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Improving urban spatial layout drives economic growth

LIU XIUYAN and NI KEJIN | 2021-03-11 | Hits:
(Chinese Social Sciences Today)

A construction site can be seen from a distance in an aerial view of a residential area in Beijing. Photo: Zhu Gaolei/CSST

A country’s economic growth hinges on both individual producers’ improved expertise and the allocative efficiency of resources among different areas, industries, and producers. Having gained enormous results after 40 years of reform and opening up, the “China Model” has also resulted in many multi-dimensional spatial mismatches concerning production factors like labor force, capital, and land, covering various industries and districts.
Land is an essential resource for, and carrier of, social economic activities. To drive urbanization, foster coordinated development among regions, and fuel economic growth, we need to improve land-use allocation by boosting land-use efficiency and output efficiency. Since land is a scarce resource in China, it is essential to ensure reasonable allocation of land in cities. 
Cross-regional efficiency
The reasons behind the factor mismatch usually boil down to two obstacles: various types of institutional barriers and factor price distortion. The combined action blocks factor flow and leads to welfare loss. For instance, by restricting interregional free mobility of production factors and distorting their allocation structures, market segmentation caused by local protectionism will lead to an ever increasing difference in labor productivity and stages of marginal return among different regions. Even though institutional barriers in labor force, capital, and technologies have been decreasing in recent years, spatial mismatches still exist, in regards to land, non-tradable goods, and various resources attached to land. These mismatches will increasingly encumber urban development and economic growth. 
The wide gap between land supply and demand as well as inadequate land utilization requires us to improve land’s allocative efficiency among cities and the way cities are developed. Statistics show that in 2015, the land for construction in eastern, middle, and western China covered 33.46%, 27.16%, and 39.38% respectively out of the country’s annual total. Land for construction continues to shrink in eastern China, while it grows in middle and western China. However, in terms of land utilization, the output of land per unit in middle and western China was less than half of that in eastern China. Meanwhile, the land investment intensity of the former two is only about 70% of their counterparts in the east. It is common for land that is approved to be used to remain idle or inefficiently utilized in central and western regions.
A city is a huge system, whose complexity experiences exponential growth as it expands in size. As it grows, a city’s development demands the coordinated improvement of all its components. Any shortcoming may hinder the city’s economic growth. When a city develops, as an economic entity, its growth gradually slows down and eventually enters a slow-growing phase as it hits the ceiling of technological and managerial advancement. 
Although a megacity can boost the productivity of its enterprises and labor force through sharing, matching, and learning mechanisms, the negative externality caused by the city’s enlargement will also offset a part of its gain. A large number of resources are needed to ease traffic jams, environmental pollution, resource shortages, while ensuring public security and social welfare. As negative externalities build up, it begins to constrain the city from pursuing a high-quality growth. 
From a national perspective, it may be more reasonable to allocate construction land quotas judging from a city’s agglomeration elasticity. High agglomeration elasticity means that a city has sufficient construction land for the growth of business and urban populations. It also means higher productivity for both companies and individual producers, as well as smaller risk of welfare loss caused by soaring housing prices or rent. 
By estimating the agglomeration elasticity of Chinese cities, we found that the top ten cities with the largest population size in China are not the ones with the highest agglomeration elasticity. Instead, cities with great potential, like Zhuhai, Zhongshan, Xiamen, and Xinyu, had higher agglomeration elasticity and stronger momentum for growth. 
By allocating more construction land quota to these cities, we can curb housing costs, which, in turn, helps reduce labor costs for enterprises, increasing the industrial profit margin and the return on invested capital, and fueling the economy. This measure not only helps the late-movers grow by bridging financial and income gaps among regions, but also assists megacities by allowing other cities to share in their burden. More importantly, this solution maximizes the overall gain of land resources nationwide. 
Old city renewal
Ways to develop land resources within cities include increasing construction land and vitalizing housing stocks by developing new towns and renewing old urban areas. As time goes by, former programs for old towns lag behind people’s living and production needs and more issues begin to surface, including traffic jams, parking space shortages, insufficient fitness and leisure facilities, poor living environments, illegal buildings, houses with poor lighting and ventilation, as well as old and dangerous buildings with aged electric wire and fuel gas. What’s more, a long time has passed since the peak utilization of land in older urban areas. Buildings in areas with intense economic activities are too short, which means the economic potential per unit of land is not fully released. Therefore, it is necessary to renew old urban areas in order to improve local living conditions and rejuvenate local economic vitality. 
In recent years, local governments have been keen on developing new towns. As of 2014, 272 out of 281 cities at the prefecture level and above have built, or are currently building, new urban areas or districts. Today, nearly all of the 281 cities have built new urban areas. 
There are two drivers for the building zeal. First, developing new urban areas is an important method for local governments to acquire land transfer fees. Second, infrastructure investment increases economic growth, which helps cities with their government performance examination. Thus, building new urban areas and districts has become a widely used policy among local governments.
However, in reality, quite a few of the new areas are too big to be practical, which leads to an enormous waste of land resources. Meanwhile, governments usually have to take large loans through the construction, which adds to their fiscal risk. What’s more, over-development will reduce the intensity of economic activities, and hurt economic vitality. Even in a world where IT is highly advanced, intensity and distance are still essential for economic vigor. The long distance between new and old towns has increased the cost of traveling and freightage, while economic activities between towns fails to complement and interact with one another. 
Bound by policies like the farmland area line and the requisition-compensation balance of cultivated land, it is becoming increasingly hard to increase and sustain the land for construction. This makes old town renewal highly important. Old towns are usually equipped with basic facilities for living and production, and the maintenance costs are supposedly lower than building a new town from scratch. However, since land’s value-added revenue continues to rise over time, housing removal costs have skyrocketed. The breakthrough in tackling old town renewal issues should be to internalize the externalities of land revenue by establishing the right mechanism. 
Urban spatial allocation
Improving efficiency of resource allocation and reducing mismatched resources are important drivers for China’s high-quality economic growth during the 14th Five-Year Plan period (2021–2025). It is essential to improve the rate of resource utilization if we want to achieve high-quality growth in the complex external and internal landscape. This requires us to stick to scientific and technological innovation, pursue technological independence, and optimize the efficiency of resource allocation. 
Improving China’s technological level via research and development helps raise the country’s economic efficiency, but it is also extremely costly. A more cost-effective way may be to lift institutional barriers, reduce mismatched factors within and among cities, and leverage factors more efficiently. Land allocation among cities requires government regulation with a top-down approach. Specifically, the government needs to allocate the construction land index according to cities’ agglomeration elasticity while observing the rules regarding minimum requirements for arable land. Cities with great potential and high agglomeration elasticity should be propelled forward to become new regional economic growth poles, so that we can cultivate multiple key cities instead of letting one megacity dominate a region. 
Within cities, land development must increase focus on old town renewal, unleashing great potential by renovating old towns and old neighborhoods, as well as building underground pipe networks and parking lots. In this process, the government needs to leverage market forces, and engage enterprises to participate in old town renovation by offering them more support.
Liu Xiuyan and Ni Kejin are from the School of Economics and Management at Southeast University. 


Edited by WENG RONG