Balance through Agglomeration: A Race between Geography and Policy in China's Regional Development

• Published date: 01 November 2018
• DOI: http://doi.org/10.1111/cwe.12262
• Date: 01 November 2018

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 72–96, Vol. 26, No. 6, 2018

72

*Yali Liu, PhD Candidate, Antai College of Economics and Management, Shanghai Jiao Tong University,

China. Email: liuyali.liu@sjtu.edu.cn; Ming Lu, Professor, Antai College of Economics and Management,

and China Institute for Urban Governance, Shanghai Jiao Tong University, China. Email: luming1973@sjtu.

edu.cn; Kuanhu Xiang (corresponding author), Lecturer, School of Economics, Shanghai University, China.

Email: khxiang1986@163.com. The authors thank Chen Chang, Libin Han and Huiyong Zhong for their data

support. The authors acknowledge research support from the Shanghai Institute of International Finance and

Economics, and the National Natural Science Foundation of China (No. 71703097).

Balance through Agglomeration:

A Race between Geography and Policy

in China’s Regional Development

Yali Liu, Ming Lu, Kuanhu Xiang*

Abstract

Changes in regional income gaps in China reflect the role of both the market and

the government in the Chinese economy. Since 2003, government policies have

aimed to distribute more resources to less developed areas. Although this process

is accompanied by a narrowing interregional income gap, it does not represent

real “convergence” between regions. From the perspective of spatial–political

economics, the free movement of people is helpful to realize regional economic balance

through agglomeration, while investment policies that deviate from the comparative

advantage of less developed regions may lead to spatial misallocation of resources

and unsustainable economic growth. In order to achieve further integration and

development in the Chinese economy in the future, restrictions to the ow of production

factors must be alleviated so that the market can truly become a decisive force for the

allocation of resources.

Key words: agglomeration, geography, interregional disparity, political economics,

spatial misallocation

JEL codes: O18, O38, R11, R58

I. Introduction

Reform and the opening-up policy has led to rapid development of the Chinese

economy, as well as spatial distribution of the economy and the population. China

is a vast country with a long history and great differences in natural, historical and

©2018 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Balance through Agglomeration in China’s Regional Development 73

geographical conditions among different regions. Before the reform and opening-

up period, the extent of regional economic agglomeration was low. When China rst

opened up, export-oriented manufacturing mainly developed in the southeastern

coastal areas as a result of the low cost of shipping transportation. Because of some

institutional factors inherited from the planned economy, free movement of the labor

force was impeded. With the development of economic spatial agglomeration, per

capita income gap between regions expanded. In response to the problem of disparity

in regional economic development, on the eve of the 40th anniversary of the reform

and opening-up at the 19th National Congress of the Communist Party of China in

October 2017, Xi Jinping, the General Secretary of the Party, pointed out that in the

new era of socialism with Chinese characteristics, a major contradiction in China’s

society lay between the people’s growing need for a better life and the current state

of unbalanced and inadequate development. A significant aspect of this imbalance

and inadequacy is the development gap between regions and between urban and rural

areas.

For a long time, the public and the government have considered economic

growth and the balance of the regions contradictory. It is widely believed that the

“excessive agglomeration” of the economy is the cause of the income gap between

different regions. At the same time, various problems, such as traffic congestion,

pollution and shortages of public services, are becoming increasingly intense

in the mega-cities. The public attributes these problems to the rapid expansion

of large cities in recent years. Along this line of thought, the direct solution to

these problems is to pursue equalized distribution of economic activities among

municipalities and provinces in China. To balance regional development, the

Chinese government needs to promote the economic growth of less developed

areas and in the meantime restrict further agglomeration of labor and resources to

developed areas. Under the guidance of this version of “balanced development,”

the Chinese central government launched a series of strategies, such as the West

Development Strategy, Northeast Area Revitalization Plan and Rising of Central

China Plan, to promote the growth of less developed regions by encouraging

investment into central, west and northeast (hereafter inland) China. These strategies

include measures such as the allocation of construction land-use quotas, and scal

transfers to support the construction of development zones and industrial parks,

which aim to attract investment to promote local growth. In the east regions, policies

have been implemented to limit the population of the mega-cities by tightening land

supply and applying stricter standards to get local hukou (household registration) in

the mega-cities to control their “urban diseases.”