Productivity Growth, Spatial Inequality and Returns to Scale: The Case of the Cities of the Province of Jiangsu, China

China’s rapid growth over the past few decades has been associated with widening regional disparities. However, this paper focuses on the causes of spatial disparities within the province of Jiangsu, one of China’s most developed and fastest growing regions. It tests two competing models of regional growth using data for total value added (GDP) and industry for the 61 cities of the province over the period 1996 to 2012. The first is the standard Solow neoclassical growth model with its assumption of constant returns to scale. This provides evidence of convergence in the sub-period from 2006-2012 but not in the earlier sub-period. The second model that is estimated is the Verdoorn law, which allows for encompassing increasing returns (including induced technical change and agglomeration economies). The results find a statistically significant Verdoorn coefficient for both total output and industry. The estimates suggest substantial increasing returns to scale. There is also evidence of a significant diffusion of innovations from the more to less technologically advanced cities. The two models are nested in that both can be viewed as being derived from a production function, and the evidence rejects the hypothesis that the cities are subject to constant returns to scale. Finally, in an effort to understand changes in the degree of regional disparities in Jiangsu, this paper utilises the Theil framework to investigate into causes of disparity across the three regions of Jiangsu, and the result confirms that inequalities in education and infrastructure can be important sources of income disparity.