Investigating growth determinants in China’s provinces: the role of spatial spillovers

China began its economic reforms in 1978 and have experienced strong economic growth. However, economic growth is a complex phenomenon, as China’s provinces experienced regional disparity, where its coastal provinces grew faster compared to its underdeveloped interior provinces. Previous provincial-level growth studies in China do not account for spatial interactions, as many economic models are dimensionless in nature. This is important to consider, as regional disparity experienced in China can be attributed to its diverse geography and initial reforms that favoured the coastal provinces. Thus, this thesis examines the determinants of economic growth in China’s provinces, using an updated panel dataset from 1996 to 2015, employing economic models that accounts for spatial effects. The thesis begins by reviewing the evolution of China’s modern economy and the determinants of economic growth followed by three empirical studies.Chapter 4 examines the role of financial development and institutional reforms on economic growth using dynamic panel models. This study does not account for spatial spillovers as banks and financial institutions in China are restricted to operate in their respective provinces. Although the relationship between finance and growth is well established in the empirical literature, there is growing evidence to suggest that the effects of financial development on growth is weakening and, in some cases, negative. More importantly, previous studies that examine finance-growth in China’s provinces have found both positive and negative effects of finance. Furthermore, financial development across China’s provinces is uneven, as the coastal provinces have benefited from the development of stock markets. Consequently, we examine the nonlinear effects of finance and statistically establish nonlinearity using a stringent U-test, providing new empirical evidence as previous studies do not formally account for nonlinearity. The estimated results support the literature that postulates the positive effects of finance on growth. However, the results also find that the effects of finance are nonlinear suggesting that further reforms are needed for China’s financial system. Chapter 5 investigates the effects of health and education expenditure on economic growth using a spatial autoregression model. Endogenous growth theories highlight the positive effects of health and education investment on growth through development human capital and productivity growth. There are various studies that examine the effects of human capital formation on growth in China’s provinces, however, most studies overlook the role of spatial spillovers. The spatial autoregression model accounts for spatial interaction between provinces and provide empirical evidence on spatial spillover effects. China’s Central government have delegated health and education expenditure responsibility to provincial governments; as a result, spatial interactions are potentially present. This study contributes new empirical evidence with policy implications. We find evidence that positive spatial strategic interaction occurs between provinces supporting the yardstick theory of competition. Furthermore, the results show that the effects of education expenditure are positive to economic growth and exerts a spatial spillover effect. However, the results on the effects of health expenditure is mixed, which suggests further reforms are needed in China’s healthcare system. Finally, Chapter 6 examines the efficiency of China’s provinces using a spatial Durbin production frontier with an extended dataset from 1985 to 2013. China’s geography is vast and diverse across the country, with the Eastern provinces that benefit from flat land and access to coastal seaports while its landlocked provinces are mountainous and lack infrastructure to international markets. Thus, it is important to consider the spatial efficiency spillover effects of the respective provinces, as they face varying production opportunities. This study contributes to the literature as it is the first study that examines the provincial-level transient and persistent efficiency and spatial efficiency spillovers in China, providing important policy implications. Previous studies that examine the productivity and efficiency in China have suggested that efficiency gains have been exhausted. However, we find evidence of persistent inefficiency and show that a one-fifth increase in output can be realised, if inefficiency issues are addressed. Policymakers should identify sectors that require further reforms, such as the healthcare system, in order to maximise the efficiency of resources. We also show that spatial efficiency spillovers are positive, which allows provinces to benefit from its neighbouring provinces.