1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

Realising regional potentials through better market integration in China

China’s regions have been experiencing impressive growth over the past decades, but their potentials could be better exploited by creating a single product and labour market. Local protectionism increases transaction costs and hinders competition, thereby taking a toll on productivity. Administrative monopolies have long thrived and are hard to dismantle. Restrictions on the hukou and the fragmented pension system limit labour mobility. Local regulations aim at, among other things, securing the collection of local taxes, without which cities could not afford to offer the same public services to migrants as to urbanites. Hence, dismantling local regulations and creating a single product and labour market needs to go hand-in-hand with the reform of inter-governmental finances. 

Recent measures on both the product and labour market front appear to aim at making up for the slow progress over the past decade or so. There are signs that these efforts are helping China’s regions at various levels to converge toward each other. Disparities are shrinking faster across provinces, compared to within provinces. Integration of product and labour markets will boost productivity over the medium-to long term by reducing transaction costs, but could potentially widen regional disparities, which are already relatively high. This will necessitate enhanced transfers and re-centralisation of the financing of spending in some key categories such as education and health. Policies to help catching up of laggard regions by better connectivity through infrastructure investment are bearing fruit, but such investments should be subject to rigorous cost-benefit criteria to enhance capital allocation efficiency and should take into account externalities. Notwithstanding significant disparities along multiple dimensions across provinces, inequalities, be it in terms of income, wealth or education, are actually most striking along the rural-urban dimension. The rural revitalisation strategy, a novel element of the 19th Party Congress outcomes, is expected to address this issue. The other recent strategy of nurturing the formation of city groups will also likely benefit rural areas in-between those cities.

This Working Paper relates to the 2019 OECD Economic Survey of China (http://www.oecd.org/economy/china-economic-snapshot/).

English

Keywords: regional policies, inter-governmental fiscal relations, competition, hukou, administrative monopolies, labour mobility, fiscal transfers, regional disparities, protectionism
JEL: L52: Industrial Organization / Regulation and Industrial Policy / Industrial Policy; Sectoral Planning Methods; L12: Industrial Organization / Market Structure, Firm Strategy, and Market Performance / Monopoly; Monopolization Strategies; L51: Industrial Organization / Regulation and Industrial Policy / Economics of Regulation; J61: Labor and Demographic Economics / Mobility, Unemployment, Vacancies, and Immigrant Workers / Geographic Labor Mobility; Immigrant Workers; P25: Economic Systems / Socialist Systems and Transitional Economies / Socialist Systems and Transitional Economies: Urban, Rural, and Regional Economics; R58: Urban, Rural, Regional, Real Estate, and Transportation Economics / Regional Government Analysis / Regional Development Planning and Policy; H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession
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