Does investment allocation affect the inter-regional output gap in China? A time-series investigation

Inter-regional disparities in China have been an important concern for central-government policy-makers for most of the past 60 years. One of the main policy instruments for redressing the imbalance between the prosperous coastal region and the poorer inland region has been the allocation of investment spending. Yet there is little empirical work evaluating the response of disparities to changes in the regional distribution of investment. We help fill this gap and analyse the two-way relationship between these variables within a VAR/VECM framework. We find, surprisingly, that changes in the regional allocation of investment have only a modest beneficial effect on inter-regional output disparities while the effect in the opposite direction is much larger. We find this conclusion to be robust to numerous variations in variable definition. The effects of investment allocation on output disparities are larger, although, for the post-1978 period they are smaller for SOE investment.