Download Are there Spillover Effects between Coastal and Non-Coastal

Are there Spillover Effects between Coastal
and Non-Coastal Regions in China ?
Jean-François BRUN, CERDI-IDREC, Université Blaise Pascal
Jean-Louis COMBES, CERDI-IDREC, Université d’Auvergne
Mary-Françoise RENARD, CERDI-IDREC, Université d’Auvergne
Draft paper
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Abstract.
The evolution of regional policy between Mao’s era and Deng’s era generated a lot of
debates concerning the inter-provincial disparities and the trade-off between efficiency and
equity. The topic of this paper is to explore the existence of regional growth spillover effects
as expected by Deng’s policy. After reviewing the theoretical underpinnings of these effects,
we test with panel data on the period 1981-1998 if the growth of Coastal provinces affects the
growth of Inland provinces. We also test if these effects are equally spread over all the Inland
provinces. We observe a relative failure to boost development of Western provinces from
Coastal regions growth. It appears as a mistake to wait for spillover effects to be sufficient to
reduce disparities between Chinese provinces in the short run. This result has some
implications in terms of political economy.
Key words.
China, growth, regions, spillover effects, panel data.
JEL classification.
O53, O40, R58.
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Since the beginning of the 80’s, the regional dimension has been crucial in the Chinese
policy. It is obvious that the size and the geography of the country lead to emphasise the role
of the regions (or provinces). Moreover, China has a very hierarchical administrative
organisation. A main fact is that the relaxation of the control by the Central State gave more
responsibilities to the regions. Reform has altered the relationships between Center and
Provinces. First, Central Government has moved from policy of control through direct
administration of the economy to one based on macro-economic management (see Goodman
and Segal, 1994). Second, the fiscal relationships between Center and Provinces changed
drastically, giving more power to the latter.
At the beginning of the Mao’s period, the regions were characterised by wide disparities
that the development strategy had the objective to curtail. The First Plan (1953-1957)
stipulated that the new industrial bases had to correct for the supposed irrational spatial
distribution of Chinese industry. Consequently, the local authorities have been called to build
up relatively independent industries and have been encouraged to promote self-reliance.
“Unlike previous Chinese governments, the communist leadership was able to tap a powerful
war-state to rectify China’s regional imbalance” (Yang, 1997). So, one of the main goal was
to reduce inter-regional imbalances. At the same time, there was also a strong desire to
enhance China’s National Defence and then most of the considerations have been of military
strategy. So, most of investments have been devoted to the inland regions and not to the richer
coastal ones. Nevertheless, at the end of this period, coastal regions kept their superiority in
terms of infrastructure and skills.
The regional policy changed with Deng Xiao Ping who reversed the strategy and
emphasised the international trade openness and so, the valorisation of regional comparative
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advantages. For that, the government chose to experiment the “Open Door Policy” in two
provinces: Guangdong and Fujian. They had relationships with Hong Kong, United States and
Europe even during the Mao’s period. The Central Government gave them some advantages,
especially by creating Special Economic Zones. This policy was reinforced by the creation of
14 coastal cities which have been given preferential treatment. The objective was to promote
growth in coastal regions with the idea that there will be spillover effects between these
regions and inland regions. The Sixth (1983-1986) and Seventh (1986-1991) Plans were based
on the assumption that economic development tended to diffuse spatially through
technological transfers. Even if this hypothesis has been discussed, “the Chinese leadership
has opted to favor growth at the expense of some equity, at least in the short and intermediate
run” (Yang, 1997). The international openness of coastal regions has been very important
during the 80’s but the inter-regional protectionism has been maintained, so that the Central
Government had to take some measures to try to reduce it. Hence, among others, these local
trade barriers acted against the political strategy of promoting the diffusion of growth.
This paper explores the existence of these growth spillover effects. In the first part, we will
review the theoretical underpinnings of these effects. In the second part, we will test, with
panel data, on the period 1981-1998, if the growth of coastal-provinces affects the growth of
Inland provinces. We will also test if these effects spread equally over all the non-coastal
provinces.
