Regional productivity, output, and labor supply and demand: A theoretical model and the case of China

Profound changes across regions of China underlie the country's rapid transformation from an economic backwater to a vital center of production and growth. The approach to evaluating the spatial aspects of China's economic development is both theoretical and empirical. A theoretical model shows that equilibrium wages and rents are determined in locations within a national economy that are endowed with varying levels of amenities. Using a specific functional form, an increase in productivity is shown to cause migration to either relatively high or relatively low amenity locations, depending on the initial technology level. Of primary empirical interest is the relative level and growth in productivity and output per capita among regions. While the neoclassical growth model suggests that regional productivity converges over time, models of agglomeration indicate that some locations will gain persistent productivity advantages from the concentration of economic activity. On the provincial level, there is some evidence of convergence. The northern coastal region has the highest estimated relative level of technology, while the southern area has the highest growth. On the level of the urban area, variation in gross domestic product per capita has increased the most in the southeastern and least in the interior provinces over the period 1987-91. Regression results show that disparities have increased fastest in provinces that are in the "takeoff" stage of economic development, as evidenced by high G.D.P. growth, foreign direct investment, and increases in the tertiary sector.