Journal of Comparative Economics 29, 95–117 (2001)

doi:10.1006/jcec.2000.1693, available online at http://www.idealibrary.com on

Infrastructure Development and Economic Growth:

An Explanation for Regional Disparities in China?1

Sylvie Démurger

CERDI-IDREC, CNRS—Université d’ Auvergne, 65, boulevard François Mitterrand,

63 000 Clermont-Ferrand, France
E-mail: S.Demurger@u-clermontl.fr

Received March 10, 2000; revised September 14, 2000

Démurger, Sylvie—Infrastructure Development and Economic Growth: An Explanation

for Regional Disparities in China?
This paper provides empirical evidence on the links between infrastructure investment
and economic growth in China. Using panel data from a sample of 24 Chinese provinces
(excluding municipalities) throughout the 1985 to 1998 period, the estimation of a growth
model shows that, besides differences in terms of reforms and openness, geographical
location and infrastructure endowment did account significantly for observed differences in
growth performance across provinces. The results indicate that transport facilities are a key
differentiating factor in explaining the growth gap and point to the role of telecommunication
in reducing the burden of isolation. J. Comp. Econ., March 2001, 29(1), pp. 95–117.
CERDI-IDREC, CNRS—Université d’Auvergne, 65, boulevard François Mitterand, 63 000
Clermont-Ferrand, France. °C 2001 Academic Press
Key Words: infrastructure; economic growth; regional inequalities; panel data; China.
Journal of Economic Literature Classification. Numbers: C33, H54, O11, R11.

1. INTRODUCTION
In two decades of market-oriented reforms, China has been one of the world’s
fastest-growing economies with per capita real incomes more than quadrupling
since 1978. Some of the key features of this evolution have been the dramatic

1 This paper is drawn from a research program on “Economic Policy and Growth” funded by the

OECD Development Centre. I am indebted to the Development Research Center of the State Council
(China), the Academy of Macroeconomic Research of the State Planing Commission (China), and
the National Bureau of Statistics (China) for useful discussions on a earlier version, as well as to
participants at the International Conference on the Chinese Economy (Clermont-Ferrand, Oct. 22–23,
1998) and the ASSA meeting (Boston, Jan. 7–9, 2000). I am also grateful to two anonymous referees
for valuable comments and suggestions. I remain solely responsible for errors and omissions.

95 0147-5967/01 $35.00
Copyright ° C 2001 by Academic Press

All rights of reproduction in any form reserved.

96 SYLVIE DÉMURGER

growth in international trade and the inflow of huge amounts of foreign direct
investment, which have accompanied the open-door policy and are usually high-
lighted as main engines of China’s growth performances. However, China’s tran-
sition to a market-based economy has created new problems, among which is the
growing inequality in per capita income between coastal and interior provinces.
Achieving balanced growth so as to reduce those disparities appears to be one of
the major policy challenges that China now faces in order to maintain both its
current GDP growth rate and social stability.
From this perspective, enhancing the growth potential of inland provinces is
necessary either directly, through appropriate economic policies, or indirectly, by
facilitating growth spillovers from rapidly developing coastal regions to backward
interior provinces. The first issue has been documented extensively in the recent
economic literature, which shows that a large part of economic growth in coastal
provinces comes from their deeper implementation of industrial and foreign trade
reforms.2 However, the question of how to take the best advantage of all these
reform and opening-door policy measures has, up to now, received little attention.
Considering China’s huge size, important regional differences arise naturally in ge-
ography and in natural resource endowments. These may have a substantial impact
on the economic returns of any kind of reform. To compensate for these natural
constraints, the availability of an appropriate infrastructure might prove helpful in
facilitating communications between provinces and with the outside world. Thus,
this issue may be important when we are evaluating provincial growth performance
and regional growth spillovers.3 Using a database covering 24 Chinese provinces
and autonomous regions over the period from 1985 to 1998,4 this paper provides
empirical evidence on why economic performance has been so different from one
province to another throughout the reform period and on the specific relation be-
tween the distribution of infrastructure endowments and the distribution of growth
performances.
The paper is organized as follows. Section 2 gives an overview of economic
growth and income level disparities among Chinese provinces. Section 3 sum-
marizes the evolution of infrastructure availability at both national and provin-
cial levels. Section 4 describes the conceptual and methodological background for
quantitative assessment made in Section 5 on the extent to which economic growth
may be accounted for through geography and infrastructure-related characteristics.
Section 6 provides and discusses a growth decomposition exercise, which leads
to a grouping of provinces according to their economic structure as well as their
2 For recent contributions, see Chen and Fleisher (1996), Mody and Wang (1997), Raiser (1998),

Wu (1999), and Démurger (2000).

3 As will be documented further below, attempts to evaluate, at least partially, the role of infrastructure

in China have been made by Fleisher and Chen (1997) and Mody and Wang (1997).
4 As will be seen, the Beijing, Tianjin, and Shanghai municipalities that are directly under the central

government are not considered in the quantitative analysis since their characteristics make them hardly
comparable with other provinces.
 INFRASTRUCTURE AND GROWTH IN CHINA 97

education level and infrastructure endowment as an explanation for their growth

performances. Section 7 concludes with several economic policy related remarks.

