Spatial Misallocation: the Crux of China's Economic Slowdown

Hosted by the European Institute

Room COW 1.11, Cowdray House, United Kingdom


Professor Ming LU


Professor Paul de Grauwe

After China began implementing the "reform and opening-up" policy in 1978, regional income gaps of China fell first, before going up and down again in the subsequent years, reflecting the role that both the market and the government play in China’s economy. Since 2003, official policy has aimed to distribute more resources to the less-developed areas, impeding the free flow of production factors, including land, capital and labour, and leading to the spatial misallocation of resources and damaging economic efficiency. Although this process is accompanied by a narrowing of the interregional income gap, it is not a true "convergence" between China’s regions in nature. Through analysis of spatial political economics, this paper shows that the free movement of people is helpful to realize regional economic balance through agglomeration; some of the investment policies that deviate from the comparative advantage of less-developed regions under administrative intervention have resulted in market segmentation and duplicative construction, worsening the misallocation of resources between regions and contributing to high debt-levels of local governments. This economic growth is inefficient and unsustainable. In the future, in order to achieve further integration, development and balance in the Chinese economy, the country must break the restrictions on the flow of production factors from administrative forces so that the market truly becomes the decisive force for the allocation of resources.

Professor Ming LU is Distinguished Professor of Economics, and Director of China Centre for Development Studies at Shanghai Jiao Tong University. He is also Adjunct Professor at Fudan University, Singapore Management University and Dongbei University of Finance and Economics. He worked as a Fulbright Scholar at Harvard University and National Bureau of Economic Research (NBER). He has consulted for the World Bank and Asian Development Bank. His research covers labor economics, and regional and urban-rural development. Recently, his work evaluates the urban and regional development policies, and their effects on resource allocation and economic sustainability

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