China's Internal Borders

We measured the business-cycle correlations of the real gross domestic product (GDP) growth rates of two cities to capture the degree of segmentation across China's provincial and regional borders. This type of segmentation can be caused by local protectionism as well as other economic and geographic factors. After controlling the other factors, we zeroed in on the administrative border effect that is due to local protectionism. We found that the interprovincial administrative border effect rose and then gradually declined in the period between 1991 and 2007. Its increase coincided with the introduction of the Tax-Sharing System reform, which started in 1994. Our analysis shows that China's reform path did not create a persistent provincial "administrative border effect" that would debilitate market forces.