2. REGIONAL PATTERNS OF ECONOMIC GROWTH IN CHINA

The issue of rising or declining inequality among Chinese provinces has been
debated extensively in recent years. If provincial unequal development is far from
being a new phenomenon in China, the renewed interest in this question partly
comes from the fact that the redistribution system has been abandoned with the
implementation of reforms (Naughton, 1999; Wang and Hu, 1999). Hence, this pol-
icy is no longer available to prevent a widening dualism between provinces. China
has experienced growing interprovincial inequality during its transition process
to a market-based economy. Indeed, large disparities occurred in growth perfor-
mances among provinces from 1978 to 1998. The gap between the most dynamic
province in terms of GDP per capita, Zhejiang, with an annual growth rate of
12.5%, and the least dynamic, Qinghai, is 7.1 percentage points.
A broader regional classification of provinces reveals that, on average, coastal
provinces grew faster than inland provinces. This growth concentration along
the coastline brought about changes in regional income disparities. First, it led
to a slight downward trend in the cross-section dispersion of per capita GDP.
However, from the 1990’s onward, it has been accompanied by an increase in the
relative disparity between regions. Indeed, the rapid growth of the coastal provinces
did not contribute to divergence in incomes until 1990 since the fastest-growing
coastal provinces started from a below-average level of per capita income. The
convergence process came to an end after 1990, and regional incomes began to
exhibit widening trends of divergence as these provinces caught up and growth also
accelerated in the richest coastal provinces. Lorenz curves can be used to visualize
these trends in Fig. 1. They suggest that, when we exclude municipalities that seem
highly atypical,5 interprovincial inequalities remained rather stable up to the early
1990’s but have tended to increase since then. As a result, inland provinces such
as Guizhou and Yunnan remained far behind in terms of GDP per capita in 1998
while most coastal provinces had caught up with the richest municipalities. Thus,
due to growth concentration along the coast, the most pronounced disparities have
arisen mainly between coastal and noncoastal provinces.6
These opposite movements, with a catch-up process at the top of the scale and
a divergence phenomenon between regional zones from the end of the 1980’s
onward, summarize the complex regional development of China since the imple-
mentation of reforms. This complexity explains why it is so difficult to discern

5 As municipalities do have very particular characteristics in terms of size and economic structure,

they may appear as outliers in the overall sample (Wu, 1998). Fleisher and Chen (1997, Fig. 1) also
show that their estimated total factor productivity level is much higher than the average.
6 To give an example, Guangdong province had a level of GDP per capita slightly inferior to that of

Qinghai in 1978, and nearly three times higher in 1998.

98 SYLVIE DÉMURGER

FIG. 1. Evolution of GDP per capita disparities among Chinese provinces, difference between the
Lorenz curve and the 45◦ line, 1978–1998. Beijing, Tianjin, and Shanghai municipalities, as well as the
Tibet autonomous region, are excluded from the sample. The curves here represent differences between
the Lorenz curve and the 45◦ line, so that a lower curve corresponds to lower inequality. Sources: State
Statistical Bureau (various issues) and author’s calculation.

a convergence relationship between Chinese provinces.7 Indeed, as suggested by

Fig. 2, there is no clear relationship between initial GDP per capita and subsequent
growth when considering all provinces but excluding the municipalities.8

3. INFRASTRUCTURE PROVISION IN CHINA

3.1. National Trends in Infrastructure Investments
During the pre-reform period, the centralized decision-making structure applied
to all kinds of investments, including those in infrastructure equipment. Central-
ization implied that infrastructure investments were made according to priorities
established in a general development strategy. Among different aspects of this
strategy were the emphasis on heavy industries development and, mainly from the
end of the 1960’s onward, the emphasis on provincial self-sufficiency. Both have
had a particular influence on infrastructure equipment, especially transportation.
They favored the development of the transport network in Northern China, where
heavy industries were located. More specifically, they favored railway develop-
ment versus other types of transportation modes, to carry huge quantities of raw
material and resources at a lower cost per kilometer from resources-rich provinces,
e.g., Shanxi for coal, to industrializing Northern provinces. As a consequence, the
7
See Raiser (1998) and Wu (1998) for a discussion on the existing literature on this issue.
8
The only significant relationship seems to be between the coastal provinces and the municipalities
alone (Démurger, 2000).
 INFRASTRUCTURE AND GROWTH IN CHINA 99

FIG. 2. Per capita income and growth performance of Chinese provinces, 1978–1998. Beijing,
Tianjin, and Shanghai municipalities, as well as the Tibet autonomous region, are excluded from the
sample. Sources: State Statistical Bureau (various issues) and author’s calculation.

central government made substantial efforts to expand the railway network rather
than upgrade existing routes (Huenemann, 1992) so that it more than doubled in
length between 1952 and 1978, from 22,900 to 48,600 km. Despite these efforts,
transport equipment investments, which were implemented mainly at the state
level, remained rather small compared to basic needs in terms of both moderniza-
tion of existing equipment and construction of new facilities, until the beginning
of the reforms. On the telecommunication side, investments were nearly nonex-
istent during the pre-reform period. Altogether, at the beginning of the 1980’s,
China was a relatively poorly endowed country in terms of both transport and
telecommunication network.
During the development process, infrastructure investments have become nec-
essary in order to alleviate infrastructure endowment related constraints and to
facilitate the development of economic activities. However, while the implemen-
tation of a priority investment program at the beginning of the 1980’s set energy
and infrastructure sectors as key sectors to be developed and financially supported
(Naughton, 1996), investment in transport as well as in the telecommunication and
energy sectors lagged behind that in industry for the ensuing decade. The share of
transportation and telecommunication services remained stable at around 10% of
state fixed-assets investment, while that of the energy sector was steady at around
20%.
In the context of growing interregional trade, the inherited primitive infrastruc-
ture associated with relatively low investments during the reform period resulted in
100 SYLVIE DÉMURGER

chronic shortages of transport services and increased urban congestion. From the
beginning of the 1990’s, investment in infrastructure has been reasserted progres-
sively as a major national policy priority,9 leading to a large increase in the share
of transportation and telecommunication services in state fixed-assets investment,
up to 30% in 1998. As road development lagged far behind that of the railway
throughout the pre-reform period, great efforts have been made from the 1980’s
onward to fill the gap by building new roads and opening up remote areas. Besides
this quantitative aspect, concerns about quality issues have appeared during the
reform period, with a shift in priorities toward upgrading existing routes.
3.2. Spatial Distribution of Infrastructure Equipment
Since the beginning of the reform period, the sources of infrastructure funding
have been diversified and include local governments’ expenditures,10 international
organizations’ loans, and foreign capital. However, the decentralization process
that has been accompanying China’s transition toward a market-based economy
has had contrasting effects on infrastructure provision at a regional level. On the
one hand, as local governments have better information about local conditions and
preferences, efforts have generally been reoriented to meet the demand for public
goods. In particular, this has been the case for the road network, which has been
expanded according to local needs in the eastern provinces. On the other hand, the
larger autonomy given to local governments at every level of the administrative
hierarchy has produced unexpected effects on the level of infrastructure provision.
As discussed by Jin (1994), the reform process led local governments to pay
less attention to investment in transportation and telecommunication because they
were focusing on their productive activities and investing in industrial capacities.
This has been true at least until the beginning of the 1990’s, when infrastructure
shortages were so severe that they required real investment efforts.
While local governments had more power in terms of fixed-assets investments
compared to the center, they tended to neglect their role as a public good provider
and to concentrate on their role as an entrepreneur. This unique feature of the
Chinese economic system, assigning a dual identity to local governments, gave
way to irrational behavior as these two objectives may produce conflicting in-
terests. Moreover, autonomy in decision making given to local governments fa-
vored individualistic behaviors and noncoordinated decisions, which sometimes
lead to a wasteful duplication of infrastructure facilities11 or, in contrast, exacer-
bated shortages in infrastructure capacity. Finally, besides the potentially inefficient
use of resources, the decentralization process induced a de facto rise in inequal-
ity between provinces since the capacity to raise funds to finance infrastructure
9 In particular, an ambitious investment policy was announced in February 1998 to build roads,

