Comments by Laura Solanko, on Great Turning: How Has the Chinese Economy Been Trapped in an Efficiency-and-Balance Tradeoff?

Abstract

Laura Solanko: The paper examines China's regional development policies designed to improve the standard of living in its central and western provinces. These policies have been associated with increasing GDP per capita but also with decreases in productivity growth and increases in public debt in inland provinces. The authors conclude that relaxing restrictions on labor mobility would be essential in unlocking further growth and improving the overall efficiency of the Chinese economy. They further raise the concern, correctly in my mind, of rising debt levels for future economic growth.In a country as vast as China, regional disparities are bound to be remarkable if only due to historical, cultural, and geographical reasons. Moreover, the rapid growth from the early 1990s to the early 2000s greatly widened differences in income levels between the coastal provinces and the inland regions. The share of the cost in national GDP increased from 44 percent in 1978 to 51 percent in 1998 and 56 percent in 2006. Since the early 2000s a series of policy initiatives designed to stimulate economic growth in the central, northwestern, and western regions have been announced. A combination of the effects of these targeted policies and a tightening of labor markets in the coastal provinces have helped in achieving a reversal in the trend. Since the mid 2000s the inland provinces have started to converge in terms of GDP per capita, wage levels, and labor productivity (Lemoine, Poncet, and Ünal 2015).Empirical evidence on the relationship between inequality and growth as well as between efficiency and growth is mixed and data on China's provincial and county levels may greatly improve our understanding on these issues. For example, using provincial level data from 1979–2004 and a vector autoregressive model, Chen (2010) argues that in the long run economic growth and reduction in inequality are not conflicting goals. Chen and Groenewold (2010) introduce a two-region model calibrated to Chinese data to evaluate policies aimed at inter-regional income redistribution. They conclude that policies reducing the migration costs (hukou system) would greatly even out income disparities, but that it would mostly be achieved at the cost of the rich region (the coast). Policies that would equalize economic welfare and make both regions better off should focus on improving productivity in the poor region. For example, policies promoting agricultural productivity or infrastructure investments could potentially help. There is evidence based on European Union Structural Funds that transfers targeted on infrastructure investments can indeed foster growth in recipient regions, but the relation may be nonlinear (Becker, Egger, and von Ehrlich 2012).Therefore, there clearly exists plenty of room for further research about these topics and the authors’ choice of using firm-level data to analyze the effects of China's regional policies is welcome. Although I find their conclusions plausible, however, the authors should focus on providing evidence on causal relations instead of mere eyeballing two-way graphs. The reader is given only vague hints on why the results in the current paper differ from those of Brandt, van Biesebroeck and Zhang (2012), who use exactly the same data set. A clear focus, detailed discussion with the recent literature, and outlining the empirical methodology used would be an improvement.