What Explains Regional Growth in PRC?

There is a lengthy (English language) technical literature examining the factors that have caused the growth experience of the different provinces in PRC. Here to summarize we put forward some broadly agreed stylized facts, with some of the evidence to support them.²

Much of the empirical work has been conducted within the framework of a neoclassical growth model that tests whether there has been income convergence across provinces; in other words whether there is evidence of catch-up with poorer provinces growing faster than richer provinces. The precise results vary between time periods and the form of specification adopted with at least some studies finding evidence of convergence of income from the early reform in the late 1970's until the early 1990's saw a convergence of incomes, in particular as the relatively poorer eastern coastal provinces grew rapidly. In the more recent period since the early 1990's with the 'Opening Up' of trade and foreign investment there has been clear divergence.³

Of more direct policy relevance are the control variables that are added in such analyses to explain growth. The key cause of the striking trend towards divergence in the 1990's noted above has been the rapid growth of the coastal provinces in the eastern region. Two possible factors to account for this are the policy environment, based around the Special Economic Zones and other related incentives for FDI and the favoured geography of the coastal provinces with easy access to the coast and thus international trading networks. One can also add easy access to the growth centres for overseas Chinese in Hong Kong, China and Taipei,China as a further benefit. The main attempt to disentangle these two effects finds both to have been important in explaining the growth of the coastal region with geographical factors, having a slower acting but slightly more important impact up to 1998. (Demurger et al, 2002). In this analysis policy is capture by a crude scoring index determined by the type of zone in a province and the main geographical variable is the proportion of the population of a province living within 100 kms of the coast or a navigable river. The north-east provinces score relatively highly by the policy index from the early 1990's due to the zones introduced at that time and Liaoning scores relatively highly over the whole period (1978-98) as it started to develop a form of zones in the 1980's. Overall the north-east has the highest score in the policy index after the coastal region. In terms of the geography measure by its location the north-east has an intermediate position with a much lower proportion of its population close to the coast than in the coastal or central regions, but a much higher proportion than the population of the west. It is thus not surprising that the impact of the policy measure is considerably higher for the north-east provinces than is the geography variable.⁴

Ownership of enterprises in a province also appears to have had an important impact on growth. The share of 'foreign invested enterprises' in economic activity in a province appears to have had a positive growth effect either directly through its impact on efficiency or indirectly through externalities. Conversely the share of SOEs in provincial activity appears to exert a negative effect, which may be in part due to their own inefficiencies, but in part also to the requirement over much of the period covered for banks to channel funds to SOEs at the expense of new forms of nonstate enterprise. FDI inflows are partly driven by the incentive system on offer to foreign investors and hence are correlated with the policy index referred to above.⁵ As noted above the north-east region is well below the coastal areas in FDI per capita, although it is above the poorer western region by this indicator. It also has a higher than average share of SOEs (for further data see Table 2 [ PDF 55.9KB | 1 page ]).

An important aspect of the investment climate that impacts on provincial growth has been shown to be the quality of provincial infrastructure, particularly roads and telecommunications. Infrastructure activities link provinces with the external sector and are a means of overcoming geographic barriers like distance to a port. In addition they link provinces with each other and thus stimulate inter-province trade. Good infrastructure can also be added as an incentive to higher FDI inflows. Low levels of inter-provincial trade can also be due to internal trade barriers and there is evidence that these still remain significant.⁶ The north-east provinces are not particularly poorly endowed with infrastructure by national standards. A decomposition of the sources of growth suggests that for Liaoning over 1985-98 infrastructure variables (covering both roads and telecommunications) contribute to a growth rate above the national mean and that it is other variables that cause a lower than average growth rate for the province. For Jilin and Heilongjiang a telecommunications variable contributes to above mean growth in both cases and it is only in the case of Heilongjiang that there is a substantial negative effect from the transport variable.⁷

Remaining barriers to inter-provincial trade are often mentioned in policy discussions on provincial growth. The most detailed examination of this question finds that whilst provinces in PRC have opened substantially to international trade the reverse has taken place for inter-provincial trade for 1987-97. When a distinction is drawn between coastal provinces (in this case including Liaoning) and the rest of the country the measure of implicit barriers is lower for the coastal region. A further decomposition by province is not given, but direct evidence on inter-provincial trade flows are provided by regional input-output tables. These show that for Jilin the share of goods from the rest of PRC (that is other provinces) in provincial expenditure remained roughly stable 1987-97, whilst it halved for Liaoning, indicating the possibility of rising internal barriers. Liaoning had a very low share by national standards. Data are not available to allow this comparison for Heilongjiang.⁸

Hence, in general, the consensus is that what matters for relative rates of provincial growth are openness to foreign investment and trade, ownership and by implication competition, infrastructure quality and the constraints imposed by provincial geography. In the following sections we examine how some of these factors work at the enterprise level in what to our knowledge is the most detailed examination of the regional dimension of enterprise performance to date.

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