Growth spillover effects and regional development patterns : the case of Chinese provinces

WPS3652 Growth Spillover Effects and Regional Development Patterns: The Case of Chinese Provinces Xubei Luo* Abstract: This paper discusses regional development patterns in China, and examines effective ways of using development aid to attain regional balanced growth through optimizing growth spillover effects. Based on provincial panel data from 1978 to 99, the paper constructs an indicator "neighbor performance" to measure the geographic spillover effects of aggregate growth from and to different provinces according to their relative richness and geographic position. Analysis of a Solow-type growth model suggests that positive spillover effects dominate negative shadow effects at the national level as well as the regional level; and some coastal provinces provide growth pull and growth push forces for their neighbors and serve as locomotives. The results show that the rapid take-off of the coastal provinces has the largest spillover effects on the entire Chinese economy, but at the expense of a widening regional gap. A policy of encouraging the growth of the non-coastal regional hubs would have strong forward and backward linkages with the inland/western regions and thus reduce the regional development gap without sacrificing much aggregate growth. The paper offers support for the policy of developing inland hubs, and argues that directing development aid to Hubei and Sichuan would optimize the growth spillover impacts on inland regions. JEL: O18, O47, R11 Key words: Spillover effects, Regional development pattern, Balanced growth, China World Bank Policy Research Working Paper 3652, June 2005 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. *Email: xluo@worldbank.org; mailing address: World Bank, Office of Senior Vice President and Chief Economist, Development Economics, MSN MC4-404, 1818 H Street NW, Washington DC, 20433. 1  Growth Spillover Effects and Regional Development Patterns: The Case of Chinese Provinces Xubei Luo* The Chinese economy has witnessed an unprecedented growth of more than 8% per annum since its reforms in 1978. However, the rapid take-off of the coastal provinces has widened the regional development gap. As shown in various studies, such as Naughton (1999) and Chen and Fleisher (1996), the dynamics of the coastal provinces and the relative stagnation of the inland provinces configure a center-periphery regional growth structure. Remoteness to the major economic centers limits the market accessibility of the inland (in particular, western) provinces, and impedes their growth performance (Luo, 2004). The growing disparity in income and standard of living may entail high social and economic cost and undermine long-term sustainability. Combining growth with a more balanced distribution of income has become one of the guiding tenets of the development plans of the Government of China. Since the late 1990s, encouraging the catching-up of the inland provinces