THE TRANSPORT SECTOR AND REGIONAL PRICE DIFFERENTIALS: A SPATIAL CGE MODEL FOR CHINESE PROVINCES

Abstract

With regression formulas replaced by equilibrium conditions, a spatial CGE (Computable General Equilibrium) model can substantially reduce data requirements. Detailed regional analyses are thus possible in countries where only limited regional statistics are available. Alhough regional price differentials play important roles in multiregional settings, transport does not receive much attention in existing models. This paper formulates a spatial CGE model that explicitly considers the transport sector and FOB/CIF prices. After describing the model, the performance of our model is evaluated by comparing the benchmark equilibrium for China with a survey-based interregional I-O table for 1987. The structure of Chinese economies is summarized using information obtained from the benchmark equilibrium computation. This includes regional and sectoral production distributions and price differentials. The equilibrium for 1997 facilitates discussion of changes in regional economic structures that China has experienced in the decade.

Keywords:

• SCGE model
• FOB/CIF prices
• Transport sector
• Chinese regional economy

Notes

¹ See Shoven and Whalley (1992) and Ginsburgh and Keyzer (1997) for basics of CGE models and their earlier development.

² Distinction between regions and countries is not essential. While traditional international economics precludes factor mobility, barriers among countries are lowered due to free trade agreements that lead to the global market.

³ Developed by the World Trade Analysis Center in 1992. See http://www.gtap.agecon.purdue.edu/ for details.

⁴ 1987 is considered as the base year for benchmark calculations since the IW and the Beijing tables (both for the year 1987) are the only survey-based I-O tables available as of 2004.

⁵ Hainan Province separated from Guangdong Province in 1988, and Chongqing Municipality separated from Sichuan Province in 1997. The 29 regions reflect the status quo in 1987. Correspondence with the seven regions employed in the IW table is also shown for later reference.

⁶ This can be justified by the fact that Chinese statistics only list freight transport for the transport sector, and passenger transport is combined with other services. Communication activities, which constitute 8.6% of transport products in 1987, are included in the transport sector. Since the cost of business communications can be regarded as a part of transport costs, only fractional demand for personal communications is left as primary demand.

⁷ If dependable data of public capital stock, , in region s are available, can be multiplied to (1) as the Hicksian augmentation factor, with a region and sector specific parameter .

⁸ For example, origins of the same good may change seasonally over a year. It is also possible to assume that the intermediate inputs are imperfect substitutes among different origins (see Armington, 1969). Then the intermediate inputs in the above production function can be written as , where represents the degree of substitution. However, in an actual production process, it is difficult to consider that a producer discriminates the same good just because it is produced in different regions.

⁹ The present model is designed to represent a static, ex post equilibrium, where factor allocation is regarded as being exogenous. Reallocation of factors can properly be considered in a quasi-dynamic setting.

¹⁰ For convenience, τ _K is called ‘corporate tax’, and τ _L ‘income tax’. Capital income may be considered as operating surplus before paying dividends. Under Assumption 3, whether the corporate tax is levied on firms or on households is not important.

¹¹ Although FDI does not explicitly appear in the model, it constitutes a part of I. In balance of payments, the fund is provided as a part of transfer from abroad.

¹² The net regional transfers TR ^s may also be determined by the government. However, they comprise two segments: one is transfer from foreign countries, and the other is associated with investment and government expenditure. While the former needs a separate distribution rule, their funding is basically independent of tax revenues.

¹³ Transport costs that accompany intra-regional purchases of transport firms are paid to transport firms themselves. Thus they can be deducted from the cost of producing the transport services required.

¹⁴ Since the production capacities of foreign countries X _i ^e directed to China are indeterminate, they may be replaced by the national amounts of imports.

¹⁵ Although interregional remittance from family workers is not explicitly considered in the model, it would constitute a major part of TR ^s . Government and investment expenditures also contribute to redistribution of income among regions. The real transfer to region s is defined as the difference between regional domestic products and regional final expenditures; . It is easy to confirm that .

¹⁶ The paths are calculated from the railroad network comprising 132 nodes and 167 links, which was compiled from the Chinese train timetable as of 1989 by Ando and Shibata (1997). This is because railroads then halved the total freight volume in ton-kilometers with ships, and the former is the only mode that serves all provinces, until recently, but Tibet. Comprehensive information on road transportation has not been available, and the network was still inadequate for long-haul carriage in the base year.

¹⁷ In practice, the 1987 I-O table for the base year of 1987 is regarded as the physical table. Average regional prices weighted by regional outputs then become unity in benchmark equilibrium.

¹⁸ MAPEs for individual columns and rows of the table may also be calculated. The highest MAPE of 207.0% is observed for the transport column, which is followed by 162.2% for the agricultural row.

¹⁹ Numbers following the regional identifier in parentheses represent changes in ranks of the given province in the decade relative to the first component.