railways, and power stations, with the total expenditure over three years planned to be US$ 750 billion.
10 Every level of local government is now concerned with public goods and services provision.
11 A striking example of this kind of inefficiency can be found in the number of airports built in

Guangdong province since the beginning of the reforms (Sung et al., 1995).
 INFRASTRUCTURE AND GROWTH IN CHINA 101

investments mainly depends on local government revenues and/or their ability to

negotiate with the central government.
Table 1 gives a broad overview of provincial infrastructure endowment dispari-
ties, including both transportation and telecommunication. The most pronounced
regional difference in the availability of transport infrastructure can be found

TABLE 1
Infrastructure Availability and Structural Characteristics by Province, 1985–1998 Average

Transport network density Telecom- Coal

(km/1,000 km2 ) munication Population production Electricity
(telephones/ density (tons/1,000 production
Provincesa Railway Highway Waterway 1,000 persons) (km2 ) persons) (kWh/person)

Zhejiang 9 310 104 50 418 31 672

Fujian 9 350 32 38 250 289 594
Guangdong 4 372 61 59 360 137 796
Jiangsu 7 245 231 45 660 357 727
Shandong 14 301 12 23 547 803 646
Hainan 6 401 10 26 199 2 291
Henan 13 273 7 14 521 1,048 461
Anhui 12 226 43 16 409 636 406
Hubei 9 259 46 23 294 197 667
Hebei 17 252 0 25 327 1,085 748
Jiangxi 10 199 29 15 229 552 357
Xinjiang 1 17 0 17 9 1,443 558
Jilin 19 151 6 36 132 1,008 864
Inner 4 38 1 19 19 2,410 957
Mongolia
Sichuan 5 173 15 12 192 687 383
Yunnan 4 154 3 14 96 628 419
Guangxi 7 163 19 13 183 237 356
Shaanxi 9 188 4 20 161 1,018 560
Shanghai 42 547 370 139 2193 0 2,620
Beijing 58 617 0 149 665 859 1,114
Tianjin 42 370 15 90 798 0 1,275
Hunan 11 276 48 11 291 653 393
Liaoning 24 276 3 44 271 1,315 1,192
Shanxi 15 214 1 14 189 9,777 1,268
Guizhou 8 178 10 9 187 1,298 456
Gansu 5 76 0 11 50 750 845
Ningxia 8 125 6 27 72 2,931 1,416
Heilongjiang 11 102 10 31 76 2,131 896
Qinghai 2 23 0 21 6 620 1,194
National 13 237 37 35 338 1,134 798
average

a Provinces are classified according to their GDP per capita average annual growth performance

from 1978 to 1998. Sources: State Statistical Bureau (various issues) and author’s calculations.
102 SYLVIE DÉMURGER

FIG. 3. Average transport network density at a provincial level, 1985–1998, including railways,
highways, and inland waterways (km/1000 km2 ): dark areas, over 500; medium-dark areas, 350–500;
medium-light areas, 200–350; light areas, less than 200.

between coastal and interior provinces. Looking more closely at transportation

modes, the coastal/inland divide appears particularly in road network density,
which is lower and lower the closer provinces are to the west. As roads have been
developed very rapidly during the last 20 years, this inequality illustrates the un-
even development that occurred throughout the reform process between coastal
and noncoastal provinces.
Figure 3 shows that, among noncoastal provinces, those that are relatively well
endowed in terms of transportation facilities are located next to coastal provinces.
Their endowments can be attributed either to a strategic role as a coal producer,
e.g., Shanxi, or to their position relative to the Yangtze River, e.g., Hubei and
Anhui. On the opposite end, transport network density remains very low in remote
provinces, which nonetheless are energy resources provinces, such as Ningxia,
Inner Mongolia, or Xinjiang.
On the telecommunication side, the regional gap is even deeper and reinforces
transport disparities. Provinces in which the number of telephone sets per capita is
 INFRASTRUCTURE AND GROWTH IN CHINA 103

higher than average are also those where overall transport network density is over
350 km per 1,000 km2 . In addition, the distribution of telecommunication facilities
indicates that the three northern provinces of Liaoning, Jilin, and Heilongjiang are
above-average provinces, which can be at least partly explained by their inherited
strategic situation as state-owned industry bases during the pre-reform period.12

4. INFRASTRUCTURE ENDOWMENT AND ECONOMIC GROWTH:

CONCEPTUAL AND METHODOLOGICAL FRAMEWORK
In the following two sections, we try to identify whether differences in infras-
tructure endowment have played a role in per capita income growth in Chinese
provinces. From a theoretical point of view, the perception of the role of produc-
tive public expenditures as an engine of economic growth has changed markedly
over the last few years. It was recently re-examined in the framework of endoge-
nous growth theory when, following the empirical work of Aschauer (1989), new
growth theory models began to take account of public spending as a factor for
self-sustaining productivity gains and long-term growth (Barro, 1990).
It is now usually recognized that investment in physical infrastructure, including
transport services, telecommunication, power, and irrigation, can improve the pro-
ductivity of all inputs in the production process and thus strengthen long-run growth
performance by facilitating market transactions and the emergence of externalities
among firms or industries (Jimenez, 1995). In this respect, total factor productivity
growth is a function of infrastructure endowment under the assumption that where
infrastructure facilities are developed, it is easier for entrepreneurs to adopt new
technologies and consequently generate technical progress and economic growth.
In the case of China, where distances are huge and where technological progress
is mainly imported rather than created by local R&D activities, this argument may
apply particularly well. Moreover, both transportation and telecommunication in-
frastructures may be of particular importance since industrial activities in China
tend to be located far from energy and raw materials resources. This is the case
for energy resources, e.g., coal and natural gas, which are located mainly in the
west while industrial centers are based on the east coast. As the latter need more
and more energy resources throughout their development process, a weak infras-
tructure network across provinces might imply inefficiency in the transportation
of raw materials as well as potential increases in their price.13 Hence, without
the basic infrastructure that links producers to raw materials providers and final
goods consumers, both inefficiencies and competitiveness problems may impede
economic development.
China’s economic growth has been the focus of a growing recent literature that
only rarely raises the question of the specific relationship between infrastructure
12 Those three provinces were already among the best endowed in terms of telecommunication as

early as 1978, when telecommunication facilities were nearly nonexistent.

