Geography Versus Policy

The development of a large country has always been faced with the dual goals of economic growth and regional balance. However, policy measures that are used to achieve regional balance by interfering with the flow of production factors are often harmful for overall economic growth. This paper pointed out that over the past decade, under the condition that inter-regional labor mobility barriers still exist, when faced with a huge disparity in regional development, construction land configuration and fiscal transfers are increasingly being used to encourage industrial development in less developed areas. The result is the slowdown of the overall efficiency growth and the deterioration of resource allocation, which not only undermines the international competitiveness of China’s economy, but also breeds a lot of debt risk. Taking development zones as an example, this paper also analyzes how the central and western favor of a specific policy affects the regional balance and resource allocation efficiency. The impact of development zones on firms’total factor productivity (TFP) show some kind of geographic heterogeneity:development zones improve firms’TFP in areas near the major port (Shanghai, Hong Kong and Tianjin), but reduce firms’ TFP in areas far away from the three ports. However, innerland Zones are not inferior to coastal Zones in improving firms’return to equity. Therefore, the central and western favored Zones distribution after 2003 will make relatively more enterprises to invest in central and western regions, thereby improving their relative economic growth in the short run. But in the long run, biased policy itself and the economic growth it brings in the less develop regions is not sustainable because of efficiency loss. In addition, the geographic heterogeneity in how development zones affect firms’ TFP also means that the current distribution of Zones distorts resource allocation between regions. In the background that agglomeration has become a globle trend, there are two options to achieve regional balance in per capita sence. The first option is to transfer of resources to the less developed area given that labor mobility between regions is low, which I called the moving money method. The second option is to eliminate of barriers to labor mobility restrictions, conbine moving labor to the east and moving money to inner land China, which is a better choice that can achieve per capita sence regional balance and agglomeration at the same time. The policy implication of this paper is that to persuit the win-win situation of regional balance and economic efficience, inhancing labor mobility is necessary and imminent.