Growth and Change Vol. 00 No. 00 (Month 2016), pp. 00–00
DOI: 10.1111/grow.12140
Economic Transition, Urban Dynamics, and Economic Development in China: An Introduction to the Special Issue CANFEI HE
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hina has caught the eyes of the world due to its spectacularly growing economy since the late 1970s. Total GDP reached 56 trillion Yuan in 2013, which is more than 26 times of GDP in 1978. The economic achievement has come with the fundamental shift from a commanding economy to a market oriented economy. This economic transition can be coded as a triple process of marketization, decentralization, and globalization, which has underpinned the economic and political foundation of growth in China (He, Wei, and Xie 2008; Wei 2001). Marketization has brought about the liberalization of prices, markets, trade and investments, and the privatization of the state-owned sectors. The devolution of power has given greater incentives to local governments for revenue creation and economic development, and allowed many locales to experiment with new and flexible policies. Globalization has introduced the international market, technology, capital, and management to China. Marketization triggers market competition while decentralization facilitates interregional competition. Globalization allows China to participate in international competition. Competition has been the growth engine of Chinese cities and regions (Li, Li, and Zhang 2000). Since the late 1970s, reforms in rural areas substantially improved agricultural productivity and liberalized the rural labor force (Lin 1992). The state allowed the rural surplus labor to have their jobs in the non-state sector and encouraged them to start small businesses. The rise of township and village enterprises (TVEs) demonstrated the strong entrepreneurship in the Chinese society and made great contributions to the early success in economic reforms (Putterman 1997). Urban reforms from the middle 1980s initiated enterprise reforms and created opportunities for rural laborers. As individual, private and foreign ownerships are gradually granted legal status, urban entrepreneurship has gained momentum, triggering the development of non-state sectors in Chinese cities. The non-state enterprises, including urban collectives, private enterprises, and foreign-invested enterprises, have progressively become the key driver of economic growth in China (Li 1996). With the mushroom of urban entrepreneurship, market competition gets intensified; more firms are created every year meanwhile many are forced out of the market. With such industrial dynamics, Chinese economies move forward with higher efficiency and increasing productivity. Together with the inflows of foreign direct investments and huge demand from international market for Chinese products in the process of globalization, the development of non-state sectors created a large number of job opportunities in the coastal region. Seeking opportunities out of agriculture Canfei He is a full professor of College of Urban and Environmental Sciences, Peking University, and the deputy director of the Peking University-Lincoln Institute Center for Urban Development and Land Policy, Beijing. His e-mail address is:
[email protected]. The author would like to acknowledge funding from the Natural Science Foundation of China for Distinguished Young Scholars (No. 41425001).
Submitted September 2014; accepted September 2014. C 2016 Wiley Periodicals, Inc V
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and rural areas, farmers have rushed into the developed coast and the cities since the 1990s. The increasing mobility of agricultural surplus labor has indeed realized China’s comparative advantages in industrial development. A large amount of rural–urban migrants has triggered the unprecedented urbanization (Zhang and Song 2003). In 2011, more than half of the total population lived in cities. China’s urbanization rate has increased from 23.71 percent in 1985 to 53.73 percent in 2013, with an annual growth rate of 1.04 percent. The official statistics show that there are about 269 million migrants in Chinese cities in 2013. Ironically, although restricted by governmental policy, the development of large cities has prevailed in China since they are so attractive to migrants (Zhao, Chan, and Sit 2003). The massive rural to urban migration into large cities has resulted in considerable demand for affordable housing. The formal housing market is, however, typically unaffordable for migrants, who are also denied for public housing due to the lack of local Hukou status. Many migrants find their housing in so-called urban villages, which were previously farming villages and are surrounded by rapid urban expansion (Song, Zenou, and Ding 2012). In the rapid urbanization process, local governments are rational to develop the cultivated land surrounding the villages since it would be time consuming and costly to redevelop the rural residential land. In the rapid urban land expansion process, villages gradually become “urban villages.” The villages in the large cities do play a huge role in the process of urbanization by providing housing to migrants (Song, Zenou, and Ding 2012). Meanwhile, they often suffer from the poor facilities and conditions, higher crime rates, and being isolated from urban life. With the rapid industrialization and urbanization, economic growth in China has also often been accreted to decentralization, particularly