^*Bulent Unel is a professor in the Department of Economics at Louisiana State University. Harm Zebregs is a senior economist in the European Department of the IMF. This paper is a significantly revised version of the authors' IMF working paper (Unel and Zebregs, 2006). The authors are grateful to Doug McMillin, two anonymous referees, and the editor, Robert Flood, for their insightful comments. They also thank Wolfgang Keller and the China division of the IMF for helping to collect and construct the data.

Abstract

China's growth performance since the start of economic reforms in 1978 has been impressive, but the gains have not been distributed equally across provinces. We use a nonparametric approach to analyze the variation in labor productivity growth across China's provinces. This approach imposes less structure on the data than the standard growth accounting framework and allows for a breakdown of labor productivity into efficiency gains, technological progress, and capital deepening. We have the following results. First, we find that on average capital deepening accounts for about 75 percent of total labor productivity growth, while efficiency and technological improvements account for about 7 and 18 percent, respectively. Second, technical change is not neutral. Third, whereas improvement in efficiency contributes to convergence in labor productivity between provinces, technical change contributes to productivity disparity across provinces. Finally, we find that foreign direct investment has a positive and significant effect on efficiency growth and technical progress.