-325, May 1997. Raiser, Martin, “Subsidising Inequality: Economic Reforms, Fiscal Transfers and Convergence across Chinese Provinces.” J. Dev. Studies 34, 3:1-26, Feb. 1998. Tian, Xiaowen, “China’s Regional Economic Disparities Since 1978: Main Trends and Determinants.” East Asian Institute Occasional Paper 21, Singapore: National University of Singapore, 1999. Tian, Xiaowen, “Privatization and economic performance: evidence from Chinese provinces.” Econ. Systems 25, 1:1-13, 2001. Tsui, Kai- yuen, “Decomposition of China’s Regional Inequalities.” J. Comp. Econ. 17, 3:600627, Sept. 1993. Tsui, Kai- yuen, “Economic Reform and Interprovincial Inequalities in China.” J. Dev. Econ. 50, 2: 353-368, Aug. 1996. Wang, Shaoguang, and Hu, Angang, The Political Economy of Uneven Development, The Case of China. Armonk, New York: M. E. Sharpe, 1999. Wei, Yehua Dennis, Regional Development in China – States, Globalization, and Inequality. London: Routledge, 2000. Wong, Christine P.W., Christopher Heady, and Wing Thye Woo, 1995, Fiscal Management and Economic Reform in the People’s Republic of China, Oxford University Press. Woo, Wing Thye, forthcoming, "Recent Claims of China's Economic Exceptionalism: Reflections Inspired by WTO Accession," China Economic Review. World Bank, Sharing rising incomes: Regional disparities in China, Washington D.C.: The World Bank, 1997. Wu, Yanrui, “Income Disparity and Convergence in China’s Regional Economies.” University of Western Australia Discussion Paper 9915, available on the following site: http://www.econs.ecel.uwa.edu.au/economics/dpapers/DP1999/DP1999.HTM

31

Yang, Dali L., Beyond Beijing – Liberalization and the regions in China. London: Routledge, 1997. Zhang, Wei, forthcoming, "Rethinking Regional Disparity in China," Economics of Planning. Zhao, Xiaobin, “Spatial Disparities and Economic Development in China, 1953-92: A Comparative Study”, Development and Change, 27, 1, January 1996.

32

Figure 1 - σ -convergence across Chinese provinces 0.7 0.65 0.6 Coefficient of variation

0.55 0.5 0.45 0.4 0.35

0.3 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996

Notes: Hainan and Tibet excluded due to missing data. Sichuan province includes Chongqing. GDP per capita is calculated at constant 1995 prices. Sources: NBS (1999), except for Sichuan, for which sources are SSB (1997), and SSB (1997-99).

33

Per capita annual GDP growth rate, 1953-78

Figure 2 - Unconditional β -convergence, 1953-78 and 1979-98

4%

3%

2%

1%

0%

-1% 5.5

6

6.5

7

7.5

8

Per capita annual GDP growth rate, 1979-98

Per capita GDP level in 1952 (1995 constant prices)

14% 12% 10% 8% 6% 4% 2% 0% 6

6.5

7

7.5

8

8.5

9

Per capita GDP level in 1978 (1995 constant prices)

Sources: NBS (1999), except for Sichuan, for which sources are SSB (1997), and SSB (1997-99).

34

35

TABLE 1 - G EOGRAPHICAL CHARACTERISTICS BY REGIONS

Region

GDP per GDP per capita capita level in Population growth rate 1978 density (%)

Distance from the Average Average Arable coast Pop100km Pop100cr Slope>10 slope elevation Temperature Rainfall land (% of (% of (% of (Yuan/person) (Person/km2 ) (Km) (%) (Meters) (Degrees) (Mm) (%) population) population) area)

