PROVINCIAL PRODUCTIVITY IN CHINA to help the lagging interior provinces catch up to their more prosperous counterparts Aware of the political danger and perhaps also sensitive to the inequity of favoring coastal development, the central government has taken steps to pro- mote the growth of enterprises in the interior, focusing particular attention on steps to encourage investment in rural enterprises(Yang and Wei, 1996) Evidently this strategy has yet to produce the desired results. We hypothesize that a use of the persistent and widening income gap between the coast and interior is lower factor productivity in the noncoastal provinces We report tests of hypotheses that total factor productivity(TFP)and TFP growth vary across provinces. We identify factors contributing to the produc tivity gap and derive implications for policies that may help the interior provinces approach parity with their coastal counterparts The rest of the paper proceeds as follows. In Section 2, we deal with methodological issues and outline the basic theoretical and econometric proce dure. Section 3 contains our econometric results. The last section summarizes and draws policy implications MODELING TFP AND TFP GROWTH 2.1. Methodological Issues The first methodological issue addressed is frontier- versus standard produc tion-function estimation Lau and Brada(1995) point out that an advantage of using the frontier approach is obtaining the relative contributions of techno- logical growth and improvements in technical efficiency to TFP growth, which is important in forecasting how long current growth trends will continue. We have chosen not to use a frontier estimation approach for two reasons. First, accuracy in allocating the" residual" of the production relationship between technical efficiency and technological progress depends critically on the accu- racy with which inputs have been measured Because we focus on all sectors of the Chinese economy at the provincial level we do not have access to accurate capital-stock data. 3 See, for example, Chen and Fleisher(1996)and Yang and Wei(1996). Chen and Fleisher contains references to earlier studies on the provincial distribution of income and production. In particular, rising per capita income in 10 coastal provinces, which we define to include Beijing because of its location and to exclude Guangxi and Hainan because of inadequate data, has outstripped growth in the interior, so that between 1978 and 1993 the coast/noncost ratio of mean GDP per capita grew from 2.53 to 2.82, or 11%. s As described below, we are able to estimate the desired production-function parameters without data on the capital stock because we estimate a growth model, which requires data investment. Discussion of difficulties in using capital stock data in China to estimate aggregate production functions can be found in Chen et al. (1988)and Chow(1984), especially pp. 202 205. We also attempt to correct for inclusion of nonproductive investment in the data described belowPROVINCIAL PRODUCTIVITY IN CHINA 221 to help the lagging interior provinces catch up to their more prosperous counterparts. Aware of the political danger and perhaps also sensitive to the inequity of favoring coastal development, the central government has taken steps to pro￾mote the growth of enterprises in the interior, focusing particular attention on steps to encourage investment in rural enterprises (Yang and Wei, 1996). Evidently this strategy has yet to produce the desired results.2 We hypothesize that a major cause of the persistent and widening income gap between the coast and interior is lower factor productivity in the noncoastal provinces. We report tests of hypotheses that total factor productivity (TFP) and TFP growth vary across provinces. We identify factors contributing to the produc￾tivity gap and derive implications for policies that may help the interior provinces approach parity with their coastal counterparts. The rest of the paper proceeds as follows. In Section 2, we deal with methodological issues and outline the basic theoretical and econometric proce￾dure. Section 3 contains our econometric results. The last section summarizes and draws policy implications. 2. MODELING TFP AND TFP GROWTH 2.1. Methodological Issues The first methodological issue addressed is frontier- versus standard produc￾tion-function estimation. Lau and Brada (1995) point out that an advantage of using the frontier approach is obtaining the relative contributions of techno￾logical growth and improvements in technical efficiency to TFP growth, which is important in forecasting how long current growth trends will continue. We have chosen not to use a frontier estimation approach for two reasons. First, accuracy in allocating the ‘‘residual’’ of the production relationship between technical efficiency and technological progress depends critically on the accu￾racy with which inputs have been measured. Because we focus on all sectors of the Chinese economy at the provincial level we do not have access to accurate capital-stock data.3 2 See, for example, Chen and Fleisher (1996) and Yang and Wei (1996). Chen and Fleisher contains references to earlier studies on the provincial distribution of income and production. In particular, rising per capita income in 10 coastal provinces, which we define to include Beijing because of its location and to exclude Guangxi and Hainan because of inadequate data, has outstripped growth in the interior, so that between 1978 and 1993 the coast/noncoast ratio of mean GDP per capita grew from 2.53 to 2.82, or 11%. 3 As described below, we are able to estimate the desired production-function parameters without data on the capital stock because we estimate a growth model, which requires data on investment. Discussion of difficulties in using capital stock data in China to estimate aggregate production functions can be found in Chen et al. (1988) and Chow (1984), especially pp. 202– 205. We also attempt to correct for inclusion of ‘‘nonproductive’’ investment in the data as described below. AID JCE 1462 / 6w10$$$121 09-30-97 14:16:24 cea