Inter-Regional Output Spillovers of Policy Shocks in China

In China inter-regional per capita output disparities are large and persistent and increasingly a matter for policy concern at the highest levels of government. Interregional spillovers are an important ingredient in the design of regional development policy. Yet little is known about the direction, magnitude and timing of output spillovers from one region to another. In this paper we focus on spillovers from policy shocks. We use a conventional three-region disaggregation of the Chinese economy and extend existing literature by explicitly introducing policy variables into a VAR model of regional outputs. We find that both policy variables have significant and positive effects on output in each of the regions when entered separately. In the short run both policy variables have a greater effect on the coastal region than on the other two and the effect in the central region is larger than in the western region, giving some credence to the common presumption that at least part of the expenditure boosts in the poorer inland regions find their way to the coastal provinces. These results are generally confirmed when we use the whole model to simulate the effects over time of the policy shocks. A shock to the coastal region not only has no beneficial spillovers to the other regions but actually depresses the output of the inland provinces. This is also true of a shock to the central region which comes at the expense of the western region. Only the western region has consistent positive spillovers on the other regions; looked at another way, a boost to the western region is shifted partially to the other regions.