Geographic factors and China's regional development under market reforms, 1978-1998
By Shuming Bao, Gene Hsin Chang, Jeffrey D. Sachs, and Wing Thye Woo
This study investigates the geographic effects on regional economic growth in China under market reforms. We develop a model for the regional growth pattern of the Chinese economy during the period, characterized by foreign direct investment (FDI) and mobilization of rural surplus labor. The FDI and labor migration are directed by the differentials in the expected returns from the capital investment and in the wage rate. The differentials are, to a large extent, explained by geographic factors. In the context of market reforms and the open door policy, the spatial and topographic advantages of the coastal provinces are realized. As a result, the returns to the capital investment in the coastal provinces are higher than in the rest of the country, thus attracting more FDI and migrant labor into the region and causing the growth disparity. Our empirical test supports this hypothesis. It finds that geographic factors are statistically significant in explaining the regional disparity in China. This disparity is mainly a coast versus non-coast gap.