The dynamics of spatial agglomeration in China: an empirical assessment

In this paper, I complement the application of New Economic Geography –NEG– models for the explanation of wage disparities in China by estimating the Helpman Hason model, which focuses on the role of consumer markets as an attraction force and housing prices as a dispersion force for economic agglomeration. I estimate the structural parameters of the model for 2000 and 2005 and devote special attention to the multiple estimation problems of the Helpman-Hanson equation. I find that the market potential is slightly lower for 2005 than for 2000, as a direct product of a higher value of the elasticity of substitution for the last year. I also find that the share of income spent on manufactures increases between the two periods, and that transport costs decrease. I show how these effects may cause dispersion or agglomeration of economic activity according to the original Helpman (1998) model. An application of income shock experiments on different economic centers across China shows that spatial externalities are not homogeneous across prefectures, so that income shocks may have different effects across the country. Based on these results, I argue that the size of existent agglomerations will increase in the near future, but with marked differences across regions. As China moves to a market economy, prices should reflect more the forces pulling for dispersion, which not only include housing and land prices, but also congestion, pollution and many other problems that come along with urbanization.