THE ROLE OF TELECOMMUNICATIONS INFRASTRUCTURE IN REGIONAL ECONOMIC GROWTH IN CHINA

1. THE ROLE OF TELECOMMUNICATIONS INFRASTRUCTURE IN REGIONAL ECONOMIC GROWTH IN CHINA Lei Ding Prepared for the Technology, Management & Policy Graduate Consortium, Annual MeetingJune 26-28 MIT Cambridge, MA School of Public Policy George Mason University

2. OUTLINE • Background: Development of China’s Telecom Sector • Motivation for Research • Research Questions • Literature Review • Methodology and Data • Empirical Results • Conclusions and Implications Teledensity: number of telephones per 100 population

3. MOTIVATION FOR RESEARCH:Regional Disparity in Growth Performance, 1986-2002

4. MOTIVATION FOR RESEARCH:ECONOMIC GROWTH IN CHINA • China has grown rapidly over the last two decades from a very low income level. • Average annual GDP growth 1980-2002: 9.5 percent • Average annual per capita GDP growth 1980-2002: 8.2 percent • Large regional disparity in growth performance • Sources of growth • Capital accumulation; labor; TFP growth • Role of infrastructure?

5. MOTIVATION FOR RESEARCH:P&T Fixed Investment in China, 1975-2003 00- 93-99 80-92 49-79 Source: Based on Statistics on Investment in Fixed Assets of China (1950-2000) (NSB, 2002) and China’s Statistical Yearbook 2001-2003

6. MOTIVATION FOR RESEARCH:GDP and Teledensity Growth in China, 1975-2002 Sources: China Statistical Yearbook (various years).

7. MOTIVATION FOR RESEARCH:National GDP Per Capita and Teledensity, 1975-2002 Note: Based on China Statistical Yearbook (various years)

8. MOTIVATION FOR RESEARCH:Regional GDP Per Capita and Teledensity in China, 2002 Source: Based on China Statistical Yearbook (2003)

9. DEVELOPMENT OF CHINA’S TELECOM SECTOR: REGIONAL DISPARITY Note: Based on data of 29 regions in china. Tibet and Chongqing excluded because of missing data.

10. RESEARCH QUESTIONS • Does the difference in telecom infrastructure endowment serve as a significant factor in explaining the growth performance of different regions? • What is the returns to scale for telecommunication investment? In other words, what is the relationship between the magnitude of the effect and prior level of telecommunications infrastructure?

11. LITERATURE REVIEW: TELECOM INFRASTRUCTURE • Neoclassical growth theory (Solow, 1956; Swan, 1956) • Growth dependent on supply of capital and labor. • Role of telecommunications in facilitating production • A new general-purpose technology • Export-based theory(North, 1975) • Growth dependent on basic production activities . • Role of telecommunications in supporting export ability • Endogenous growth theory (Romer, 1986, 1990; and Lucas, 1988) • Importance of knowledge • Role of telecommunications in accessing and spread of knowledge • Evidence from empirical studies

12. LITERATURE REVIEW:TELECOM INFRASTRUCTURE • Simple correlation or regression analysis (Jipp, 1963; CCITT, 1968; Hardy, 1980; Cronin, Paker, Colleran and Gold, 1991, 1993; Dholakia and Harlam, 1994; Greenstein and Spiller, 1995; Wang, 1999; Dutta, 2001; Forestier, Grace and Kenny, 2002 ) • Form: • Data: cross-sectional, time-series, cross- sectional-time-series • Limitation: correlation  causality; too much simplification • Neoclassical production function (Yilmaz et al, 2001, 2002) • Form: or • Limitation: simultaneity bias; assumed causality

13. LITERATURE REVIEW:TELECOM INFRASTRUCTURE • Single equation growth model (Norton, 1992; Mody and Wang, 1997; Madden and Savage, 1998; Canning, 1999; Canning and Pedroni, 2004) • Form: • Limitation: aggregate and distant relationships; omission of regional specific effects (cross sectional data) • Structural growth models ((Bebbe and Gllling, 1976; Chen and Kuo, 1985; Roller and Waverman, 2001; Savage, Schlottman, and Wimmer, 2003) • Supply-demand model (Roller and Waverman, 2001) • Two-sector model (Savage et al, 2003) • Limitation: model specification; data

14. LITERATURE REVIEW:CRITIQUES • Most studies find a positive correlation between telecommunications and economic development. • Development level of samples • Most based on cross country data or regional data of developed countries • Telecom benefits depend on the stage of development • Causality problem • Strong simultaneity between telecom and development • Assumed or asserted causal mechanism • Role of mobile communications • Mobile communications usually not considered in previous studies • Lack of a spatial perspective • The spatial dependence drew little attention in previous studies and its presence may lead to misspecification

15. METHODOLOGY AND DATAMETHOD • Revised from Islam (1995) and Datta and Agarwal (2004). • Regional growth dependent on prior growth, prior income level and a set of variables reflecting differences in the steady-state equilibrium. • Captures short-run autoregressive behavior. • Allows for differences in the aggregate production function (fixed effect for each region). • A panel data approach for estimation • Other factors influencing growth: X ?

16. METHODOLOGY AND DATA: GROWTH FACTORS

17. METHODOLOGY AND DATA • A preliminary model • Data • 29 regions for a 17 years period:1986-2002 • Tibet and Chongqing excluded • Screening candidate variables • Four variables excluded due to their statistically insignificance: HC; URBAN; SOE; TRANS

18. METHODOLOGY AND DATA • Moran’s I statistics of the residues are not significant for most of the years • Spatial dependence issue is not a major concern when we use the fixed-effect model.

19. METHODOLOGY AND DATA • Final model Notes: t-statistics in parentheses; *** significant at 1% level; ** significant at 5% level; *significant at 10% level

20. METHODOLOGY AND DATA • A validation test: effect of reverse causality • Introduce lagged values of TEL (TELt-1and TELt-2) to replace current value of TEL in previous model. • Non-linearity: returns to scale • A square term (TELSQ) is introduced in previous model

21. EMPIRICAL RESULTS Notes: t-statistics in parentheses; *** significant at 1% level; ** significant at 5% level; *significant at 10% level TELt-1 : one-year lag of TEL TELt-2 : two-year lag of TEL

22. CONCLUSIONS • Strong and positive relationship between telecom infrastructure and regional economic growth. • The positive relationship is not merely due to reverse causality. • An marginal increase in telecommunications infrastructure has a positive and significant impact on regional economic growth and an insufficiency of basic telecom infrastructure indeed constrains economic development. • The size of the effect of telecommunication infrastructure on the economic growth is inversely related to its prior level, “diminishing returns to scale”.

23. CONCLUSIONS (Continued) • Some evidence for “conditional convergence”: regions with higher levels of GDP per capita tend to grow at a slower rate, at least in the short run. • Fixed investment, foreign investment, and employment rate, have positive and significant effect on growth. • Population growth has a negative and significant effect on growth. • No significant impact of human capital on growth was found.

24. POLICY IMPLICATIONS • The market mechanism for expanding telecommunications infrastructure might be augmented by specific public policies to guide telecommunications growth in targeted ways. • Regions at an earlier stage of development in China are more likely to gain the most from further investment in telecom infrastructure (Going West!). • Public policies should be designed to stimulate the factors that have a positive impact on the penetration of telecommunications technologies. • Be cautious: “Infrastructure deliver major benefits in economic growth…. , but only when it provides services that respond to effective demand and does so efficiently” (World Bank, 1994).

25. Thank you!