I.
A Theoretical Analysis of Provincial Spillover Effects.
Provincial spillovers can emerge from three kinds of externalities:
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(i)
demand side externalities, in the sense that marginal productivity of capital
depends on the beliefs of the province’s investors about the demand in other
provinces, especially in coastal provinces which have the highest level of
income per capita.
(ii)
trade externalities because trade is more intensive when transaction costs are
decreasing, and then coastal regions economic activity enhances the domestic
trade in all China and consequently the growth of inland provinces.
(iii)
supply side externalities which result from technical knowledge and managerial
skill diffusion. In a long term growth perspective, we may suppose the
predominance of this kind of externalities.
Supply spillovers may be channelled by domestic trade between coastal and non-coastal
provinces. Technological innovations embodied in foreign capital goods (Grossman and
Helpman, 1991) diffuse to inland provinces from coastal provinces imports. Moreover, the
competition on national market may incite inland producers to adopt the technology of coastal
producers.
An other important channel is foreign direct investments (FDI), as domestic firms imitate
technologies created by foreign firms (de Mello, 1997). With the “Open Door Policy”, the
coastal provinces and notably, Guangdong and Fujian have been allowed to attract FDI and so
local firms captured some benefits (learning by doing, technological transfer, intermediate
goods demand and access to foreign markets). Some firms notably from inland regions,
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relocated part of their production process to try to get the same benefits. It is a way to diffuse
this type of externalities from coastal to inland regions.
When a coastal province invests in an innovative project, the latter can be considered as a
free countrywide market study that improves economic information available to inland
provinces.
Moreover, there must exist an imitation process of policies between provinces. It is easy to
understand why good policies may be copied (for instance household responsibility system,
attraction of FDI). This process may be observed in a lot of countries but in the case of China
it has been strongly encouraged by the Central Government whose target was to experiment a
policy on coastal regions and “Open Cities” and then extended it to other provinces. But, bad
policy may also be contagious according to local government rent-seeking.
At least, an inland province may benefit from public capital goods provided by coastal
provinces. When a province invests in roads, telecommunications, airports and ports, other
provinces are favoured, as price exclusion is not possible. The same mechanism is at work
concerning public investments in human capital, i.e. health and education. It is certainly the
case with Special Economic Zones which concentrated most part of the investments in
infrastructure, finance, tourism, whose objective was the diffusion of the benefits.
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II.
An Empirical Analysis of Regional Spillover Effects.
A. The data.
The test of regional spillover effects is based on the estimation of a growth equation
derived from the empirical framework proposed by Barro (1991). The growth rate of real GDP
per capita (GROWTHit) is regressed on three categories of variables:
(i)
the initial value of a state variable, ie the logarithm of initial real GDP per capita
(GDPit) which is a proxy for the initial physical capital stock;
(ii)
control variables allowing for different steady states between provinces,
(iii)
provincial variables catching spillover effects.
Notably, because of diminishing returns, the expected effect of the initial GDP per capita
on the dependent variable is negative. Thus, poor provinces grow faster to their own steady
state than wealthier ones (β-conditional convergence).
Among control variables, the international economic environment is captured by the rate of
growth of the real GDP of industrial countries (ICGROWTHt). It is expected to catch
international overall economic situation1. A positive sign is expected.
1
To catch this effect, other variables were included in the regression such as: terms of trade, the rate of growth of
the real GDP of China’s trade partners, none appeared significant.
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Two variables are linked to demography: the population (POPit) and the population growth
rate (POPGRit) of the province. The former should affect economic growth positively through
economies of scale, for instance in the innovation activity. The latter is a rough proxy for the
reproduction rate and so, should affect negatively the economic growth as high fertility
implies an increase in the opportunity cost of economic activity (Barro and Sala-I-Martin
1995).