Municipalities

8.5

3,645

1,104

77

65

71

1.4

1.2

135

10.9

63

36

North-east

7.9

1,700

138

380

17

18

2.2

1.6

314

4.5

50

21

Coast

10.7

1,154

333

86

60

82

2.6

2.4

267

16.4

103

29

Center

8.4

941

264

492

0

57

2.7

2.4

428

14.9

90

24

North-west

7.7

1,045

46

1,383

0

0

5

2.8

1,971

6.8

26

8

South-west

7.8

814

126

656

4

4

14.1

5.2

1,428

16

98

10

9

1,355

290

547

24

41

4.3

2.7

804

12.2

74

21

Total

Notes: GDP per capita compound annual growth rate throughout 1979-98 and GDP per capita level in 1978 are calculated at 1995 constant prices. Pop100cr = proportion of the population distribution of a province in 1994 within 100 km of the coastline or ocean-navigable river, excluding coastline above the winter extent of sea ice and the rivers that flow to this coastline. Pop100km = proportion of the population distribution of a province in 1994 within 100 km of the coastline, excluding coastline above the winter extent of sea ice. Slope>10 measures the percentage of area within a province with a slope greater than 10 %. Temperature and rainfall are averages throughout the 1951-88 period. Arable land is available for 1994. Municipalities = Beijing, Tianjin, and Shanghai. North-east = Liaoning, Jilin, and Heilongjiang. Coast = Hebei, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, and Hainan. Center = Shanxi, Anhui, Jiangxi, Henan, Hubei, and Hunan. North-west = Inner Mongolia, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang (Tibet excluded due to missing data). South-west = Sichuan, Guizhou, Yunnan, and Guangxi. Sources: NBS (1999) for economic and population variables; GIS calculations made by Bao Shuming for geographical data, except arable land; Wang and Hu (1999, table 4.1, p. 83) for arable land.

36

Table 2 - Timeline of China’s Regional Preferential Policies Year of approval 1979 1980 1984

1985

Number and type of opened zone

Location

3 Special Economic Zones 1 Special Economic Zone 14 Open Coastal Cities

Guangdong. Fujian. Liaoning, Hebei, Tianjin, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong and Guangxi.

10 Economic and Technological Development Zones

Liaoning, Hebei, Tianjin, Shandong, Jiangsu, Zhejiang and Guangdong. Fujian.

1 Economic and Technological Development Zone 3 Coastal Open Economic Zones

1986 1988

1990 1992

2 Economic and Technological Development Zones Open Coastal Belt

Pearl river delta, Yangtze river delta and Fujian. Shanghai. Liaoning, Shandong, Guangxi and Hebei.

1 Special Economic Zone

Hainan.

1 Economic and Technological Development Zone Pudong New Area 13 bonded areas in major coastal port cities

Shanghai. Shanghai Tianjin, Guangdong, Liaoning, Shandong Jiangsu, Zhejiang, Fujian and Hainan.

10 major cities along the Yangtze river

Jiangsu, Anhui, Jiangxi, Hunan, Hubei and Sichuan.

13 Border Economic Cooperation Zones

Jilin, Heilongjiang, Inner Mongolia, Xinjiang, Yunnan and Guangxi.

All capital cities of inland provinces and autonomous regions 5 Economic and Technological Development Zones 1993

12 Economic and Technological Development Zones

1994

2 Economic and Technological Development Zones

37

Fujian, Liaoning, Jiangsu, Shandong and Zhejiang. Anhui, Guangdong, Heilongjiang, Hubei, Liaoning, Sichuan, Fujian, Jilin and Zhejiang. Beijing and Xinjiang.

Table 5 - Chinese provinces GDP per capita level ranking Province

Rank in GDP per capita level (constant price 1995) 1952

Shanghai Beijing Tianjin Zhejiang Guangdong Jiangsu Fujian Liaoning Shandong Heilongjiang Hebei Hainan Xinjiang Jilin Hubei Inner Mongolia Shanxi Hunan Anhui Henan Qinghai Ningxia Guangxi Jiangxi Sichuan Yunnan Shaanxi Gansu Guizhou

