New Evidence on the Human Capital Dynamics Within China - Is There a Human Capital Trap?

It is by now well-established fact that human capital accumulation is decisive for explaining income differences across and within countries. However, while there is already a significant body of literature focusing on the analysis of income convergence, research on the dynamics of the underlying factors of economic development is still in its infancy. Our paper contributes to this literature by investigating the formation of human capital convergence clusters within China over the period 1985 to 2018 using Phillips and Sul’s (2007, 2009) log t test and various merging algorithms. It is the first paper to analyze the convergence dynamics of human capital within China. Our results indicate the existence of multiple human capital clubs with various provinces being stuck in a low human capital trap. Moreover, we find that human capital convergence clubs are to some extent formed on the basis of geographic region; in particular, there seems to be a core-periphery divide. We also study the factors that determine human capital club membership by using an ordered probit model. Most importantly, we find that the population and transportation density as well as the initial level of human capital are decisive for determining whether a country is on a high or low human capital development trajectory. Moreover, urbanization and institutional quality appear to have an indirect effect via a province’s initial human capital endowment. Public spending on education appears to play at best an insignificant role and even decreases the probability of belonging to the highest human capital club in some specifications