Do urbanization and public expenditure affect productivity growth? The case of Chinese Provinces

In this paper, we examine the effect of infrastructure financing (public expenditure) and urbanization on productivity using a new concept. We call this concept Urban Kuznets curve (UKC) and define it as an inverted U-shaped relationship between per capita GDP and urbanization. We examine the UKC relationship from several angles. First, we explore its existence from a data driven approach (the scatter plot of log per capita GDP against urbanization). We then examine it after controlling for the input factors and a time trend. The first approach is ad hoc because no formal economic model is used. The second approach is grounded in the microeconomic theory with state-of-the-art econometric tools instead of using some popular ad hoc regressions where (log) per capita GDP is regressed on public expenditure and urbanization along with some other controls. In our pursuit of understanding the various channels through which urbanization may affect productivity, we use parametric and semiparametric partially linear econometric approaches. In the parametric approach we treat urbanization in the same way as inputs (capital, labor, etc.) and compute optimum levels of urbanization to examine whether the benefits of urbanization are exhausted for any of the Chinese provinces during our study period. In the semiparametric partially linear models, the UKC is detected from the estimated elasticity of urbanization without calculating the optimal levels of urbanization. For this study we use the Chinese province level panel data over the period 2005–2014 from three sectors, viz., agriculture, manufacturing, and services.