Borders, geography, and economic activity: The case of China

Abstract

We document large economic discontinuities across the provincial borders separating coastal China from the inland. Using counties contiguous to the borders of four plains provinces, we find that manufacturing activity (output, employment, and exports) increases abruptly as one crosses from the inland to the coastal side of the border. The counties on the coastal side of the border also have higher urban population shares and higher shares of output produced by foreign firms. The economic discontinuities are larger for non-state sectors than for the state sector, and are robust to including measures of local public goods and infrastructure. Because there is no geographic barrier associated with the border in the plains provinces, and because geography and culture are fairly continuous at the border, these large economic discontinuities are unlikely to be explained by geographic or cultural differences. We argue that policy differences between the coastal and inland provinces explain much of the discontinuity, and find that differences in preferential policies can account for a large part of the coastal/inland divide.