1958 1965 1978

1 9 4 7 8 12 11 5 22 2 6

1 5 3 11 9 22 13 4 24 2 16

1 4 2 9 8 16 12 7 24 3 19

10 3 18 15 17 13 19 23 16 20 25 14 21 26 27 28 24

6 10 12 7 8 15 18 26 14 19 23 17 20 27 25 28 21

5 10 15 13 11 18 17 27 6 14 23 20 21 22 26 28 25

1 2 3 7 9 8 16 5 17 4 11 21 14 10 18 19 13 15 23 26 6 12 20 25 22 24 27 28 29

1952-78 shift 0 7 1 0 -1 4 -5 0 5 -2 -5 -4 -7 0 -4 4 -2 -3 -2 10 8 5 -10 0 3 1 1 -4

1984 1991 1998 1 2 3 6 8 7 10 4 11 5 16 19 13 12 15 18 14 20 21 24 9 17 23 27 22 25 26 29 28

1 2 3 6 5 8 10 4 11 7 15 13 9 12 18 16 19 20 27 24 14 17 25 26 21 22 23 28 29

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

1978-98 shift 0 0 0 3 4 2 9 -3 8 -6 0 9 1 -4 3 3 -4 -3 4 6 -15 -10 -3 1 -3 -2 0 0 0

Note: The 1952-78 shifts are calculated without taking Hainan into consideration. Tibet is not included due to missing data for GDP components. Sources: NBS (1999), except for Sichuan, for which sources are SSB (1997), and SSB (1997-99).

38

Table 6 - Winners and losers in terms of GDP per capita ranking

1952-78

1978-98

Winners

Qinghai (+ 10) Ningxia (+ 8) Beijing (+ 7) Shandong (+ 5) Guangxi (+ 5) Jiangsu (+ 4) Shanxi (+ 4) Yunnan (+ 3)

Fujian (+ 9) Hainan (+ 9) Shandong (+ 8) Henan (+ 6) Guangdong (+ 4) Anhui (+ 4) Zhejiang (+ 3) Hubei (+ 3) Inner Mongolia (+ 3)

In-between

Tianjin (+ 1) Shaanxi (+ 1) Gansu (+ 1) Shanghai (0) Zhejiang (0) Liaoning (0) Hubei (0) Sichuan (0) Guangdong (-1) Heilongjiang (-2) Hunan (-2) Henan (-2)

Jiangsu (+ 2) Xinjiang (+ 1) Jiangxi (+ 1) Beijing (0) Tianjin (0) Shaanxi (0) Gansu (0) Shanghai (0) Guizhou (0) Hebei (0) Yunnan (-2)

Losers

Anhui (-3) Xinjiang (-4) Inner Mongolia (-4) Guizhou (-4) Fujian (-5) Hebei (-5) Jilin (-7) Jiangxi (-10)

Guangxi (-3) Liaoning (-3) Sichuan (-3) Hunan (-3) Shanxi (-4) Jilin (-4) Heilongjiang (-6) Ningxia (-10) Qinghai (-15)

Source: computed from Table 4.1.

39

Table 7 - Gaps between the top-5 and bottom-5 provinces in per capita GDP

GDP per capita level

1952

1958

1965

1978

1985

1992

1998

Top 5

1,028

1,650

1,445

2,500

3,797

5,607

12,759

Bottom 5

403

583

543

746

1,157

1,770

3,557

National mean

616

838

780

1,143

1,849

2,929

6,400

Absolute gap

625

1,067

901

1,754

2,641

3,837

9,202

Relative gap

1.01

1.27

1.16

1.54

1.43

1.31

1.44

Top5/Bottom5

2.55

2.83

2.66

3.35

3.28

3.17

3.59

Note: GDP per capita is measured at 1995 constant prices, using the “compound” method. The average GDP per capita level is computed as the weighted sum of per capita provincial GDP levels, the weights being the provincial share in total population of the group (top-5, bottom-5 or all provinces). Top-5 are the 5 richest provinces in a particular year and bottom-5 are the 5 poorest provinces in a particular year. The relative gap is the difference between top-5 and bottom-5 divided by the national mean. Sources: NBS (1999), except for Sichuan, for which sources are SSB (1997), and SSB (1997-99).

