Two Region Econometric Model Including Population Movement in China, 2 Provinces, 2 Areas (Urban, Rural) and 2 Sectors (Formal, Informal)

Abstract

We take up two provinces, Guangdong Province (an expanding coastal province with biggest inflow of population), and Sichuan Province (a retarded inland region with biggest outflow of population) in China, and construct an econometric model with 3-dimensional decomposition: 2 provinces (Guangdong and Sichuan Province), 2 areas (urban and rural) and 2 sectors (formal and informal). We paid special efforts to estimate the employment and productivity of formal and informal sectors in urban and rural areas. We divided the inter-provincial and intra-provincial migration into urban-rural flows accordingly. We also divided the total labor force in urban and rural areas into different skill groups based on academic careers (without education, graduates from elementary, junior high, senior high, university) to explain the different productivity (and thus level of employment) in each area and sector.In traditional analysis of rural-urban labor movement a la Harris & Todaro, population movement from rural area to urban area occurs based on the comparison between the wage of urban formal sector discounted by unemployment rate and with average productivity in rural area. But in the actual world, poor people in urban area cannot stay as unemployed without any revenue, and they are pooled in informal sector with low productivity. Out model explicitly considers this point.Our model has 51 equations (7 population movement, Guangdong Province with 21 equations, Sichuan Province with 21 equations, evaluation with 2 equations). We divide the population migration flows between 3 regions (Guangudong Province, Sichuan Province and other provinces), and between urban and rural areas. Then we decide urban and rural areas population based on natural increase and social increase. Next we explain employment and productivity of formal and informal sector in urban and rural areas, and decide GDP of each sector in urban and rural areas. Finally we decide the sum of GDP of 2 Provinces and differential of per-capita GDP between 2 Provinces for overall evaluation purposes.We used the data of 1978-2000 (1990 price), and estimated equations by Least-Square-Method. The final test showed a good fitting in which MAPE are in principle under 5% (except 2 population migration variables with very small absolute levels). We applied this model to various simulation studies to assess the economic effects of relaxing restrictions on population migration, influence of changing educational distribution, promotion of foreign trade and development strategy of western inland regions.Construction of this paper is as follow: Section 2 explains the changing trend of Chinese Economy; Section 3 explains model building; Section 4 shows simulation analysis; Section 5 shows economic projection until 2005; Section 6 concludes.This is a part of our continuous research effort of econometric analysis of Chinese 30 provinces. Last year we reported an econometric model of two provinces based on aggregate variables. This year we improved the results by disaggregating employment and productivity into different areas and sectors, and also migration flows accordingly.