Trade, rural–urban migration, and regional income disparity in developing countries: a spatial general equilibrium model inspired by the case of China

Abstract

Inspired by the case of China, this paper develops a spatial agglomeration model to explain the increasing regional disparity in China and explore several policy implications. The model shows that the improving trade condition and the increasing rural-to-urban labor mobility in China may be the reasons for the enlarging income gap between the coastal area and the hinterland. With a geographical advantage in international trade, the coast becomes the initial location for industrial agglomeration and its leadership becomes strengthened by the positive feedback mechanism from increasing returns to scale. The necessary labor supply for industrial agglomeration in the coast comes from intraregional rural-to-urban migration instead of interregional migration. As a consequence of the industrial agglomeration, the income disparity between the coast and the hinterland increases. The location disadvantage of the interior comes from higher transportation cost in international trade. However, the model suggests that increasing domestic accessibility can actually make the interior worse off.