40

Table 3 - Growth episodes by region 1953-98

1953-78

1979-98 1953-58

1959-65

1966-78

1979-84

1985-91

1992-98

Medium growth

No growth

Low growth

Medium-high growth

Medium growth

High growth

Municipalities

5.6

3.3

5.4

-4.6

6.5

7.9

6.8

5.5

11.4

North-east

4.2

1.7

5.5

-6.8

3.6

7.3

6.4

6.2

8.7

Coast

5.5

1.8

2.8

-1.0

2.9

10.3

8.8

7.7

13.1

Center

4.2

1.5

5.2

-3.0

2.0

7.8

7.7

4.9

11.2

North-west

4.3

1.6

7.1

-2.8

2.5

7.7

7.1

6.9

7.9

South-west

4.2

1.0

5.8

-0.9

1.7

7.4

6.7

5.4

9.1

National mean

4.8

1.7

4.9

-2.6

2.7

8.6

7.6

6.3

11.2

Gap (in % point)

1.5

2.3

4.3

5.9

4.8

3.0

2.4

2.8

5.1

Note: Annual growth rates are calculated by regressing the logarithm of per capita GDP on a time trend. GDP per capita is measured at 1995 constant prices. Tibet is not included due to missing data for GDP components. Sources: NBS (1999), except for Sichuan, for which sources are SSB (1997), and SSB (1997-99).

