Human Capital And Provincial Economic Convergence In China

China has experienced rapid economic growth in the last three decades,averaging more than9%per annum growth in GDP. However, not everyone enjoys thefruit equally, regional disparity become a serious issue during the same period.According to neoclassical economic growth theory, regional per-capita income willconverge to a same level. In contrast of this, the provincial economic development ofChina shows a divergent trend. Recent studies have agreed that human capital playsan important role in the economic development. Human capital is an important sourceto promote long-term economic growth, and also proved to be an effective way toreduce poverty and regional disparity. However, former literature did not study therole of human capital in the process of regional economic convergence thoroughly. Inview of this, this paper tries to investigate the impact of human capital on China’sprovincial economic convergence from both theoretical and econometrical aspects,and give policy suggestions to reduce regional economic disparity based on ourfindings.Using provincial level panel data for1990-2009, we investigate the convergenceof provincial economies in China, focusing on the role of human capital. Our datashow that there is significant gap between regions or provinces in terms of per-capitaGDP and human capital, coastal region has advantage over central and westernregions in both aspects. In spite of this, the difference of economic growth ratebetween provinces is reducing, implying that our economy do have the potential toconverge. How to transform this potential into reality is the problem this paper aimsto solve.Firstly, we use the traditional neoclassical economic convergence model to studyprovincial economic growth under the assumption of diminishing returns to capital,and to explore the relationship between human capital and regional economicconvergence. Then we gradually relax the linear assumption of this model by dividingsample provinces into different groups according to region and time period, our groupestimation found that China’s provincial economic convergence have a nonlinearproperty. To study the nonlinear relationship between human capital and economicconvergence, this paper applies simple threshold effects model, and Hansen humancapital threshold effects model on China data, we determine the number of threshold, calculate human capital threshold estimates, and investigate the different impact ofhuman capital before and after the thresholds. Considering the possible modelspecification problem, we completely drop the assumptions of parametric model, andstudy economic convergence using non-parametric approach, which solely based ondata. The paper further builds a semi-parametric model to avoid curse ofdimensionality, which is a common problem in multidimensional nonparametricregression, our semi-parametric model mainly focus on the non-linear relationshipbetween human capital and economic growth.With multiple measurements of human capital, and Fixed Effects as well asInstrumental Variable estimation, our results are quite robust. Firstly, provincialeconomies show signs of conditional convergence, but not unconditional convergence.Coastal region, interior region shows sign of club convergence, but western regiondidn’t. When combining the interior and western together, we find significant sign ofclub convergence. Provincial saving rate and population growth appear to promoteeconomic convergence, but human capital works the opposite, dominating theobserved divergence of the Chinese economy. The late developing-advantage of poorprovinces can be offset by their backward in human capital. Secondly, human capitaland economic growth have a non-linear relationship, and human capital investment isalso the key for poor provinces to catch up. More specifically, the engine power ofhuman capital on economic development is greater in central and western regions thancoastal region, and also is more apparent in1990-1999than2000-2009for the wholesample. Our semi-parametric fixed effects model finds that, average years ofeducation always have a positive impact on economic growth, but the marginal impactis different in different stages. At the same time, the impact of per-capita labor forcehuman capital follows a ladder shape, it first promotes economic growth, then theeffect vanishes, but when LFHC reach certain point, its’ positive effect appears again.In general, human capital is the reason that caused regional inequality in China, andalso one way to reduce regional economic gap.Finally, based on our theoretical analysis and empirical results, this paperproposes the following policy suggestions to reduce regional economic inequality.Firstly, change the old concept of economic development, stick to human capital-oriented development strategy. Secondly, encourage and help the non-coastal regionsto increase their human capital investment according to comparative advantage principle. Thirdly, improve our human capital institutional system, enhance thehuman capital quality and efficiency.