Economic Growth and Infrastructure Investments in Energy and Transportation: A Causality Interpretation of China's Western Development Strategy.

• Author: Shiu, Alice

1. INTRODUCTION

   China is now the second largest economy of the world, thanks to three decades of an average annual growth of 9.7% since the economic reform that began in 1978. Along with this unsurpassed growth, China has become the world's largest energy-consuming country and leader in C[O.sub.2] emissions. Its vast regional income disparities in the 1990s led to the Western Development Strategy (Xibu Da Kaifa, or WDS hereafter) launched in 2000 to construct large infrastructure projects in the Western region shown in Figure 1. Fifteen years later, expanding the region's energy and transportation infrastructures (ETI) remains prominent on China's development agenda. (1)

   This paper aims to answer two questions. First, were the large investments in ETI effective in fostering economic growth? If "yes", the need for maintaining the ETI expansion to mitigate the regional income disparities would diminish. As a result, the ETI expansion could slow down in sympathy with China's commitment to reduce its fossil fuel consumption and carbon emissions announced in the 2015 Paris Summit on Climate Change. (2)

   China's Paris commitment coincides with an annual economic growth of 6.9% immediately prior to the 2016 release of its thirteenth five-year plan. (3) This leads to the second question: did economic growth trigger these infrastructure developments? If "yes", the ETI expansion would continue in response to China's goal of achieving by 2020 a per capita income twice the 2010 level.

   We empirically answer these two questions by estimating the causal relationship between regional ETI expansion and economic growth. An affirmative answer to the first question is premised on an empirical finding of ETI expansion causing economic growth. An affirmative answer to the second question is premised on an empirical finding of economic growth causing ETI expansion. A bidirectional causal relationship between ETI expansion and economic growth suggests a balancing act of cutting C[O.sub.2] emissions and maintaining an annual growth rate of about 7%. (4)

   To provide a contextual background of our empirical analysis, we first recognize that the WDS was designed to remedy the regional income inequalities documented in the extant literature (e.g., Jian et al., 1996; Wu, 2001; Grewal and Sun, 2002; Lin and Liu, 2005; Kanbur and Zhang, 2009; Fleisher et al., 2010; Huang and Todd, 2010; Li and Wei, 2010). Further, infrastructure investments gained national policy priority in the 1980s (Jin, 1994). Despite the large investments made since 2000, little is known of the causal relationship between ETI expansion and economic growth in China.

   While a Granger-causality analysis is a fruitful first step to answer the two questions posed above, its empirical reasonableness is debatable for two reasons. First, an econometric inference of Granger-causality between ETI expansion and economic growth may be biased due to its omission of likely important drivers of China's regional growth. (5) Second, economic interdependence between the Western and non-Western regions is complicated, and a Granger-causality analysis like ours oversimplifies this interdependence.

   While conceptually valid, these reasons can apply to any econometric investigation not based on a full blown model of China's locational growths by region, province or county. They also imply an infeasible scope of research due to limited availability of data and research time and resources. Hence, using these reasons to reject a causality investigation is counter-productive, resulting in a research paralysis that does not aid the understanding of the nexus of ETI expansion and economic growth. That said, these reasons do point out our analysis' limitations that we try address to the extent possible.

   Our causal analysis of ETI expansion and economic growth adds to the sparse literature on the WDS. To the best of our knowledge, there are only two extant studies: (a) Grewal and Ahmed (2011) develop a regional growth model to assess the WDS's progress; and (b) Lu and Deng (2013) offer a qualitative analysis of the WDS. However, neither study informs the next policy step for the WDS-related ETI expansion: deceleration, continuation, or acceleration?

   Our investigation entails the pre- and post-WDS periods during 1991-2012, so as to provide insights on the fundamental differences in the causal relationships among these variables. Using a panel data sample for China's 30 provinces in the Western and non-Western regions, we conduct a Granger causality analysis of the relationships between ETI expansion and economic growth. Interpreted through a model of production capacity constraints that treats other economic variables (including land, labor and materials) as given, we find Granger causality between ETI expansion and economic growth in the post-WDS period but not the pre-WDS period. This suggests capacity constraints in the energy and transportation sectors following the implementation of the WDS.

   Using a trivariate formulation, our causality investigation enriches the literature on energy-GDP nexus that focuses on how GDP may vary with energy consumption and production (Ozturk, 2010 and references thereof), as well as the China-specific literature on the same topic (e.g., Yuan et al., 2008; Yu and Meng, 2008; Wu et al., 2008; Zhang and Cheng, 2009; Chang, 2010; Li et al., 2011; Wang et al., 2011a; Wang et al., 2011b; Yalta and Cakar, 2012). (6) It also enriches the literature on the causal linkage between transportation infrastructure and economic growth (e.g., Yu et al., 2011; Gao, 2005; Zhang and Sun, 2008; Tan and Yang, 2009; Sahoo et al., 2010) and among energy consumption, transportation infrastructure and economic growth in India (Pradhan, 2010). To the best of our knowledge, our paper is the first study that documents the causal relationships among energy investment, transportation infrastructure expansion and economic growth for China.

   The paper proceeds as follows. Section 2 is a brief background of the WDS. Section 3 presents our economic model used to explain the econometric results in Section 5, which are based on the data described in Section 4. Section 6 concludes.

2. WESTERN DEVELOPMENT STRATEGY

   China has three stages of regional development: (1) Balanced Development (1949-1978) marked by the central government's promotion of similar growth among China's provinces, (2) Unbalanced Development (1979-1999) marked by the central government's targeted promotion of the coastal provinces' rapid growth, and (3) Coordinated Development (2000-present) marked by the central government's effort to achieve a more even growth pattern for all provinces.

   Endowed with favorable geographical and natural conditions (e.g., large urban cities, availability of skilled labor and exposure to international commerce), the coastal provinces (e.g., Guangdong and Fujian) had been developing at a faster rate than provinces in China's interior (e.g., Guangxi and Sichuan). The second stage of Unbalanced Development exacerbated the unequal development because the coastal provinces benefited from the central government's exclusive...