The paper tests for external effects of local economic activity on consumption and income
growth at the farm household level using panel data from four provinces of post-reform
rural China. The tests allow for nonstationary fixed effects in the consumption growth
process. Evidence is found of geographic externalities, stemming from spillover effects of
the level and composition of local economic activity and private returns to local human and
physical infrastructure endowments. The results suggest an explanation for rural
underdevelopment arising from underinvestment in certain externality-generating
activities, of which agricultural development emerges as the most important.