ABSTRACT
Provincial income inequality in China has been increasing during the last ten years, especially between successful coastal provinces and backward inland 270 provinces. Explanations given to this unequal distribution of economic growth among China provinces are often based on including regional dummies in the provincial growth regressions. A smaller but vocal part of the literature has emphasized the granting of preferential policies to explain the faster growth of the coastal provinces. We decompose the regional dummies into a measure of the ability to participate in international trade (geography), and a preferential policy index (policy). We find that geography and policy had about equal influence on coastal growth. Geography affected growth with a much longer lag than policy, however. Speeding up economic development in inland provinces requires to facilitate their integration with both the rest of China and the world. An effective strategy must therefore encompass infrastructure investment, interprovince cooperation in investment and production activities, as well as human capital formation, and institutional capital formation.