fiscal decentralization (Lin and Liu 2000). Economic reform has resulted in considerable decentralization of power from the central government to a more regional locus. As a result, local governments now have a primary responsibility for economic development in their respective jurisdictions (Qian and Weingast 1996). In the course of China’s remarkable economic growth since the early 1980s, local governments have been playing an active role in building local infrastructure, encouraging local businesses and attracting foreign investments. The probusiness role of local officials stands in contrast with the rent seeking behavior of local offcials in other transitional countries (Frye and Shleifer 1997). Pro-business incentives given to local offcials are the result of fiscal decentralization and high powered intergovernmental fiscal revenue sharing contracts (Qian and Weingast 1996). In the past, under the command economy in China, all revenues were mandated to be remitted to the central government, which then decided the budget of each local government. However, after the economic reform, local governments acquired authority over expenditure within a broad set of guidelines (Wong 2000). In 1994, due to the decreasing revenue of the central government, the central government initiated a new tax sharing system (TSS). This system introduced a clear distinction between national and local taxes, and determined that value added tax would become the major indirect tax to be collected by the central government and shared by local governments in a fixed ratio of 75:25. The introduction of TSS and following reforms has fundamentally altered China’s centrallocal fiscal relations (Wong 2000). It has considerably raised the central share in revenue and reduced that of local governments (World Bank 2002).The central government then develops the governmental transfer system to fund the poor regions and key areas such as education and infrastructure. Fiscal decentralization generates strong incentives for local governments to compete for growth by creating a friendly investment environment to attract new investments (Zhao and Zhang 1999). Inter-regional competition indeed can be observed in many aspects. For example, local governments are found to compete to attract foreign direct investments (Coughlin and Segev 2000), provide land for urban and industrial uses (He, Huang, and Wang 2014) and spend in public infrastructure (Yu et al. 2013).
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Facing the tight revenues, local governments intend to spend in the projects such as infrastructure development, which would promote economic growth quickly. Public spending in welfare, education, health care, and research and development is typically insufficient and left behind. The triple process of econmic transition in the past decades created institutional advantages and liberalized comparative advantages to promote economic growth in China. This growth however has been driven mainly by the extensive inputs of labor and capital and supported by the gigantic exports (Akyuz 2011; Chow 1993). Recognizing the importance of innovation to sustain the long run economic development, the Chinese government has aggressively promoted and funded innovation activities (Sun and Mu 2010). China’s R&D expenditure as a proportion of GDP has expanded steadily in recent years and is expected to reach 2.5 percent in 2020. China has also seen increasing number of domestic patents applied and patents registration offshore. Studies have found significant contribution of innovation to productivity growth at the firm and sectoral level and regional economic growth (Breznitz and Murphree 2011; Kuo and Yang 2008; Wei and Liu 2006). In summary, China has enjoyed unprecedented economic growth for more than three decades. The success has institutional foundation in the triple process of marketization, decentralization, and globalization. The institutional shift has added a number of new elements such as entrepreneurship, labor mobility, firm dynamics, urbanization and innovation to China’s urban and regional development. This special issue covers a range of the key components in the six articles, which is collected from the second international workshop of urban, regional, and spatial economics in China held in Beijing in June, 2014. In the first article, Zhang et al. (2015) estimate the potential impacts of urban villages on the housing prices of nearby formal housing markets. Their study is based on two micro data sets collected in Beijing: one includes all the existing urban villages in 2006 and a unique micro survey of 50 villages conducted in 2008; and the other contains 24 thousand micro resale records in the formal housing sector from 2006 to 2011. They report significant negative impacts of urban village on housing prices nearby, a 2.5 percent housing price discount in nearby communities. The removal of the urban villages, however, can trigger a 3.3 percent to 4.3 percent housing price appreciation. The study provides economic justification about why local governments intend to remove the urban villages, which are considered the dark side of rapid urbanization in China. However, attention should be paid to the welfare loss of migrants who live in urban villages and are displaced during the redevelopment of urban villages. Using 2007 Chinese household income project (CHIP) data, in the second article Liu and Huang (2015) apply a probit model on self-employment to examine the