13 A World Bank discussion paper (Harral et al., 1992) pointed out this problem in the case of

Guangdong.
104 SYLVIE DÉMURGER

availability and growth. Among others, Fleisher and Chen (1997) use the trans-
portation route length in 1986 as an explanatory variable for total factor produc-
tivity (TFP) level and growth in Chinese provinces from 1978 to 1993. However,
they do not find any significant contribution of transport infrastructure. Despite
these weak results, they retain the estimated value of the corresponding coefficients
when evaluating policy implications. Mody and Wang (1997) use panel data on
the output of 23 industrial sectors for seven coastal provinces from 1985 to 1989
and emphasize several determinants of coastal China’s growth during the second
half of the 1980’s. They find that both transport, measured only by road network
length, and telecommunication facilities have been engines of growth during this
short time period from 1985 to 1989.
Our analysis aims at assessing the relationship between infrastructure develop-
ment and economic growth in China by using both a larger database and as many
different infrastructure indicators as possible. The database used in the economet-
ric analysis covers 24 Chinese provinces and autonomous regions over the period
from 1985 to 1998.14 One of our main concerns is the role of transport equip-
ment in growth differentials. Hence, it seemed relevant not to include the three
municipalities of Beijing, Tianjin, and Shanghai in the analysis in order to keep
a comparable basis in terms of size and of the role of transport as a transaction
facilitator. Moreover, due to time length limitations of our sample and in order to
eliminate partly short-term fluctuations, we use three-year weighted and centered
moving averages15 for all the variables. This approach increases the number of
time-series observations in our panel data set. Data sources are described in the
Appendix.
We estimate a growth equation by using the now-standard Barro-type frame-
work, which allows testing for conditional convergence by adding to a Solow-type
equation a set of variables reflecting differences in the steady-state equilibrium. In
our case, we try to account for differences in investment in both physical and human
capital and in economic environment, including the relative degree of openness
and reform in different provinces as well as their geography and their infrastructure
endowment.
Hence, the growth equation estimated on panel data has the form

git = αi + ηt + β Ln(yit−1 ) + γ X it + φ Z it + ψ Wit + u it , (1)

where g represents the average annual growth rate of real GDP per capita, y
14 Due to missing values, Hainan, Qinghai, and Tibet have been excluded from the statistical analysis.

Moreover, as the Chongqing area was given a municipality status only from 1997 onward, data before
1997 do not allow us to distinguish between Sichuan and Chongqing municipality, which have therefore
been combined.
15 A three-year average is certainly not long enough to capture long-term phenomena and serves

only to smooth short-term cycle variations. Moving average computations give a higher weight to the
current year; for the computation formula, see Table 2 and its notes.
 INFRASTRUCTURE AND GROWTH IN CHINA 105

represents the level of real GDP per capita, X contains a set of variables intended to
account for production factors accumulation, basically physical and human capital,
W is a matrix of variables intended to account for differences in reform implemen-
tation and economic structure, Z contains measures of geographical constraints
and infrastructure endowment, and αi and ηt are province- and time-specific pa-
rameters, respectively. The former stands for productivity level differences among
provinces and takes into account unmeasured characteristics of provinces, includ-
ing economic reforms, natural resources, or geographical location differences. The
latter is introduced to control for temporary shocks or policy changes that might
have affected all provinces at the same time. This may be particularly relevant
during the 1990’s, when both economic reforms and growth accelerated. Hence,
the potential shift in China’s growth process during the 1990’s is accounted for
using a dummy variable covering the 1991 to 1998 period. Moreover, as will be
seen in the regression results, the period dummy is introduced both as an additional
term and in interaction with a coastal dummy variable in order to take into account
any potential differences between coastal and inland provinces in terms of policy
implementation.16
Finally, some statistical features must be stressed. First, due to the panel form
of the data set, several tests have to be performed in order to choose the correct
specification. In particular, the Hausman test indicates that a fixed-effects model
is preferred to a random-effects model (see Table 2). However, presenting the two
different estimation techniques is a way to check the robustness of our results, and,
as pointed out by Mody and Srinivasan (1998), the random-effects model gives
a composite picture, since it combines the within and between perspectives.17
Moreover, the use of a random-effects model allows us to introduce infrastructure-
related variables that are available only at one point in time and can be considered
as environmental variables. Second, several variables used as explanatory variables
are likely to be affected by economic development and consequently to be inversely
correlated to growth. Both domestic and foreign investments in fixed assets may be
to some extent demand-induced, in that they may follow as well as lead economic
development. To get consistent results, we also present estimations computed
through a two-stage least-squares (2SLS) procedure.

5. ECONOMETRIC EVIDENCE
Regressions reported in Table 2 provide estimation results on the role played
by geographical constraints, and human efforts made to alleviate these natural
constraints, along with structural factors in the economic performances of Chinese
provinces. Different indicators are used, a measure of the urbanization rate, two
16 The distinction between the two periods (1985–1991 and 1992–1998) has been suggested by an
anonymous referee to capture any policy shift toward developing the coastal region during the 1990’s.
17 As suggested by an anonymous referee, the use of different panel data techniques is important

both to extract the most information from the data and to test the robustness of our estimates.
 106

TABLE 2
Determinants of Per Capita Economic Growth, 1985–1998a

(1) (2) (3) (4) (5) (6) (7)

