Declining Agglomeration Elasticities and the Geography of Urban Growth in China

Abstract

China’s rapid economic growth is partly due to the productivity gains from agglomeration, whereby firms and workers in larger and denser cities benefit from proximity through knowledge spillovers, thicker labor markets, and shared infrastructure. This study examines the changing nature and location of agglomeration economies in China using resident-based measures of urban scale from the 2000, 2010, and 2020 population censuses. Chinese “cities” are administrative jurisdictions that contain both dense urban districts and lower-density counties, so the agglomeration elasticities are estimated separately for districts and counties for a balanced panel of 298 prefectural jurisdictions. Agglomeration economies occur only in urban districts, while coefficients on urban scale for counties and county-level cities are close to zero or significantly negative. Moreover, district-level elasticities decline over time, from 0.24 in 2000 to 0.15 in 2020, assuming no feedback from productivity to urban scale. Allowing for such feedback, the temporal decline is even greater, from 0.24 in 2000 to 0.08 in 2020. However, urban growth is shifting increasingly toward counties rather than districts, foregoing the potential agglomeration effects. Changes in location of construction workers also shows this dispersed urban growth. Hence, recent urban growth is increasingly in locations without agglomeration benefits.