41

Table 4 - Annual per capita GDP growth rates 1953-98

1953-78

1979-98 1953-58

1959-65

1966-78

1979-84

1985-91

1992-98

Municipalities Shanghai Beijing Tianjin

5.7 5.8 5.5

3.4 3.0 3.8

5.1 7.3 7.5

-4.3 -5.9 -5.0

6.4 8.1 5.8

8.2 8.0 7.5

6.6 7.8 6.3

5.5 6.5 4.4

12.7 9.3 11.9

North-east Jilin Liaoning Heilongjiang

4.0 4.9 3.5

0.8 2.6 1.0

0.8 7.4 5.3

-3.0 -7.6 -7.9

1.8 5.5 2.4

8.3 7.8 6.3

8.5 6.2 5.7

6.5 6.6 5.5

10.0 8.9 7.9

5.4 5.1 5.5 5.9

1.5 0.9 1.5 2.3

4.5 5.2 3.3 0.5

0.8 -2.2 -0.1 1.6

1.7 1.6 2.3 3.6

5.9 4.5

2.5 1.2

3.3 1.4

-2.0 -5.5

4.0 2.9

11.5 10.8 10.5 10.3 10.0 10.0 8.4

8.9 9.8 9.7 8.6 9.0 10.0 6.1

11.0 7.9 6.6 7.6 7.7 6.5 6.0

12.2 14.6 13.8 13.5 9.0 13.0 12.1

Center Henan Hubei Anhui Jiangxi Hunan Shanxi

4.9 4.4 4.0 3.5 4.0 3.9

1.8 1.4 1.6 0.8 1.5 1.4

3.1 8.1 4.3 3.8 5.7 6.2

-4.9 -2.1 -1.0 -3.0 -3.8 -4.0

2.8 2.0 1.6 0.4 2.3 2.1

8.4 8.1 8.0 8.0 7.0 6.9

9.2 7.7 8.6 6.6 5.8 7.8

5.7 5.0 3.4 6.0 5.0 3.8

11.5 11.6 13.3 11.3 9.8 9.1

North / West Xinjiang Inner Mongolia Shaanxi Gansu Ningxia Qinghai

4.1 3.9 4.6 4.5 4.3 3.6

0.2 0.7 1.9 2.2 2.8 2.6

7.4 7.7 6.8 5.6 5.2 7.1

-1.8 -5.3 -3.9 -2.4 0.5 3.0

-0.6 1.9 3.0 5.3 3.1 2.2

8.7 7.8 7.8 7.4 6.5 5.3

8.5 8.5 7.4 3.8 6.2 5.9

8.0 6.0 7.4 7.4 5.6 3.5

7.5 8.7 7.7 8.4 6.8 6.4

South-west Yunnan Sichuan Guangxi Guizhou

4.4 4.3 4.5 3.1

1.7 0.6 2.6 -0.4

5.9 5.3 7.1 6.5

0.7 -0.4 -1.4 -3.5

2.0 1.0 4.2 0.1

8.0 7.5 7.2 6.5

7.7 6.3 6.2 8.6

7.3 5.4 4.5 4.6

8.8 9.2 10.3 6.5

Coast Guangdong Fujian Zhejiang Jiangsu Hainan Shandong Hebei

Note: GDP per capita is measured at 1995 constant prices. Annual growth rates are calculated by regressing the logarithm of per capita GDP on a time trend. Tibet is not included due to missing data for GDP components. Sources: NBS (1999), except for Sichuan, for which sources are SSB (1997), and SSB (1997-99).

43

Table 8: Selected Growth-Related Regressions from Literature (constant term omitted) Jian, Sachs and Warner (1996): Explaining Regional Growth, cross section (dependent variable is average annual provincial GDP growth rate, 1978-93) initial GDP

Eq 1

-0.017 [3.32]

Eq 2

-0.009 [1.11]

initial share of agriculture

coast dummy

0.08 [1.88]

0.021 [3.93]

Wang and Hu (1999): Explaining Foreign Investment Flows into Provinces, cross section (dependent variable is accumulated foreign capital over 1983-95)

Economic Model Eq 3 Political Economy Model Eq 4

GDP 1991

Growth in 1978-91

Infrastructure in 1990

Illiteracy in 1990

0.383 [2.26]

0.348 [2.26]

0.292 [1.71]

0.037 [0.23]

0.239 [2.09]

0.023 [0.20]

-0.208 [1.48]

0.025 [0.24]

Preferential Policy

0.858 [5.83]

Bao, Chang, Sachs and Woo (2001): Explaining Provincial Growth, cross section (dependent variable is average annual provincial GDP growth rate, 1978-97) GDP 1978

Inverse Distance

Coastline Length

Eq 5

-0.178 [2.88]

375.02 [1.76]

245.57 [3.91]

Eq 6

-0.178 [2.88]

361.5 [1.69]

209.87 [2.82]

-0.023 [.90]

Eq 7

-0.063 [1.53]

113.19 [1.88]

-0.020 [1.06]

0.098 [4.89]

44

Pop100km

Elevation

45

Demurger (2000): Explaining Provincial Growth, pooled estimation (dependent variable is annual provincial GDP growth rate, 1985-96) Labor Growth

Investment Rate

Foreign Investment

Export Growth

Human Capital

Eq 8

0.343 [1.85]

-0.0004 [0.02]

0.067 [3.34]

0.005 [0.17]

0.443 [2.67]

Eq 9

0.274 [2.23]

0.006 [0.46]

0.022 [2.65]

0.004 [0.35]

0.221 [2.08]

Foreign K Austerity & Human K Dummy interaction (1989-90) 0.080 -0.041 [2.93] [4.83] 0.026 [2.04]

Zhang (forthcoming): Explaining Provincial Growth, cross section (dependent variable is average annual provincial GDP growth rate of sub-periods, 1978-84 and 1985-95) initial GDP

non-state sector size

export/GDP

1978-84 Eq 10

-0.03 [5.36]

0.025 [1.16]

1985-95 Eq 11

-0.027 [7.42]

0.009 [2.15]

1985-95 Eq 12

-0.028 [7.70]

0.092 [1.25]

foreign invest /total invest

coastal dummy

western dummy

0.612 [0.65]

0.012 [1.48]

-0.013 [1.81]

0.809 [4.47]

0.031 [6.96]

-0.009 [1.44]

0.025 [4.07]

-0.008 [1.34]

0.094 [4.09]

46

-0.004 [0.50]

Initial GDP

Spread Effect

-0.090 [3.13] -0.043 [2.91]