According to the link between local branches of the Central Bank and the local
governments, the monetary policy of each regions was very influenced by the regional
governments. For this reason, a regional inflation rate is included. Inflation (INFLAit)
generates distortions in the structure of relative prices. These distortions lead to an inefficient
allocation of resources. Moreover, inflation is positively correlated to its variability, which
increases risks for decision making. At least, inflation drives resources to governments and
public spending may be less efficient than private spending. So, we expect a negative impact
of inflation on GDP growth (Brun, Chambas and Combes, 1998).
The share of direct foreign investments in fixed capital investment (FDIit) is included in the
regression. A social or private productivity gap between domestic and foreign investments
may explain a positive influence of FDI on economic growth. Several mechanisms can play a
role. First, FDI promote technological transfers from industrial countries. Second, FDI may
strengthen the managerial skills of domestic firms. Third, the access to world market is more
easy for Chinese products (Chen, Chang, and Zhang, 1995). At least, FDI proxy the
international openness of the provinces which strengthens the competitiveness, extends the
scale of markets and promotes the access to more technological intensive intermediate goods.
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State-owned enterprises are experiencing rather poor performances. The main explanation
is the lack of adaptability to market rules: redundant employees, obsolete technologies, poor
managerial skills and social and political constraints (Chen and Feng, 2000). So, importance
of state-owned enterprises is measured by the ratio between state-owned staff and workers and
total number of employed persons (SOEit). It is expected to exert a negative impact on growth.
To test if the coastal real GDP growth rate affects the real GDP per capita growth rate of
non-coastal provinces, we calculate the unweighted mean of coastal growth rate. Then, the
resulting variable is multiplied by a dummy for each province. This method allows to catch up
spillover effects different for potential receiving provinces. As usual in the literature, two
types of inland provinces are distinguished: central (CENTRALit) and western (WESTERNit)2.
As coastal growth may also affects coastal provinces, we calculate for each coastal province a
coastal growth excluding this province (COASTALit) 3.
The data set includes 28 provinces and so 168 observations as each province is described
by 6 observation points covering the following periods: 1981-1983, 1984-1986, 1987-1989,
1990-1992, 1993-1995 and 1996-1998. The sample concerns the post-reform area, where the
growth of each province largely results of their own structural characteristics and on
decentralized policy choice. For instance, local authorities directly manage Township and
Village Enterprises.
2
Central provinces are: Heilongjiang, Jilin, Inner Mongolia, Shanxi, Henan, Anhui, Hubei, Jiangxi and Hunan.
Western provinces are: Xinjiang, Qinghai, Sichuan, Gansu, Shaanxi, Guizhou and Yunnan. Tibet, Ningxia and
Chongqing are exclused because of lack of data.
3
For instance, for Beijing, the coastal growth mean is calculated on the following provinces: Liaoning, Tianjin,
Hebei, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guang,dong, Hainan and Guangxi.
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Data come from Comprehensive Statistical Data and Materials on 50 Years of New China
(Department of Comprehensive Statistics of National Bureau of Statistics, China Statistics
Press, 1999). The industrial growth rate and exchange rate are taken from International
Financial Statistics Yearbook 2000 (IMF).
B. The Estimation Method.
The econometric method is based on panel data techniques (Islam, 1995) contrary to Chen
and Feng (2000) who use cross-sectional data. A fixed effects estimator is applied, it allows to
take into account some unobserved provincial heterogeneity. The random effects model has
been rejected because of the correlation between provincial effects and explanatory variables.
A White test rejects the null of homoskedasticity at the 10% level and thus the variancecovariance matrix is corrected for heteroskedasticity. The null of no serial correlation cannot
be rejected. A RESET test does not detect at the 10% level a wrong specification.
