This paper develops an improved test of economic convergence or divergence using time series methods by introducing nonlinear trends in the form of logarithmic trend functions into the vector error correction model. The usefulness of the method is illustrated in an analysis of the growth pattern between Chinese regions in 1952–2007. Comparing all combinations of regional pairs, the analysis yields support for economic divergence in roughly half of the cases. In the other half, we instead find that regions have grown while maintaining stable income differences. As such, the results show the co-existence of divergence and conditional convergence among China’s regions.
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A similar approach is the nonlinear panel unit root test used by Lau (2010). There are some drawbacks with that method, e.g., the theory applied postulates that all differences between pairs of regions should cointegrate and that the test used only has the alternative hypothesis that a proportion of the differences is stationary.
Following the literature, the term “region” is used to denote China’s 22 provinces, 4 self-governing municipalities, and 5 Autonomous Regions. These three types of entities operate at the same administrative level and are directly subordinate to the central government.
We also conducted the tests for the post-1978 period only. Because we have fewer data points for these tests, the analysis is less precise compared to when we use the full sample, and the results will hence not be analyzed here. Nevertheless, the graphical analysis largely supported the findings for the latter years as represented in the figures using the full sample period.
Evans and Karras (1996) argue that the conventional cross-sectional technique of testing for economic convergence produces invalid inferences unless all permanent cross-economy differences in per capita GDP are perfectly controlled for and unless the countries or regions under consideration have income series that exhibit identical first-order autoregressive dynamic structures.
Note that the appropriateness our analysis is not affected by the trend breaks in GDP levels caused by unified chocks to growth on the national level, such as the Great Leap Forward, which can be clearly seen in Figs. 2 and 3. This is because our unit of observation is the difference in log GDP per capital between pairs of regions rather than separate regional time series.
Due to identification of the parameters, without loss of generality, the first observation is normalized to zero and the last to one.
A test based on the Taylor approximation principle presented by Teräsvirta (1994) was also carried out. The result was in accordance with the other tests and are, hence, not reported here.
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The authors gratefully acknowledge helpful comments from Tor Eriksson, Bertil Holmlund, Joakim Westerlund, and three anonymous referees. Johanna Rickne acknowledges financial support from the Ragnar Söderberg foundation.
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Lyhagen, J., Rickne, J. Income inequality between Chinese regions: newfound harmony or continued discord?. Empir Econ 47, 93–110 (2014). https://doi.org/10.1007/s00181-013-0745-y
- Output convergence
- Nonlinear cointegration
- Regional analysis