Growth of China's Medium-Size Cities

For the last quarter century, China has sought to divert rural migration to its small and medium-size cities and away from the biggest urban areas. At the same time, China's other policies influence the allocation of resources, directing relatively more resources and political influence to larger cities and less to smaller cities. By favoring the largest cities, China stimulates employment opportunities there, attracting migrants in opposition to the country's goal of deflecting them to small and medium-size cities.

This paper explores that contradiction, focusing on the sources of growth for medium-size cities and what policies would stimulate employment opportunities there, but beginning with an overview of the entire Chinese urban system and essential policies governing it. Models of city population and productivity growth and their application to China are presented. China is unusual in that it has high-quality gross domestic product (GDP) numbers at the urban area level on which to base productivity analysis for the city as a whole. In most countries, such as the United States, GDP is not tracked at the level of an urban area.

The analysis in this paper is focused on county cities, which are generally medium-size cities; I also compare county cities to cities at the prefecture level and above, which are generally larger cities. Prefecture-level cities include provincial capitals, but above these are four cities that have the same administrative status as provinces. Also presented in this paper is a review of institutional and policy structures that impede county city growth and modernization, to help explain why county cities have as good total factor productivity (TFP) levels and growth as higher-order cities but offer much lower per capita incomes. The paper concludes with an examination of models of city population growth, demonstrating why traditional approaches are not useful in China.

The distinction between county cities and cities at the prefecture level and above is not formally based on size, but on position in a formal administrative hierarchy, replete with specific privileges and responsibilities that affect the allocation of investment, foreign direct investment (FDI), infrastructure, and ultimately population. Below county cities are towns, which are generally smaller and for which we do not have data. Analyzing China's county city growth is complex for two reasons. First, for these cities the potential for population growth is different from the possibilities for productivity growth. This may sound like an odd statement, since in typical urban modeling faster productivity growth in a city is reflected by faster population growth. But in the unusual context of China, with its history of institutional restrictions on migration, this is not the case.

Second, the Chinese context for county city growth as part of China's overall development process is unusual. In a typical development context, early industrialization occurs initially in the largest cities (which have good public infrastructure and access to international markets), rather than in the hinterlands. But as these largest cities grow and the country develops, standardized manufacturing activity typically leaves the largest cities, moving first to nearby satellite cities, as in the case of Korea in the 1970s, as well as Indonesia and Thailand in the 1980s. Next, as national infrastructure improves and development progresses, manufacturers start to move to more rural destinations, where both labor and land costs are cheaper, as happened in Korea beginning in the early 1980s. For Korea at least, this industrial decentralization was not accompanied by population growth in these small towns and rural areas. Instead, these newly industrialized regions switched from primary and tertiary sector activities to manufacturing. For a developed country like the United States, the relatively depopulated rural sectors have a much higher relative share of manufacturing than do urban areas. As cities move up the urban hierarchy within the United States, the relative share of manufacturing in the local economy declines.

China's ability to decentralize manufacturing activities away from...