0.751 [6.98]

Table 9 - Preferential policies (number of newly open zones) 1979 1980 1984 SEZ SEZ COC ETDZ Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hubei Hunan Guangdong Guangxi Hainan Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

1985 COEZ ETDZ

1986 ETDZ

1988 OCB ETDZ

1 1

1990 Pudong

1992 BA MC BECZ CC ETDZ 1 1

1

1

1

2

1

2 2

1

2

1 1

4 1

2

1

2

2

3

1 1

1

1

1 1

1

1 1

1 1 1

1

1 1

1 1 2

2 1 1 3

3

47

3 1 1

1

5

1

1 1 1

1 1 1

1

1 1

1 1 2

1

1994 ETDZ 1

1 2

1

1993 ETDZ

1 1 1 1 1 1 1 1 1

1

1

Table 10 - Preferential policy index 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Average Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hubei Hunan Guangdong Guangxi Hainan Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0

0 2 1 0 0 1 0 0 1 2 2 0 3 0 2 0 0 0 3 1 0 0 0 0 0 0 0 0 0 0

0 2 1 0 0 1 0 0 1 2 2 0 3 0 2 0 0 0 3 1 0 0 0 0 0 0 0 0 0 0

0 2 1 0 0 1 0 0 2 2 2 0 3 0 2 0 0 0 3 1 0 0 0 0 0 0 0 0 0 0

0 2 1 0 0 1 0 0 2 2 2 0 3 0 2 0 0 0 3 1 0 0 0 0 0 0 0 0 0 0

48

0 2 2 0 0 2 0 0 2 2 2 0 3 0 2 0 0 0 3 2 3 0 0 0 0 0 0 0 0 0

0 2 2 0 0 2 0 0 2 2 2 0 3 0 2 0 0 0 3 2 3 0 0 0 0 0 0 0 0 0

0 2 2 0 0 2 0 0 3 2 2 0 3 0 2 0 0 0 3 2 3 0 0 0 0 0 0 0 0 0

0 2 2 0 0 2 0 0 3 2 2 0 3 0 2 0 0 0 3 2 3 0 0 0 0 0 0 0 0 0

2 2 2 1 2 2 2 2 3 2 2 1 3 1 2 1 1 1 3 2 3 1 1 2 1 1 1 1 1 2

2 2 2 1 2 2 2 2 3 2 2 2 3 1 2 1 2 1 3 2 3 2 1 2 1 1 1 1 1 2

2 2 2 1 2 2 2 2 3 2 2 2 3 1 2 1 2 1 3 2 3 2 1 2 1 1 1 1 1 2

2 2 2 1 2 2 2 2 3 2 2 2 3 1 2 1 2 1 3 2 3 2 1 2 1 1 1 1 1 2

2 2 2 1 2 2 2 2 3 2 2 2 3 1 2 1 2 1 3 2 3 2 1 2 1 1 1 1 1 2

2 2 2 1 2 2 2 2 3 2 2 2 3 1 2 1 2 1 3 2 3 2 1 2 1 1 1 1 1 2

2 2 2 1 2 2 2 2 3 2 2 2 3 1 2 1 2 1 3 2 3 2 1 2 1 1 1 1 1 2

0.67 1.43 1.24 0.33 0.67 1.24 0.67 0.67 1.76 1.43 1.43 0.62 2.71 0.33 1.43 0.33 0.62 0.33 2.86 1.24 1.57 0.62 0.33 0.67 0.33 0.33 0.33 0.33 0.33 0.67

Table 11: Cross-Section Growth Regressions Dependent Variable: Average Growth Rate of Per Capita GDP of Province in 1978-98 period Variables:

constant

GDP78

Coast

Pop100km

Sample: 3 Municipalities plus 26 Provinces (excluded Tibet and Hainan) Eq 1 0.0657 0.0076 [25.13] [1.62]

Policy

Agr78

SqArg78

Soe78

-0.0743 [-0.84]

0.0907 [0.97]

