Causal Relationship Between Urbanization, Industrialization & Economic Growth In The Case Of China

Abstract

This study empirically investigates the causal relationship between urbanization, industrialization and GDP per capita growth in the case of China over the period 1981-2019 using a VAR model. This is the first study of its kind and no study has previously studied the causal relationship between the three variables. Nevertheless, we followed the conceptual framework for studying three-way causality laid out by Zhao and Wang (2015). The data was obtained from the WDI and the World Bank Open Data. The Chow test for structural break was initially carried out to identify structural breaks in the original data set from 1960-2019. The data was trimmed accordingly. The ADF test was used to check for stationary and found data for all variables to be non-stationary in levels and to be stationary in their first differences. The results from the Johansen cointegration test showed that there were full-rank co-integrating or long term equilibrium relationships between the three variables. In addition, the Granger causality test on a VAR model showed that there was bi-directional causality between urbanization and industrialization, between urbanization and GDP per capita growth, and between industrialization and GDP per capita growth.