Summary
The analysis of barriers to trade within countries has received growing attention in the recent literature. Barriers to domestic economic activity are to a large extent created by intra-national protectionism, and the existing literature on China has suggested limited improvement in domestic market integration or even increased fragmentation since economic reforms began in the late 1970s. This past work however does not offer any insights about explicit forms or mechanisms of protectionism, given that the presence of inter-provincial trade barriers is revealed indirectly in province-level data by detecting the absence of cross-provincial specialisation or price integration – both to be expected if goods and services can flow freely across provinces.
In this Nottingham School of Economics working paper, Markus Eberhardt, Zheng Wang and Zhihong Yu inform this debate on protectionism in China by providing direct micro-economic evidence on how ambiguous state regulations in combination with competition among provinces can be a cause for market fragmentation. The unique case of inter-provincial protectionism studied, the selective public disclosure of ‘illegal’ drug advertisements by provincial Food and Drug Administrations, shows that firms from other provinces have a 8-10% higher probability of having their drug advertisement publicly disclosed as ‘illegal,’ with additional analysis investigating some of the patterns of discrimination related to economic power, government connections and market dominance. These results imply that giving provincial governments strong incentives to compete with each other may lead to rent-seeking behaviour, echoing the conclusion in Alwyn Young’s work that in a partially reformed economy “distortions beget distortions.”
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This paper is now forthcoming in the Journal of Comparative Economics, doi:10.1016/j.jce.2015.10.012
GEP Discussion Paper 15/07, From One to Many Central Plans: Drug Advertising Inspections and Intra-National Protectionism in China by Markus Eberhardt, Zheng Wang and Zhihong Yu
Authors
Markus Eberhardt, Zheng Wang and Zhihong Yu
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Posted on Monday 6th July 2015