GDP(−2) −0.189 (−10.99) −0.193 (−10.90) −0.128 (−10.21) −0.194 (−11.53) −0.120 (−11.80) −0.127 (−10.31) −0.192 (−12.65)
Investment 0.213 (5.21) 0.339 (3.35) 0.140 (4.55) 0.212 (5.25) 0.357 (3.61) 0.135 (4.46) 0.196 (2.80)
Secondary 0.511 (3.13) 0.709 (2.94) 0.127 (1.94) 0.636 (3.90) 0.891 (3.80) 0.139 (2.14) 0.605 (3.53)
education level
Share of agriculture −0.318 (−3.45) −0.240 (−2.60) −0.135 (−2.28) −0.363 (−3.65) −0.275 (−2.88) −0.146 (−2.49) −0.424 (−4.69)
Share of collective 0.075 (2.31) 0.067 (2.15) 0.134 (4.91) 0.079 (2.41) 0.067 (2.17) 0.132 (4.90) 0.103 (3.50)
sector
Foreign direct 0.610 (7.84) 0.518 (5.07) 0.566 (6.24) 0.435 (5.09) 0.394 (3.57) 0.443 (4.34) 0.367 (3.76)
SYLVIE DÉMURGER

investment
1992–1997 period 0.030 (5.92) 0.022 (2.57) 0.043 (10.93) 0.025 (4.85) 0.015 (1.75) 0.042 (10.51) 0.025 (4.14)
dummy
Coastal dummy 0.58×10−2 (0.69)
Coast × period 0.020 (2.97) 0.021 (3.14) 0.013 (2.37) 0.024 (4.03)
Urbanization 0.037 (2.04) 0.036 (2.00) 0.064 (3.87) 0.034 (1.89) 0.030 (1.73) 0.063 (3.84) 0.041 (2.43)
Transport 0.698 (3.403) 0.754 (3.69) 0.198 (1.74) 0.578 (2.79) 0.644 (3.14) 0.166 (1.47) 0.553 (3.02)
Transport2 −1.198 (−5.13) −1.121 (−4.77) −0.730 (−3.02) −0.920 (−3.75) −0.857 (−3.41) −0.646 (−2.67) −0.731 (−3.42)
Population 0.14×10−3 (0.54) 0.42×10−3 (1.31) −0.35 × 10−3 (−3.81) 0.23×10−3 (0.90) 0.54×10−3 (1.68) −0.31 × 10−3 (−3.33)
density
Transport × 0.59 × 10−3 (1.92) 0.39 × 10−3 (1.20) 0.93 × 10−3 (4.09) 0.24 × 10−3 (0.72) 0.26 × 10−3 (0.77) 0.81 × 10−3 (3.49)
population
density
Telephone 0.443 (3.90) 0.326 (2.50) 0.304 (2.74) 0.395 (3.44) 0.243 (1.84) 0.273 (2.48) 0.419 (3.56)
Distance to −0.102 (−1.75) −0.088 (−1.53)
town more
than 10 km
Village accessible 0.040 (3.08) 0.036 (2.54)
by telephone
Number of 288 (=24 × 12) 288 (=24 × 12) 288 (=24 × 12) 288 (=24 × 12) 288 (=24 × 12) 288 (=24 × 12) 288 (=24 × 12)
observations
Estimation method fixed-effects fixed-effects random-effects fixed-effects fixed-effects random-effects fixed-effects
(2SLS) (2SLS) (2SLS)
Fisher test 7.86 [F(23, 249)] 7.96 [F(23, 247)]
Hausman test 37.712 [χ 2 (6)] 56.795 [χ 2 (7)]
Adjusted R 2 0.786 0.779 0.581 0.791 0.785 0.584 0.794
a All variables are expressed as weighted moving averages. If X it is the observed value of X for province i at date t, its weighted moving average X̃ it , used in the
regression, is measured as X̃ it = (X i,t−1 + 2 × X i,t + X i,t+1 )/4. The values shown between brackets are the t-values. The estimated standard deviations have been
INFRASTRUCTURE AND GROWTH IN CHINA

corrected using a White matrix. The abbreviation 2SLS indicates two-stage least-squares. Instruments are exogenous variables (including fixed effects), twice-lagged
investment and foreign direct investment variables, the annual real wage (weighted by the share of the labor force in total population), agricultural to industrial relative
prices, and the ratio of exports plus imports over GDP. The adjusted R 2 of the instrumentation equations is 0.86 (and 0.86 when adding “coast × period”) for investment
and 0.93 (and 0.95 when adding “coast × period”) for foreign direct investment.
107
108 SYLVIE DÉMURGER

measures of the relative isolation of rural areas in the province, i.e., the share
of villages whose distance to town is more than 10 km and the share of villages
accessible by telephone, a measure of the development of telecommunications, i.e.,
the number of telephones per capita, and several measures of the overall transport
network density and related congestion issues.
Together with the implementation of market-economy reforms, a reallocation of
production factors, in particular labor, from agricultural to industrial and services
activities has contributed to growing urbanization all over China. One of the most
striking evolutions in the past 20 years has been the increase in disparities between
rural and urban areas, and, from a spatial point of view, very important variations
arose among rural areas between inland and coastal provinces. Indeed, while rural
areas in coastal provinces largely benefited from the overall economic improve-
ment, many rural areas in inland provinces remained very poor. To account for the
relative isolation of some provinces as well as for the urban/rural divide, we use the
urbanization rate taken as an imperfect proxy for all kinds of geographical char-
acteristics related to the provincial economic structure. Estimation results confirm
that the urban-biased development strategy implemented since the beginning of
reforms leads urbanized provinces to grow at a higher rate than rural provinces.
Data from the First National Agricultural Census in China, issued in 1997,
provide additional evidence on the negative role of geographical constraints in
economic growth. They give information on the percentage of villages located
more than 10 km from the home township or town as well as on those accessible
by telephone. They suggest that provinces where the percentage of isolated villages
is above 20% are also the poorest and the most remote provinces in China, e.g.,
Yunnan, Guizhou, and Inner Mongolia. Moreover, while nearly all villages had
electricity and were accessible by roads and postal services in 1997,18 less than half
were accessible by telephone and there were huge differences among provinces.
Using both indicators in a random-effects specification confirms the negative re-
lationship between rural isolation and economic growth. Estimations also indicate
that the development of telecommunication in rural areas helps reduce the burden
of isolation and has a positive impact on economic growth. The introduction of the
number of telephones per capita, in both urban and rural areas, as another proxy
for telecommunication development confirms this significant impact on growth
performances and corroborates Mody and Wang’s (1997) results on the positive
effect of telecommunication growth.
Turning to the relation between transportation infrastructure and economic
growth, the indicator chosen to account for regional differences in transport en-
dowment is the density of railway, road, and inland navigable waterway networks.
These factors have been taken into account together, since it is difficult to dis-
tinguish benefits from one transportation mode to another. Of course, a density
18 According to the First National Agricultural Census, 96% of the administrative villages in China

