The decomposition of disturbances to national output of China–the evidence of sectoral and regional shocks

Abstract

The Chinese government has established policies to promote its industrial sectors and to develop coastal provinces since the late 1978. To investigate the extent and reason the output growth in China has been influenced by these policies, an error-component model is employed to decompose the importance of sectoral and regional shocks to variations in national output. The results show that both sectoral specific shocks common across regions and regional specific shocks common across sectors are important in explaining the disturbance of national output in China. Specifically, sectoral specific shocks consistently explain relatively more disturbance of Chinese output than regional specific shocks do. Our empirical results are somewhat different from Stockman (1988) and Costello (1993), since they show almost equal explanatory power of sectoral and national shocks in accounting for national outputs in OECD countries.

Acknowledgements

We appreciate an anonymous referee and David Cornberg for their valued suggestions and comments on the revision of this article. The usual disclaimer applies. We also wish to thank the National Science Council (NSC) of Taiwan and National Policy Research Center NSYSU for providing funding for this research. Finally, we like to thank the funding from the National Science Council of Taiwan under the funding number NSC 91-2415-H-130-002-, and the funding from the Center for Humanities and Social Sciences, and the funding from National Policy Research Center of National Sun Yat-sen University. We also thank Dr. David Cornberg for his comments and suggestions to this paper.

Notes

¹In the initial stage of reform, from 1979 to 1987, the main objective was to transform central planning economy to competitive economy. In the following adjustment stage, from 1988 to 1991, the Chinese government allowed previously open areas more freedom and allocated state-owned investment more toward building a competitive economy. From 1992 to 1997, China mainly emphasized establishment of the investment system which could foster efficiency of intermediary service system and develop network of capital market (Yao, 2003).

²Using these SEZs as ‘windows to the west’, China accessed advanced technology, business information, and managerial techniques from the outside world. Such ‘open door policy’ acted as an ‘engine’ of China's fast growth in the later periods (Wang and Bradbury, 1986). In 1980, China formed four special economic zones (SEZs) in the coastal cities of Shenzhen, Zhuhai and Shantou in Guandong province and Xiamen in Fujian province. Based upon the great success of SEZs, in 1984 and 1985, 14 open coastal cities (OCCs) in eight provinces, were granted rights to trade with foreign investors with little administrative restriction.

³Please see the details of open door policy in Lee (1994) and Jian et al. (1996).

⁴The Gini coefficient of China for national income inequality has increased from 0.330 in 1980 to 0.458 in 2000 (Chang, 2002).

⁵Central region (C) consists of the provinces of Hubei, Jiangxi and Hunan. Jiangsu, Shanghai, Anhui and Zhejiang form the East region (E). The North region (N) combines Hebei, Bejing, Tianjing, Shanxi, Shandong and Henan. The Northeast (NE) region has Heilongjiang, Jilin and Liaoning. Xinjiang, Qinghai, Gansu, Ningxia, Inner Mogolia and Shanxi form the Northwest (NW) region. The Southwest (SW) denotes the provinces of Tibet, Sichuan, Yunnan and Guizhou. Finally, the South (S) region has Guangxi, Guangdong, Fujian and Hainan.

⁶Chatak and Seale (2001) modelled supply response for agricultural sector using 28 Chinese provinces from 1970 to 1997 to determine whether national Chinese agricultural supply is price and price risk responsive. At the national level, Chinese agriculture is found to be price and price risk responsive. Therefore, any disruption in the agricultural sector in different regions could change the national price level of foods.

⁷Because the total amount of global rice export per year has never exceeded 85% of rice production in Hunan province alone, any excessive demand for rice resulting from China might create upward pressure on the rice price in the global market.

⁸Please see details in ten Raa and Haoran (2006) and Benjamin et al. (2005).