Appendix I: Data Sources and Description
Appendix II: Labor and Capital Mobility
Barro, Robert J. (1989), “A Cross Country Study of Growth, Saving and Government,” NBER Working Paper No. 2855, (Cambridge, Massachusetts: National Bureau of Economic Research, February 1989).
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Barro, Robert J. and Xavier Sala-i-Martin (1991), “Convergence across States an Regions,” Brookings Papers on Economic Activity, No. 1, 107-182.
Barro, Robert J. and Xavier Sala-i-Martin (1992b), “Regional Growth and Migration: A Japan-United States Comparison,” Journal of the Japanese and International Economics, 6 (December), 312-346.
Bell, Michael W., Hoe Ee Khor, and Kalpana Kochhar (1993), China at the Threshold of a Market Economy, IMF Occasional Paper No. 107, International Monetary Fund, September 1993.
Cashin, Paul and Ratna Sahay (1996), “Internal Migration, Center-State Grants, and Economic Growth in the States of India,” International Monetary Fund Staff Papers, Vol. 43, No. 1.
Husain, Aasim M. (1998), “Economic Performance and Business Cycles in China’s Provinces and Regions,” in People’s Republic of China—Selected Issues, International Monetary Fund, SM/98/184.
Khan, Mohsin S. (1987), “Macroeconomic Adjustment in Developing Countries: A Policy Perspective,” World Bank Research Observer, Vol. 2, pp. 23-42.
Khan, Mohsin S. and Manmohan Kumar (1993), “Public and Private Investment and the Convergence of Per Capita Incomes in Developing Countries”, IMF Working Paper, WP/93/51.
Jin, Hehui, Yingi Qian and Barry R. Weingast (1999), “Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style,” Mimeo., Stanford University, 1999.
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We would like to thank, without implicating, Jahangir Aziz, Tam Bayoumi, Paul Cashin, Mohsin Khan, Peter Montiel, Ichiro Otani, David Robinson, and Reza Vaez-Zadeh for helpful comments on earlier drafts of this paper. We are also indebted to Kirsten Fitchett, Lakshmi Sahasranam, and Bin Zhang for excellent research assistance.
All references to China in this paper are to the Mainland of China.
As noted by Cashin and Sahay (1996), convergence of per capita incomes is a necessary, but not sufficient condition for a reduction in dispersion of per capita incomes.
Public policies include the volume of consumption spending and the associated level of taxation, some form of public investment, and institutional infrastructure.
See Barro and Sala-i-Martin (1995) for a review of this literature.
Labor mobility is analgous to capital mobility and also tends to speed up an economy’s convergence towards its steady state position. While the empirical evidence for convergence in the regional data after taking into account net migration is not definitive, Cashin and Sahay (1996) find that migration is an especially slow means of equalizing per capita incomes.
Appendix II provides some background information on policies relating to capital and labor mobility.
By regressing average growth on only FDI, however, Bell et. al. (1993) obtain a significant positive coefficient.
Hainan and Tibet Autonomous Region were excluded from the estimations owing to lack of data covering the entire sample period. Data for Chongqing, which became an independent municipality in 1997, are included in the data for Sichuan.
Time series income data at a macro level are not available. Consequently, per capita incomes and per capita output are used inter-changeably in this paper.
Although there is some degree of arbitrariness in assuming that the duration of the business cycle is five years and is synchronized across provinces and the periods chosen, a study by Khan and Kumar (1993) using a similar approach does not find that the results are sensitive to the choice of a three- or five-year average. It may also be noted that Husain (1998) finds that cycles were about that long in each region in China, although the cycles tended not to be synchronized across regions.
The equation for the rate of economic growth is based on the Mankiw, Romer, Weil (1992) version of the Solow-Swan model.
The loan-to-deposit ratio is intended to capture the redistributive nature of bank lending, or the extent to which the banking system was a net borrower or net lender in a particular province. Another possibility would be to consider credit availability, measured as the change in real credit, scaled by provincial GDP. However, such a variable would be highly correlated with investment, and its construction is complicated by the use of multiple sources of data for bank loans and deposits.
Barro and Sala-i-Martin (1992a) find that the estimated speed of convergence in the US was negative over the period 1920-30. This was attributed to large declines in the relative price of agricultural commodities which affected the poorer agricultural states adversely.
However, these differences do not appear to be significant at the provincial level. Estimations using fixed effects for each province to test whether each province was converging to its own steady state were not supported by the data.
Khan and Kumar (1993) also examine the effect of investment on the speed of convergence for a sample of developing countries. They find that the higher the ratio of investment to GDP, the higher is the rate of growth of per capita income. The estimated size of the convergence coefficient, taking into account regional differences is 1.4 percent, which is very close to the estimated convergence coefficient for China.
Average levels of the FDI flows over 1985-87 are used for the second sub-period under the assumption that the level of FDI flows was close to zero in 1983 and 1984.
While the estimated coefficients of this equation may in principle be affected by collinearity between total investment and FDI, there was actually very little correlation between the two variables over the sample period, as can be seen from a casual inspection of Charts 5 and 7.
The time t for which log (y(t)) is halfway between log (y(0)) and log (y*) satisfies the condition e-βt = ½. The half-life is therefore log(2)/β = 0.69/β. Hence, if β = 0.018, then the half-life is 38 years.
Instead of total investment in provincial GDP, the share of fixed investment in provincial GDP is used as an explanatory variable as these two measures began to diverge in the 1990s.
Almanac of China’s Finance and Banking (1993).
“Income Distribution in China,” China and Mongolia Department, The World Bank, June 1997. Jian, Sachs, and Warner (1996) estimate the total number of migrants at 100-150 million.
A detailed discussion of the institutional aspects of taxation policy and its effect on interregional capital mobility is contained in World Bank (1994).