rate and scale of urban entrepreneurship across Chinese cities as well as the characteristics and earnings associated with self-employment as compared to wage employment. They distinguish between “necessity entrepreneurs” and “opportunity entrepreneurs” and stress the roles of the financial capital, human capital, and social capital factors underlying entrepreneurial entry. They find significant differences across regions, localities and industries in urban entrepreneurship. They also report that self-employed workers have lower financial, human and social capital endowments than wage workers but they tend to earn higher income, showing that entrepreneurship offers a lucrative route to wealth generation. Their results indicate that as a newly marketized economy, China’s self-employment rate is on par with that of the U.S. and is the key to sustain the economic growth. Based on a panel of Chinese cities over the period 2004–2009, in the third article MorenoMonroy, Yu, and Euse (2015) analyze the relationship between urban employment in small businesses and economic development. They find an inverted U-shape relationship between the share of urban employment in small businesses and the urban disposable income level, which is not consistent
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with the developed economies. They argue that the restructure of the state sector along with a booming service industry is associated with a higher share of employment in small businesses in cities with lower levels of income. In cities with higher levels of income, more vibrant manufacturing sector is related to a lower share of employment in small businesses. The inverted U shape relationship is however largely situated in the current institutional context and the dominance of industrialization. Based on the annual survey of industrial firms during 1998–2007, in the fourth article He and Yang (2015) employ the linear probability model to investigate the determinant of firm dynamics in China. They find that less productive and older firms are more likely to fail, while firms with governmental supports are more likely to survive. There is an inverted U shaped relationship between firm age and firm failure. The results imply that market competition effects could dominate learning effects and impose challenges on the survival of older firms. In a transitional economy like China, both market force and governmental power influence firm dynamics. The selective process would be good for the Chinese economy since it will move the efficiency and productivity up the ladder. Based on China’s county-level education data during 2007, in the fifth article Yu, Wang, and Tian (2015) test the presence of the “flypaper effect,” an unconditional lump-sum grant from the upper governments to the county governments increases spending in a greater proportion than an equivalent rise in local income in China. They estimate a spatial econometric model that accounts for spatial interaction behavior on public education expenditure across counties. Rather than confirming the “flypaper effect,” they report the “anti-flypaper effect.” They provide three explanations. First, public education is a kind of non-GDP-creating social public services. In light of the Chinese appraisal system for local officials, education will not become the priority of local spending. Second, fiscal decentralization reform makes the reversion spending plausible in China. Third, the competition effect results in a smaller portion of government grants invested in education. Through exploratory spatial data analysis and confirmatory spatial data analysis, in the final article Wang, Cheng, Ye, and Wei (2015) examine the space-time dynamics of innovation at the provincial level in China from 2000 to 2011 by analyzing the knowledge production function with the spatial panel Durbin model. They report an increasingly coastal-interior divide in innovative activities and a close space-time relationship between innovation and its determinants. They particularly find the spatial dependence of innovation activities across Chinese provinces, indicating the presence of positive externalities of knowledge creation. It also suggests that there may be significant inter-provincial competition in promoting innovation. The significant knowledge spillover effects of innovation activities provide empirical support for the innovation strategy of the Chinese government. Altogether, six papers in this special issue collectively explore the multiple trajectories of economic development in China based on rich data and solid econometric techniques. Individually, these studies highlight the spatial dimensions of development. Those issues have to be understood in the institutional context of economic transition. The findings in the papers should prove valuable to scholars who are interested in understanding the richness of urban and regional development in China. REFERENCES Akyuz, Y. 2011. Export dependence and sustainability of growth in China. China & World Economy 19(1): 1–23. Breznitz, D., and M. Murphree. 2011. Run of the red queen: Government, innovation and economic growth in China. New Haven and London: Yale University Press Books. Chow, G.C. 1993. Capital formation and economic growth in China. Quarterly Journal of Economics 108(3): 809–842. Coughlin, C.C., and E. Segev. 2000. Foreign direct investment in China: A spatial econometric study. The World Economy 23(1): 1–23.
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