had electricity in 1997; 87% were accessible by road vehicles and 90% by postal services.
 INFRASTRUCTURE AND GROWTH IN CHINA 109

measure gives only quantitative information on transportation infrastructure and

does not say anything about its quality, e.g., accessibility and road conditions.
In the absence of information on transport infrastructure quality at the provincial
level, a quantitative assessment for a country where distances are huge can nev-
ertheless give useful primary information on the relative importance of means of
communication in economic performance. Moreover, the relation between infras-
tructure and growth may not be linear since the impact of quantity, rather than
quality, enhancing investments in infrastructure may be lower with economic de-
velopment. Our results show a nonlinear and concave relationship for the impact
of transport endowment on economic growth.19 The positive effect of transport
equipment is decreased with its development. This finding suggests that, although
investing in network expansion of transport-poor provinces can prove to be very
useful for economic growth, the best strategy for transport-rich provinces is to
invest in upgrading or quality-improvement of existing facilities.
Finally, in measuring the role of infrastructure in economic growth, it is impor-
tant to distinguish between opening-up and congestion related issues. The former
can be measured through a density measure, as previously done; the latter needs
to account for population density when infrastructure endowment is measured.
Following Mody and Wang (1997), we introduced an interaction term between
transport density and population density in the regressions, together with popu-
lation density itself. As indicated by the, respectively, positive and negative co-
efficients, our results tend to suggest that a higher transport density also reduces
congestion-related constraints and thus facilitates growth. However, these are much
less robust than other results to specification changes and should be taken with
care.
Econometric estimations of Eq. (1) reported in Table 2 provide additional ev-
idence on the determinants of provincial economic growth from 1985 to 1998.
These determinants have already been documented, at least partially, in the exist-
ing literature on China’s economic growth. However, as some of our specifications
differ from the usual ones, our results require further comment. First, the signifi-
cant and negative coefficient associated to the logarithm of lagged GDP per capita
(GDP(−2) )20 indicates a catch-up phenomenon among Chinese provinces. If not
convincing evidence of a conditional convergence relationship between Chinese
provinces,21 this result suggests that those provinces that were farther from their
steady-state equilibrium level tended to grow at a higher rate, at least in the short
run. Moreover, this result holds even when municipalities are excluded from the
sample. This may be an important contribution to the debate on convergence issues
19 They corroborate Mody and Wang’s (1997) findings about the positive but subject to diminishing

returns effect of a road network on economic growth for a limited time and regional data set.
20 As regressions use three-year centered moving averages, the level of GDP per capita is twice

lagged in order to prevent any overlapping with the dependent variable.

21 Testing for conditional convergence would require a longer time period, or at least averages on

more than three years.

110 SYLVIE DÉMURGER

in the sense that, while there is no evidence of an absolute convergence relationship

between provinces only, conditional convergence is likely.
Second, the set X of explanatory variables included on the right-hand side of the
growth equation accounts for production factors-related differences. As physical
capital is a major production factor, different rates of accumulation in fixed-assets
should contribute to growth differences, and this hypothesis is confirmed by our
estimation results. Moreover, referring both to Lucas’ (1988) work on the contribu-
tion of human capital to economic growth and to the empirical debate on the issue,
we use a secondary education level variable to account for the impact of human
capital availability on technical progress. The proportion of total population with
at least secondary education measures the level of education.22 As indicated in
Table 2, the availability of educated labor improves economic performance. From
the perspective of the decentralization process, this result is very important because
education funding falls mainly within the jurisdiction of local governments. This
means that further inequalities are likely to arise if poor provinces cannot raise
enough funds to invest in education capacities.
A final set of explanatory variables includes differences in the implementation
of reforms that can be accounted for by a wide range of indicators. The volumi-
nous literature dealing with this issue shows that, among important reforms, those
that seem to have been engines of growth differences reflect productive structure
and openness. Thus, the matrix W includes indicators on the share of agricultural
activities, on the share of the collective sector in total industrial production, and
on the rate of foreign direct investment. The basic idea for introducing the share
of agriculture in total value-added is that agricultural provinces may have fewer
opportunities for productivity growth than industrial provinces and may thus grow
substantially more slowly. This difference may be important since our period of
interest does not cover the beginning of the 1980’s, when agriculture production
grew at a sustained rate. Indeed, Table 2 indicates that the share of agriculture
in total GDP has the expected negative impact on growth. Moreover, to control
for differences in the internal reform process, we introduce the share of collective
enterprises in total industrial production as a proxy. These enterprises, including in
particular township and villages enterprises (TVEs), are usually said to have been
the most dynamic. Contrary to the state sector, they may have benefited relatively
more from both technical progress and the introduction of market economy mech-
anisms. As suggested by the positive and significant coefficient, it is indeed the
case that provinces in which the share of collective enterprises, as opposed to state
enterprises, is higher have experienced higher growth performance.23 Turning to
22 The computation of this variable is based on the 1982 population census, which gives information

on population by educational level and by province. The values for the number of educated people
in subsequent years are inferred with the perpetual inventory method using available information on
graduation and mortality.
23 Note that when we use the nonstate share of industrial production rather than the collective share,

results are similar. Unfortunately, because of missing data, we could not test for the contribution of
private industrial production alone.
 INFRASTRUCTURE AND GROWTH IN CHINA 111

the impact of openness on regional economic growth,24 the positive and highly
significant coefficient confirms the standard conclusions as to the role played by
foreign direct investment in China’s provincial growth process since the imple-
mentation of reforms. Finally, the use of the 1991 to 1998 period dummy and its
interaction with a coastal dummy indicates, other things being equal, an acceler-
ation of economic growth from 1991 onward, which has been significantly more
pronounced in coastal provinces.

