Cities and Economic Development: The Chinese Experience

Abstract

This thesis investigates the proximate determinants of the observed differences in levels and growth rates of output per worker across the 69 major cities in China during 1994-2010, and asks the following two questions to develop a better understanding of the regional economic development and growth in the second largest economy of the world: (i) Why are some cities so much richer than others? (ii) What drives economic growth in Chinese cities? I utilise growth and development accounting approaches to answer these questions. I find that growth in the first-tier cities (Beijing, Shanghai, Guangzhou, and Shenzhen) enjoy the highest contribution from total factor productivity (TFP) growth. I find a clear distinction between Tier-1 cities and the rest. In terms of growth rates, growth in Tier-1 cities is driven primarily by TFP growth. On the other hand, TFP growth contributes a lot less to growth in Tier-2 and 3 cities. Growth in Tier-2 and 3 cities depends overwhelmingly on accumulation of physical capital. Rapid accumulation of physical capital in Tier-2 cities has not closed the gap in income levels between them and Tier-1 cities. Similarly, growth in human capital has played a minor role. In terms of income levels, I find that TFP levels are highly correlated with income levels in 2010. I also find a declining role of variation in factor endowments in explaining variation in income levels. My results cast doubt on the long-run sustainability of growth in the second- and the third-tier cities as they have relied too much on physical capital deepening. In order to avoid a growth slow-down in the future, Chinese cities should focus more on improving productivity and less on capital deepening. Productivity growth is not only crucial for the sustainability of economic reform programs in the short term but also a major factor for China to converge to per capita income levels in developed countries in the long term.