This paper investigates whether temporary subsidies to the manufacturing sector at an early stage of structural transformation stimulate economic development. We study the “Construction of Third Front” (TF), a massive yet short-lived industrialization campaign in China's under-developed hinterland. Motivated by defense considerations, location choices of TF projects followed a peculiar set of criteria, which generates plausibly exogenous variation in manufacturing capacity before market reforms started in the mid-1980s. We find initial advantages in manufacturing have long-run positive effects on the structural transformation of the local economy. The effects are driven by new entrants in the private sector, consistent with the existence of local agglomeration economics. However, there is no evidence that agglomeration forces are stronger in initially less-developed regions. While the TF reduced regional inequality, it likely hurt the aggregate efficiency.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics