Industrialization from Scratch: The 'Third Front' and Local Economic Development in China’s Hinterland

Abstract

Government subsidies to the manufacturing sector are popular in developing countries. This paper studies the long-run effects of a large-scale regional industrialization campaign in China, known as the “Third Front" (TF) construction. Motivated by national defense considerations, the TF established large manufacturing plants in China’s remote and under-developed hinter- land. Using variation from the site-selection criteria for these plants, we find that the TF has positive effects on local economic development. Two decades after the end of the TF, places that received more investment had a larger and more productive private manufacturing sector. Evidence suggests that local agglomeration forces play an important role. By reallocating resources to a less-productive region, the TF might decrease the aggregate efficiency. Using a simple model of structural transformation, we derive conditions under which the TF improves aggregate efficiency, and show empirically that these conditions are not met.

Keywords: Structural Transformation, Regional Economic Development, Local Spillovers

JEL Classification: O14, O18, R1