Understanding China's recent growth experience: A spatial econometric perspective

This study reconsiders the question of China's recent growth experience from a spatial econometric perspective. An empirical model of Chinese output growth using cross provincial data over the 1978-1998 period is specified, but a spatial econometric analysis of the specification reveals strong evidence of misspecification due to ignored spatial lag dependence. The subsequent estimating using Anselin's spatial lag model determines the important sources of growth to be the growth of non-farm labor force, manufactured products, capital stock, and realized direct foreign investment. On the other hand, the estimated coefficient for the spatial lag variable suggests a polarizing process undergoing within the Chinese spatial economy, and the resulting change in the estimates of causal factors implies that as marketization progresses, a variety of spillover effects due to factor mobility, transfer payments and technological diffusion become operational, which actually improve the marginal productivity of factor inputs for labor (G(L)) and capital (G(K), G(DFI)) and bring national output closer to its frontier of the Chinese economy.