Chinas provincial disparities and the determinants of provincial inequality

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 mutual depending development process. Due to positive externalities, incoming trade and FDI induce imitation and hence productivity growth. The regional government can in‡uence the economy by changing international transaction costs and providing the public infrastructure. Due to mobile domestic capital disparity e¤ects are reinforced. The implications of the theoretical model are tested. As the cntral intention of the paper is to explain provincial disparity we directly relate income disparity (indicated by the contribution to the income Theil index) to the disparity of selected income determining factors (indicated by the contribution to each other Theil index). We examine the determinants of income and inequality for 28 Chinese provinces over the period 1991-2004 and apply random e¤ects panel estimation. Our analysis is based on revised GDP and investment data from Hsueh and Li (1999) and various sources of Chinese o¢ cial statistics provided by the National Bureau of Statistics (NBS). The results con…rm the theoretical framework and suggest a direct linkage between the factors that determine regional income and regional disparity. More speci…c it is apparent that trade, and foreign and domestic capital as well as government expenditure have an impact on the provincial inequality. Moreover it is the success of the coastal regions and hence potentially geography with the low international transaction costs that drives the provincial inequality of China. JEL Classi…cation: J24, O14, O18, O33, O40, R55