C. The Results.
GROWTHit = 0.26 – 0.07.GDPit + 0.003.ICGROWTHt - 2.91.POPGRit
(0.0) (0.0)
(0.16)
(0.007)
+ 5.54E-09.POPit – 0.13.INFLAit + 0.11.FDIit – 0.60.SOEit
(0.004)
(0.005)
(0.06)
(0.004)
+ 0.34.WESTERNit + 0.54.CENTRALit + .0.61.COASTALit
(0.27)
(0.05)
(0.007)
R2 adjusted = 0.60
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P values are between brackets. Underlined coefficients, which are elasticities, are averaged
over coefficients for provinces. All variables take the expected sign4. More particularly, the
coefficient for initial GDP per capita is significant and negative, so, we cannot reject the
hypothesis of conditional β-convergence between provinces. Guillaumont and Boyreau
Debray (1996), Jian, Sachs and Warner (1996), Chen and Fleisher (1996) and Chen and Feng
(2000) report similar results. 5
Of course, this result does not mean a trend towards a reduction of the GDP per capita
inequalities between provinces. In fact, conditional β-convergence conducts to different
provinces steady-state level per capita output. For instance, the high level of FDI in coastal
regions gives them a higher level of welfare in the long run.
Investment decisions are endogenous to growth. So, after controlling, the variable of
investment only captures the autonomous part of investment. Hence, it appears that the
investment ratio does not increase the explanatory power of the equation6.
The weak significance of the variable ICGROWTHt reflects the low dependence of the
Chinese economy vis-à-vis the rest of the world.
The growth of coastal provinces affects differently the grouping of provinces considered.
Regarding western regions, the impact is positive but non-significant. On the reverse, coastal
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We also test without success the impact of initial human capital with a variable calculated as the number of
students enrolled in tertiary schools relative the total population. Unfortunately, we do not dispose of the correct
denominator, which should be the total population of the corresponding age group. Moreover, variables like that
of Barro and Lee (1993) are not available for Chinese provinces.
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Cf. Naughton (2001) for a discussion of these results.
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growth acts positively and significantly on central provinces. Moreover, spillover effects can
be observed within coastal provinces. So, this result tends to show that coastal growth benefits
in an unequal way to inland provinces. Central provinces seem to take more advantages than
western provinces from coastal development. With a different theoretical framework (coreperiphery model), and a different method (detection of spatial auto-correlation), Ying (2000)
does not reject the hypothesis of an unequal diffusion of coastal growth between inland
provinces. For instance, he observes that the spillover effects are more evident for the
provinces near Guangdong.
Some explanations can help to understand our results. The first one is that location and
geography matter in the diffusion of growth (Moreno and Trehan, 1997) either via
transportation costs or via monitoring costs (confidence, common knowledge) which decrease
with cultural proximity probably correlated with geographical proximity.
The second one is that some kinds of spillovers are particularly effective in cities (Glaeser,
Kallal, Scheinkman, and Shleifer, 1992). The reason is due to agglomeration effects, certainly
more developed in the central provinces, where there are more cities than in western
provinces.
The third explanation probably comes from differences in the level of development. The
western regions may be not benefit from the coastal growth as the economic distance reduces,
even annihilates, regional spillovers.
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An attempt to use instrumental variables techniques for investment did not permit to show a significant impact
of investment.
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III.
Conclusion.
This paper will be prolonged in three ways. First, it will be useful to explain for each inland
province, the coastal contribution to economic growth. Second, it will be pertinent to identify
more precisely which coastal regions are the sources of spillovers. Third, the spillover effects
will be more appraised with infra regional data. Nevertheless, our results allow us to draw
some remarks.
The relative failure to boost development of western provinces from coastal regions growth
or ladder step policy, shows that it is an illusion to hope that spillover effects may be
sufficient in the short term to reduce disparities between Chinese provinces. Now, the stake is
crucial for Chinese social stability and to avoid the risks of fragmentation and inter-regional
massive migrations. This observation conducts the Central Government to give the priority to
public investment in western regions in the next Five Years Plan (2001-2005). The target is to
help these provinces to take more profit from their international comparative advantages.
We may think that if an outward looking strategy is implemented by every region, less
disparities may be expected. But anyway, the Central Government will keep a crucial role by
its redistribution policy through public finance ie structural transfers.
IV.
References.
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