Spatial state dependence in a growth process can imply dynamic welfare gains from poor-area development programs – gains which are not identifiable in conventional program assessments. A consumption-growth model is estimated by Generalized Method of Moments using farm-household panel data for southern China. Households living in targeted poor areas are found to have significantly higher rates of consumption growth than one would have expected, though still not enough to reverse their longer-term divergence from other areas. Failing to control for spatial externalities in the growth process entails a sizable underestimation of the welfare gains from the program. 1998 Elsevier Science S.A.
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