6. GROWTH DECOMPOSITION
While the estimation results reported in Table 2 provide some evidence of the
marginal contribution of each identified determinant to economic growth, they
do not give any direct indication of their relative average contribution. To deal
with this issue, this section proposes a retrospective analysis of growth based on
a simple growth accounting exercise. Its aim is to give a picture of the economic
development of Chinese provinces in light of their structural and economic char-
acteristics and to highlight the growth engines that should be targeted in order to
achieve a balanced and sustainable growth process. The decomposition involves,
first, computing the gap between the predicted per capita income growth rate of
each province and the national average, approximated by the average of our sample
simulated growth rates, and then decomposing this gap into various components
that reflect the differences in each of the variables included in the growth regres-
sions presented in Table 2.
Average gaps over the 1985 to 1998 period with respect to the national mean
and their decomposition into each component for each province are reported in
Table 3. As indicated in this table, a broad regional classification can be drawn from
the results taking into account both differentiated development strategies and geo-
economic characteristics. The first group includes eastern coastal provinces, which
have had on average higher per capita GDP growth rates. Their above-average per-
formances come from a relatively developed transport and telecommunication
network as well as economic activities oriented toward nonagricultural industries.
In addition, for the southeast provinces of Guangdong and Fujian, foreign direct
investment has played a particularly important role, while for Shanghai’s neigh-
boring provinces of Jiangsu and Zhejiang, nonstate activities, and particularly
collective enterprise activities, have been important engines of growth.
The second group gathers northern provinces in which growth performances
have been much less impressive. While urbanized, relatively well-endowed in

24 In terms of openness, two categories of indicators can be considered. One deals with export

promotion, the other with foreign direct investment (FDI) attraction. For the former, neither openness
indicators, e.g., the ratio of exports over GDP or the ratio of exports plus imports over GDP, nor export
growth indicators appeared to be significant and robust to specification changes. Hence, openness is
measured here only by its FDI component. The weak results on the role of export promotion, indicating
that it would have been a less important determinant of provincial growth in China, are discussed in
Démurger (2000).
 112

TABLE 3
Contributions to Provincial Growth Gaps Relative to the National Mean (1985–1998), in Percentages a

Contribution of each variable to the difference in per capita growth relative to the national mean

Growth difference Fixed Initial Coll.

predicted effects GDP Invest. Education Agriculture sector FDI Urban. Transport Telecom.

East: Nonagricultural, transport-rich, successful provinces

Guangdong 2.97 2.64 −8.50 0.22 −0.54 2.49 0.29 2.00 1.27 1.79 1.31
Fujian 2.87 2.65 −2.29 −0.56 −4.16 1.19 0.73 2.11 0.37 2.38 0.45
Zhejiang 2.40 2.24 −8.73 −0.14 −0.35 2.98 2.82 −0.12 0.55 2.28 0.86
Jiangsu 2.25 1.60 −10.63 0.52 1.80 3.16 3.05 0.37 0.06 1.67 0.65
Shandong 1.40 0.20 0.37 1.38 0.29 0.47 2.00
SYLVIE DÉMURGER

−0.29 −2.76 −0.19 −0.06

Hebei 0.98 −1.98 −0.97 −0.07 0.58 1.35 1.12 −0.21 −0.31 1.45 0.00
North: Nonagricultural, Education-rich, unsuccessful provinces
Jilin −0.15 −2.92 −3.37 −0.16 6.23 0.31 −0.81 −0.17 0.90 −0.64 0.48
Liaoning −0.87 −4.84 −12.21 −0.18 8.05 4.98 −0.35 0.19 0.77 1.99 0.72
Shanxi −1.45 −10.08 0.02 0.56 3.65 3.95 0.43 −0.40 0.17 0.64 −0.39
Heilongjiang −1.71 −0.38 −5.51 −0.48 5.96 1.60 −1.13 −0.24 0.54 −2.34 0.26
Center: Agricultural, transport-rich, unsuccessful provinces
Jiangxi 0.26 4.59 3.47 −0.92 −3.06 −2.87 −0.81 −0.27 −0.53 0.99 −0.34
Henan 0.23 −4.68 5.00 −0.19 −0.10 −0.92 0.75 −0.29 −0.74 1.79 −0.38
Hubei −0.31 −0.66 −1.51 −0.90 0.74 −0.99 0.44 −0.21 0.66 2.14 −0.04
Anhui −0.36 0.29 4.73 −0.66 −3.68 −2.34 0.52 −0.28 −0.29 1.65 −0.30
Hunan −0.73 −2.89 5.18 −1.74 −0.46 −2.24 0.11 −0.25 −0.30 2.31 −0.47
Southwest: Agricultural, education-poor, unsuccessful backward provinces
Guangxi 0.34 −1.25 10.71 −1.07 −2.96 −3.78 −0.74 0.27 −0.17 −0.28 −0.40
Yunnan −0.48 5.30 7.39 −0.01 −7.63 −2.15 −0.81 −0.36 −0.68 −1.13 −0.40
Sichuan −0.72 0.68 4.79 −0.67 −3.12 −1.23 −0.04 −0.30 −0.31 −0.10 −0.43
Guizhou −2.07 −1.98 12.58 −0.16 −6.71 −2.96 −1.55 −0.40 −0.33 0.00 −0.55
Northwest: Transport-poor, unsuccessful provinces
Xinjiang −0.49 8.20 −1.77 2.70 3.87 −4.00 −1.36 −0.40 −0.40 −7.09 −0.25
Gansu −0.51 5.78 2.13 −0.32 −2.89 1.32 −1.04 −0.42 −0.60 −3.98 −0.48
Shaanxi −0.84 −5.22 2.04 0.79 2.23 0.35 −0.56 −0.12 −0.36 0.14 −0.14
I. Mongolia −0.86 6.31 −0.46 −0.01 2.41 −1.33 −1.06 −0.43 −0.25 −5.84 −0.20
Ningxia −2.14 −3.12 0.65 3.24 −0.23 1.30 −1.39 −0.38 −0.49 −1.82 0.10
a The fixed effects column is calculated from both fixed effects estimated in Eq. (7), Table 2, and the interaction term between the coast dummy

and the period dummy. Thus, it comprises an individual effect as well as a measure of policy shift toward coastal provinces. The transport column
gives the overall contribution of transport infrastructure to the difference in per capita growth relative to the national mean, including both the linear
term and the squared term, but excluding the congestion-related coefficients, which are not estimated in Eq. (7), Table 2. Source: author’s calculation,
from Eq. (7), Table 2.
INFRASTRUCTURE AND GROWTH IN CHINA
113
114 SYLVIE DÉMURGER

