Skip to main content

China’s Lagging Poor Areas, by Martin Ravallion and Jyotsna Jalan, 1999, The American Economic Review Papers and Proceedings

There are remarkable geographic differences both cross and within provinces in China. What creates the poor areas? Are they catching up? What should government do? In their paper (AER, 1999, 103 citations), Ravallion and Jalan looked at these questions.

There is a bunch of evidence on convergence (Raiser 1998; Chen and Fleisher, 1996; Jian et al., 1996). However, it would be too hasty to conclude that China’s poor rural areas will eventually catch up. There is sign of dualistic divergence in the post-reform period between the coastal provinces and much of inland China (Jian et al., 1996). There is evidence for interurban convergence, but also for divergence within the rural economy (Howes and Hussain; 1994, Ravallion and Jalan, 1996; Khan and Riskin, 1998).

A  "geographic poverty trap” can arise if there are geographic externalities generated by local public goods, or local endowments of private goods with spillover effects, and that capital is not perfectly mobile. In this situation, a poor household live in a rich area can eventually get rid of poverty, yet an otherwise identical household living in a poor area experiences stagnation or decline. In Ravallion and Jalan (2002), they proposed a way to identify the impact of time-invariant geographic capital on consumption growth and discussed factors such as natural conditions, rural roads, private investment in agriculture and health care.

Since the mid-1980’s antipoverty policies in China have emphasized on poor-area development. When looking at the unconditional growth rates of affected areas, the policies seem to be unfruitful. The areas covered by policies actually have lower growth rates than those uncovered. However, initial area characteristics and whether the area is targeted are correlated. As a result, such unconditional evaluations will underestimate the impact of programs. What Jalan and Ravallion find, based on a structure model, is that the gains from the program were enough to prevent absolute decline, but were not enough to reverse the underlying divergent tendencies.

But these programs do have limitations. For example,  the counties covered are on average poorer than uncovered ones, but about half of the poor people live in the uncovered “rich” counties. A further limitation concerns lump sum vs consumption smoothing improvements. Year to year fluctuations in income is an important cause of poverty in rural areas while most policy instruments are only able to provide temporary consumption increases.  Another common criticism to direct investment is that it would be better to foster out-migration from poor areas than investing in these areas. However, investing in poor area is arguably a necessary condition for out migration. Rural families in China will almost never abandon their land. Underdevelopment and inherent riskiness of agriculture in poor areas can impede export of labor on farm.

Reference
Chen, Jian and Fleisher, Belton, 1996, Regional Income Inequality and Economic Growth in China, Journal of Comparative Economics, 22, issue 2, 141-164.
Khan, A., & Riskin, C. 1998. Income and Inequality in China: Composition, Distribution and Growth of Household Income, 1988 to 1995. The China Quarterly, 154, 221-253. 
Howes, Stephen, and Athar Hussain 1994 "Regional Growth and Inequality in Rural China° London School of Economics Working Paper.
Jalan, Jyotsna & Ravallion, Martin, 1996. Transient poverty in rural China, Policy Research Working Paper Series, The World Bank.
Jalan, Jyotsna & Ravallion, Martin. 1999. China's Lagging Poor Areas. American Economic Review. 89. 301-305. 
Jalan, Jyotsna & Ravallion, Martin,2002. Geographic poverty traps? A micro model of consumption growth in rural China, Journal of Applied Econometrics Volume 17, Issue 4, 329–346
Raiser, Martin. 1996. Subsidising Inequality: Economic Reforms, Fiscal Transfers and Convergence Across Chinese Provinces. The Journal of Development Studies. 34. 1-26. 
Tianlun Jian, Jeffrey D. Sachs, Andrew M. Warner, , 1996. Trends in regional inequality in China, In China Economic Review,  7(1), 1-21

Comments

Popular posts from this blog

Dividends and expropriation, Faccio, Lang, and Young (2001 AER)

 The failures in East Asian corporate governance are blamed for the East Asian financial crisis.  In East Asia, the predominant form of ownership is control by a family, termed as "crony capitalism", and the top managers are often from the family. In  Faccio, Lang, and Young (2001 AER, citation 1861) , they document ownership and control structures among East Asian corporations and analyze the salient agency problem, namely the expropriation of outside shareholders by controlling shareholders, by looking at dividend behavior. To start with, they show an extraordinary concentration of control in East Asia, whereby 6 groups control more than 20% of the corporations in the 9 most advanced East Asian economies. This control is obscured behind layers of corporations, hence insulated against the forces of competition on less-then-transparent capital markets. However, family control is also predominant in West Europe, though the group sizes are smaller, with 5 groups control about

TFP Differences and Capital Misallocation in Developing Countries: Hsieh and Klenow (2009) and Virgiliu and Xu (2014)

Cross-country income differences for the most part reflect differences in total factor productivity (TFP) across countries. But what could explain the differences in TFP in different countries? Hsieh and Klenow (2009, QJE, citation 3021) , use establishment level data in manufacturing to measure TFP gaps between China and India and the U.S. They find that misallocation in labor and capital could explain 30%-60% of the TFP differences between developing and developed countries, which means that  China and India have low TFP mainly because that resources are not allocated in the most efficient way. Virgiliu and Xu (2014, AER, citation 571) extend the framework to study the role of financial frictions in determining TFP. They focus on one specific type of misallocation, distortion in capital allocation generated by financial frictions. However, they find that this type of misallocation explains only a small part, 5%- 10%, of the TFP differences. However, financial frictions reduces n

Cultural and Institutional Bifurcation China and Europe Compared, by Avner Greif and Guido Tabellini, American Economic Review, 2010

How to explain the cultural and institutional bifurcations between China and Europe? In their paper Cultural and Institutional Bifurcation China and Europe Compared , Avner Greif and Guido Tabellini ( AER  2010 citation:187) demonstrated that initial distribution of values and social heterogeneity themselves alone could be the reason. Two otherwise identical societies can evolve along different self-reinforcing trajectories of both cultural traits and organizational forms. The collapse of the Chinese Han dynasty and the Roman Empire (after 220 CE) were turning points in the cultural and institutional evolution of China and Europe respectively. Large kinship organizations were common in the former but not the latter and this remarks the distinction in initial conditions. In China, the Han dynasty came to power while advocating Confucianism as an alternative to the Legalism of the previous Qin dynasty. Confucianism considers moral obligations among kin as the basis for social order,