Regional disparities change because growth rates of output have varied across provinces over time. Why have provincial growth rates differed? What have been the factors underlying differential economic growth performances among provinces? It goes without saying that economic growth is governed by many determinants. Whatever they are, however, if these diverse factors are to affect economic growth positively, they must somehow help either increase the supply of factor inputs (mainly capital and labor) or enhance factor productivity, or some combination of both. Thus, to arrive at an understanding of the factors behind the growth of output, we must first identify the immediate economic sources of growth.

In the last decade or so, economists in China and elsewhere have conducted extensive research trying to break down the proximate sources of output growth and examine the contributions of labor and capital to output. They generally arrive at two principal conclusions.

First, the contribution of labor input to economic growth was insignificant in China. Here, labor input is measured not only by the total number of working persons but also by such indicators of labor quality as the age and gender composition and the educational and health profiles of the labor force. A World Bank study, for instance, attributed only about 17 percent of growth to improvements in both quantity and quality of the labor force in the Chinese economy as a whole.11 An abundant labor supply may explain the relatively small contribution of labor in China. It is intuitively plausible that, in a capital-scarce and labor-abundant economy, the injection of more human resources would not increase output very significantly and rapidly.

Second, rapid capital accumulation alone can account for a very substantial part of GDP growth for each and every province of China. This finding confirms the central importance of capital accumulation for growth at early stages of economic development, a position held by such prominent economists as Domar, Harrod, Lewis, and Rostow. It is also consistent with the results of many empirical studies of economic growth. Furthermore, the role of capital in the explanation of growth in China was very similar to that found in other East Asian economies and in developing countries at large.

Since capital investment has been the most important engine of economic growth, regions with greater capital mobilization capacity are expected to grow faster. Then, why are sometimes some provinces more capable of mobilizing local savings and of obtaining capital inflows from other provinces and from other countries? What are the political factors that affected the direction of capital flows? More specifically, we want to explore how the central government’s regional policy preference and extractive capacity have affected the spatial distribution of investment resources and ultimately the growth potential of different provinces.

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