China's provincial disparities and the determinants of provincial inequality

Authors: Gries, Thomas; Redlin, Margarethe

Source: Journal of Chinese Economics and Business Studies, Volume 7, Number 2, May 2009 , pp. 259-281(23)

Publisher: Routledge, part of the Taylor & Francis Group

Abstract:

The paper explains the growth-inequality nexus for China's provinces. The theoretical model of provincial development consists of two regions and studies the interactions of a mutually dependent development process. Owing to positive externalities, incoming trade and FDI induce imitation and hence productivity growth. The regional government can influence the economy by changing international transaction costs and providing a public infrastructure. Mobile domestic capital reinforces disparity effects. The implications of the theoretical model are tested. As the central intention of the paper is to explain provincial disparity, we directly relate income disparity (indicated by the contribution to the per capita income Theil index) to the disparity of selected income determining factors (indicated by the contribution to every other Theil index of the determinants). We examine the determinants of inequality for 28 Chinese provinces over the period 1991-2004 and apply a fixed effects panel estimation. The results confirm the theoretical framework and suggest a direct link between the factors that determine regional income and regional disparity. More specifically, it is apparent that disparities in trade, foreign and domestic capital and infrastructure have an impact on the provincial income Theil disparity, whereas provincial disparities in government expenditure and human capital do not seem to drive the income Theil disparity. Therefore, three decades of government reforms led to an extraordinary success of some provinces and increasing inequality. However, government expenditures and public human capital investments seemed to have a stabilizing effect on provincial disparity.

Keywords: regional development; FDI; international integration; China

Document Type: Research article

DOI: http://dx.doi.org/10.1080/14765280902847783

Affiliations: 1: Department of Economics and Centre for International Economics, University of Paderborn, D-33089 Paderborn, Germany

Publication date: 2009-05-01

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