Two essays on China's regional economic development

Abstract

The thesis consists of two studies on economic development in Sichuan – one of the most populous provinces of China. Much research has been devoted to explaining the fast growth of China in the last thirty five years, which has mostly taken place in the coastal region of China. What remains to be understood is the uneven growth of China during the same period. Sichuan represents the less-developed China. In addition, there is possibly as much variation in growth across Sichuan’s 178 counties as that across different provinces of China. Thus, Sichuan provides a good setting to study issues in China’s regional economic development.

In the first essay, we investigate the role of the Chinese Communist Party (CCP) – which serves as a proxy for state capacity – in the rural development of Sichuan’s 178 counties between 1957 and 1985. To deal with the endogeneity problem associated with the strength of the CCP in the various counties, we use the route of the Long March, a military retreat undertaken by the Red Armies in 1934-35, as an instrument to isolate the effect of CCP strength on agricultural investment and output, education, and rural industry. We find that counties with more CCP members are associated with more deaths in 1958-61 after the Great Leap Forward; they recorded faster grain output growth during the reform era (1978-1985), but not before; and they also experienced faster growth of township and village enterprises (TVEs) in 1980-85. However, the picture is more than a simple dichotomy of a dark Maoist period and a bright reform era. Counties with more CCP members also witnessed faster agricultural modernization and reduction in illiteracy during the Maoist era. In line with the burgeoning literature that emphasizes the importance of state capacity for economic development, the results suggest that while the policy excesses of the Maoist era destroyed private initiative and inflicted the famine, the seeds of China’s post-1978 growth might have been sowed during this period through the promotion of human capital and increased local state capacity.

In the second study, we study whether government policy changes might improve resource utilization in the setting of healthcare, which subsequently affects the quality of workforce and impacts on economic growth. Hospitals in China are certified by the government into three grades: Grade-1 (primary), Grade-2 (secondary), and Grade-3 (tertiary) with an increasing level of quality. Patients have a strong tendency of visiting Grade-3 hospitals, due to the relatively uniform pricing among different grades of hospitals. Meanwhile, the Chinese government provides its people with various medical insurance plans financed by government subsidies and contributions from employers and employees. The second study takes advantage of a policy change of the government insurance plans in the capital city of Sichuan – Chengdu, which lowered out-of-pocket cost for patients going to different grades of hospitals asymmetrically and aimed to increase the incentive of patients going to lower-grade hospitals. We employ a difference-in-difference (DID) approach to estimate the differential effect of the policy change on inpatient admission in Grade-2 and Grade-1 hospitals relative to that in Grade-3 hospitals, using a set of hospital-level data collected from a sample of more than 100 general hospitals in Chengdu for the 2007-2013 period. We find the growth of inpatient volume in Grade-2 and Grade-1 hospitals to be 16% faster than that in Grade-3 hospitals, indicating that the changes in insurance plans succeeded in enhancing more usage of Grade-2 and Grade-1 hospitals and hence improving the efficiency of resource utilization in Chengdu’s hospitals.