Human capital, economic growth, and regional inequality in China

Regional inequality in China is an important issue and has been subject to numerous studies including those of many of my MSc dissertation students.

Belton Fleisher and co-authors look at growth and inequality in a recent Journal of Development Economics paper.

The results are fairly standard. The role of FDI and government policy can play their part.

Human capital, economic growth, and regional inequality in China

Belton Fleisher
Haizheng Li
Min Qiang Zhao

Abstract

We show how regional growth patterns in China depend on regional differences in physical, human, and infrastructure capital as well as on differences in foreign direct investment (FDI) flows. We also evaluate the impact of market reforms, especially the reforms that followed Deng Xiaoping's “South Trip” in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. These impacts of education are more consistent than those found in cross-national studies. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas is justified on efficiency grounds and because it contributes to a reduction in regional inequality.

Keywords: Regional disparity; Human capital; TFP growth; Foreign direct investment

JEL classification codes: O15; O18; O47; O53