Regional growth of the Chinese economy

The objective in this thesis is to analyse the growth of China's three major regions and of China itself. The study is motivated by apparently divergent rates of growth in the eastern (coastal), central and western regions of China. The East is modifying its economy at a faster rate and although there is an element of modernisation in the central provinces, the West remains a more traditional economy, rich in resource endowments, but in need of large infrastructure investments to progress into the future. An introductory chapter (Chapter 1) is followed by an overview of the recent development of China (Chapter 2) which culminates in the identification of the year 1978 as the benchmark year in China's recent development. The doors of the Chinese economy were opened in this year, inward foreign direct investment (FDI) was welcomed and export expansion encouraged. The major conclusion from this overview is that 1978 was an appropriate starting point for the analysis of regional development which follows. The literature about regional development is reviewed and two common themes are identified: the significance of the nexus between output growth and exports and between inward FDI and exports. These relationships are analysed at a national and regional level in a fourth Chapter. Cointegration, equilibrium correction modelling (ECM) and Granger and Sims causality tests are applied and the major finding is that exports and FDI are subject to feedback (bilateral) causality in the case of the PRC as a whole, the eastern and western regions but that exports lead inward FDI in the Centre. An explanation is provided in Chapter 4. The major innovation of the thesis occurs in Chapter 5 where Feder's model of economic development is extended to include a distinction between inward FDI and domestic investment. This provides a basis for additional insights, in particular, the role of the relative productivity of the export and domestic sectors of China's regional economies. A panel data set is applied to the growth model. Inward FDI and domestic investment are both significant causes of regional growth but the outcomes for exports and labour are mixed. Export expansion has a positive and direct impact on the growth of the PRC and its eastern and central regions but not on the growth of western China. Further, it is only in the western region where labour expansion plays a significant role. This issue is resumed in Chapter 6 where both dynamic and static shift-share analyses of labour growth are explored in each region. The major findings are as follows: only the eastern region's industrial mix produces job gains while this does not occur in the other two interior regions. The competitive shift component of labour growth indicates the opposite finding. The net outcome is that job losses occurred in the East but job gains prevail in the Centre and the West. The labour growth by sector reveals that the West still depends on traditional industries where productivity is low. The final step in this research project is a study of the income distribution effects of China's regional growth in the form of the question: are per capita incomes converging or diverging in China and its three regions? The following answers apply: China's per capita income sigma converged from 1978-90 but not for the period of 1990-98. Within each of the three regions, only the eastern region shows evidence of per capita income sigma convergence throughout the period 1980-1996. In central China, the coefficient of variation fluctuates so much that it is not possible to infer that incomes in the central provinces are converging. In the poorer western region, however, per capita incomes diverged throughout the period 1978-98. Convergence conditional on both FDI and exports suggests that per capita income (3 converged in China for all periods except 1994-1998. Inward FDI played a significant role in China's per capita income convergence during 1990-1994 while exports were especially important during 1986-1990. The final chapter (Chapter 8) is dedicated to the discussion of policy issues and future directions.