terms of education and, for some of them, also in terms of transport or telecommu-
nication facilities, these provinces grew at relatively moderate rates. An important
part of their weak performances is captured through fixed effects and, thus, re-
mains to be analyzed further. However, the industrial structure of these provinces,
based either on natural resources extraction, i.e., Shanxi, or on heavy industry, i.e.,
Liaoning, Jilin, and Heilongjiang, might be a potentially important explanatory
factor. In the case of Shanxi, coal abundance has indeed induced a de facto spe-
cialization of the province in coal extraction and may have created some type of
Dutch disease by diverting resources from more productive activities. In the case of
the northeast provinces of Liaoning, Jilin, and Heilongjiang, the state-dominated
and inefficient production structure based on heavy industry might have acted
as one of the most important brakes on economic growth. This effect might be
captured partly by the collective sector variable, whose contribution is below the
national average, and partly through fixed effects. Indeed, following Lin et al.
(1998), we argue that the centrally determined specialization of these provinces in
heavy industry might not reflect their actual comparative advantages, which could
have affected negatively their economic performance.
The third group is composed of a set of central provinces, i.e., Henan, Jiangxi,
Anhui, Hubei, and Hunan, which have been relatively unsuccessful on average.
While transport-rich thanks to their geographical position along the Yangtze River,
these provinces did not overcome their main handicap based on a specialization
in agricultural activities. The neighboring provinces along the Yangtze River are
hardly industrialized despite their natural resources endowment, in terms of both
coal and hydraulic resources, and a relatively favorable geographic position. Being
located next to fast developing eastern provinces, they could have benefited from
growth spillovers. However, their low investment in both physical and human capi-
tal seems to have impeded their growth performance, as can be seen by the negative
sign of the gap in investment, foreign direct investment, and education level.
The southwest provinces of Guangxi, Yunnan, Sichuan, and Guizhou com-
pose the fourth group, characterized by a backward, agricultural, and unsuccessful
economy; they are very poorly endowed in education and to some extent in trans-
portation facilities. These provinces remain very poor on average compared to the
rest of the country and have not taken advantage of the reform process. They look
like forgotten provinces in the overall economic landscape since many types of
investment, in domestic or foreign capital, in education, in transportation, or in ur-
banization, as well as industrial reforms, remained far below the national average.
While southwest China does have important natural resources, its isolation and the
absence of investment make these resources inefficiently utilized or underutilized
so that its economic performance remains very low.
Finally, the northwest group consists of unsuccessful provinces for which the
lack of infrastructure investment and the low implementation of economic re-
forms explain much of the lower growth rates during the 1985 to 1998 period.
While the availability of transport infrastructure explained an important part of the
 INFRASTRUCTURE AND GROWTH IN CHINA 115

above-average performance of the eastern provinces, the lack of adequate infras-

tructure endowment in Inner Mongolia, Gansu, and Xinjiang strongly constrained
their growth potential. In this respect, the case of Xinjiang deserves particular
attention since, despite an above-average rate of investment in fixed assets and
a high average education level,25 its economic performance has been among the
poorest. An explanation can be found in its underdevelopment in terms of transport
facilities which, in a strongly agricultural province, makes goods transportation to
and from markets extremely difficult and expensive.

7. CONCLUSION
This paper investigates the relationship between interprovincial disparities in the
availability of infrastructure and economic growth in China from 1985 to 1998.
Since infrastructure improvement may be considered a byproduct as well as a
necessary condition for market development and economic growth, it is important
to determine whether underdeveloped infrastructure networks are likely to lead to
growing regional disequilibrium in China. Using panel data for a sample of 24
Chinese provinces, the estimation of a growth equation indicates that differences
in geographical location, transport infrastructure, and telecommunication facilities
do account for a significant part of the observed variation in the growth perfor-
mances of provinces. Moreover, this conclusion is reinforced in the growth gap
decomposition exercise, in which the transport variable appears as one of the most
regularly differentiating factor.
The regional classification drawn from this exercise also gives a broad picture
of the extent to which economic policy induced and naturally inherited elements
combine to explain provincial economic growth differences. These findings have
different policy implications in terms of both redistribution by the central gov-
ernment, and the related decentralization process, and public investment targeting.
They suggest that economic policy measures that can improve infrastructure equip-
ment may have a nonnegligible impact in promoting per capita income convergence
among Chinese provinces. Moreover, setting policy priorities and targeting public
investments toward those that have the highest growth payoff would help to im-
prove regional as well as nationwide growth prospects. In this respect, expanding
and upgrading the network of transportation, storage, and distribution services, as
well as developing the telecommunication network, would be particularly useful
in rural areas, to allow for the development of efficient, competitive markets and
for the diffusion of economic growth.

STATISTICAL APPENDIX: SOURCES AND DEFINITIONS

The database has been constructed from a number of different official Chinese
sources, including Hsueh et al. (1993), State Statistical Bureau (various issues
25 This high level of education is attributable to two main sources, the pre-reform redistributive

system that put emphasis on western regions and the presence of Koranic schools.
116 SYLVIE DÉMURGER

and 1996), National Bureau of Statistics (1999), and National Agricultural Census
Office of China (1999). All current values are expressed in local currency (RMB
yuan). Real GDP has been computed with the implicit deflator given by the State
Statistical Bureau. Other variables expressed in real terms were deflated using
the provincial overall retail price index based on 1978 price structure. The list of
indicators used is the following:
Investment: gross fixed capital formation over GDP.
Secondary education level: number of people who have completed at least
secondary education divided by the total population.
Share of agriculture: primary sector real GDP divided by total real GDP, in
percentage terms (deflators are not similar).
Share of collective sector: share of collective enterprises in total industrial
production.
Foreign direct investment: foreign direct investment in constant prices (1978 =
100) as a share of real GDP.
Urbanization: urban population divided by the total population.
Transport: railway, road, and inland navigable water network length per square
kilometer.
Population density: total population per square kilometer.
Telephone: number of telephone sets per capita.
Distance to town more than 10 km: percentage of villages located more than
10 km from the home township or town.
Village accessible by telephone: percentage of villages accessible by tele-
phone.

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