-0.0313 [1.14]

0.0136 [7.52]

Eq 2

0.1445 [1.41]

-0.0043 [0.45]

Eq 3

0.1610 [1.86]

-0.0110 [1.31]

0.0093 [1.71]

0.0140 [6.24]

0.0267 [0.31]

-0.0422 [0.45]

-0.0270 [0.94]

Eq 4

0.1345 [1.43]

-0.0131 [1.52]

0.0107 [2.24]

0.0127 [[5.32]

0.2396 [2.35]

-0.2793 [2.64]

-0.0310 [1.02]

Sample: 26 Provinces (excluded 3 Municipalities, Tibet and Hainan) Eq 5 0.0646 0.0122 [24.25] [3.02]

0.0141 [8.14]

0.0770 [0.57]

-0.0819 [0.57]

-0.0420 [1.36]

0.1869 [2.06]

-0.2353 [2.42]

-0.0312 [1.07]

Eq 6

0.1523 [1.34]

-0.0087 [0.80]

Eq 7

0.1785 [2.12]

-0.0176 [2.34]

GDP78 = Coast = Pop100km = Policy = Agr78 = SqAgr78 = Soe78 = Municipal = Chongqing is

0.0257 [5.48]

0.0242 [4.99]

0.0143 [3.20]

Municipal

0.0130 [5.77]

Level of GDP per capita in 1978 Dummy Variable equals 1 for Coastal Province Proportion of population with 100 kilometers of coast or navigable river Preferential Index Value Agriculture share of GDP in 1978 Agr78 squared Share of workforce employed by state-owned enterprises 49 in 1978 Dummy Variable equals 1 if Beijing, Shannghai, Tianjin included in Sichuan.

0.0321 [2.45]

Table 12: Pooled Growth Regressions 1979-1998 growth rates divided into 3 sub-period averages (a) 1979-84 (b) 1985-91 (c) 1992-98 Dependent variable is average growth rate of GDP per capita in the sub-period Figures in brackets are absolute t-statistics Variables

constant

initial GDP

Agr

Soe Total Invest

Eq 1

-0.0548 [1.37]

0.0181 [3.32]

Eq 2

0.0662 [0.84]

0.0059 [0.63]

0.0283 [0.86]

-0.0667 [1.45]

-0.0086 [0.19]

0.5445 [3.62]

Eq 3

0.0318 [0.39]

0.0062 [0.69]

0.0083 [0.22]

-0.0046 [0.07]

-0.0308 [0.64]

0.5070 [3.51]

Eq 4

0.1429 [1.68]

-0.0111 [1.09]

-0.0235 [0.67]

0.0203 [0.35]

0.0041 [0.10]

Eq 5

0.1380 [1.51]

-0.0202 [1.81]

0.0271 [0.70]

0.0087 [0.14]

0.0358 [0.86]

Eq 6

0.1511 [2.38]

-0.0196 [2.30]

0.0309 [0.75]

Fdi

Coast

Pop100km

Policy

Transport

Education

0.4482 [3.36]

0.0158 [2.08]

0.0093 [2.72]

0.5019 [3.58]

0.0187 [1.80]

0.0095 [2.90]

0.0072 [0.18]

0.1376 [3.06]

0.5161 [3.76]

0.0187 [1.84]

0.0099 [3.15]

0.0019 [0.05]

0.1127 [2.58]

0.1356 [1.53]

Sample excludes Beijing, Tianjin, Shanghai, Hainan and Tibet. Chongqing is also within Sichuan. initial GDP = Initial level of GDP per capita Agr = Agriculture share of GDP initially Soe = Share of workforce employed by state-owned enterprises initially Total Invest = Total Investment / GDP Fdi = Foreign Direct Investment / GDP Coast = Dummy Variable equals 1 for Coastal Province Pop100km = Proportion of population with 100 kilometers of coast or navigable river Policy = Preferential Index Value Transport = Density of transportation, (rail+road+inland navigable rivers)/area Education = Proportion of population with at least a secondary school50 education