Sources of income differences across Chinese provinces during the reform period: A development accounting exercise

Abstract

The present paper performs a development accounting analysis to investigate the sources of China's interprovincial income inequality over the period 1982-2005. We estimate a Cobb-Douglas aggregate production function with various specifications. Using the estimated parameters, we conduct a development accounting analysis as well as a variance decomposition. Our results suggest that differences in physical capital intensity and in total factor productivity are both important sources of cross-province income differences, each accounting for roughly half of the variation in income levels. Differences in human capital explain only a small amount of income differences across provinces. The results are robust to whether or not the assumption of constant returns to scale is imposed. The interaction between factor accumulation and total factor productivity is also discussed. © Journal compilation © 2009 Institute of Developing Economies.