Cumulative causation and inequality among villages in China

Abstract Why are villages that are geographically so close together economically so far apart? This question is examined using a survey of 1000 households in seven villages in Hebei province, China. An answer is developed in terms of factor immobility and processes of cumulative causation. Although a good natural resource endowment helps to initiate the process, the main cause of differential village development is non‐farm sources of income: migration and village industry. Both are constrained and the easing of the constraints involves path‐dependent cumulative processes. For instance, migration requires a village network of information and contacts, and village industrialization depends on the accumulation of local skills through a process of learning‐by‐doing and on the reinvestment of profits. There is a case for mesoeconomic analysis at the village level in China and in other poor countries.