Transfer Payments, Integration And The Coordinated Development Of Regions

Since reform and opening up, China's overall economy makes obvious progress. However, the performances of economic growth are quite different in different regions of China. The rapid growth of the whole country's economic, as well as the difference of regions, are so remarkable that it has becomes an urgent and major problem for the government's macroeconomic administrative authority to achieve the coordinated development of regions. One possible approach is to make full use of the effect of the transfer payments on equalization of public services. And ultimately, it will come true both the equality of industrial distribution and income at the macro-regional level and the equality of welfare at the micro-individual level among regions.Based on this view, this paper try to discuss the macro effect, the location effect and the welfare effect of transfer payments from the perspective of New Economic Geography. On the one hand, New Economic Geography has some special micro-foundations so that we can easily put the space dimension into the general equilibrium framework. New Economic Geography facilitates us to put the transfer payment into an entire economic system to consider the mechanism and the related effects. On the other hand, the transfer payments will be effective policy instruments to achieve the coordinated development of regions. The scale and distribution of transfer payments will be related to China's future development performance and the whole country welfare. Specifically, this paper focuses on three issues. What kind of "efficient" and "fair" trade-off will be faced by different types of transfer payments? What kind of comprehensive economic effects will come true by different methods of transfer payments calculation methods in the backward region? To owners of different factors and the whole society, what kind of welfare effects will be faced by using different methods to finance transfer payments? The aim of this paper is to further enhance the understanding of the coordinated development of regions.For these, this paper carries the following four tasks, and draws some meaningful conclusions. Firstly, basing on the local spillover model, we construct a comprehensive analysis framework about economic growth, spatial distribution and transfer payments, in order to investigate "efficiency" and "fair" tradeoff of transfer payments. We find that if we try to implement some measures to influence economic spatial distribution, such as a general transfer payments or improvement of infrastructure facilities in the backward region, the cost may be lower overall economic growth rate. Of course, we also found a variety of transfer payment methods that can achieve both "efficiency" and "equity". For example, the transfer payments which can enhance innovation capacity, expand effective demand, develop business activities and boost market confidence will either reduce the innovation cost or increase effective demand in the market, so that they can push economic growth rapidly. Thereby profits decrease by enhancing crowding effect, while income and economic activity achieve a more equitable space distribution.Secondly, basing on the footloose capital model, we focused on three types of transfer payments to subsidize production process of firms in the backward region, profit subsidies, fixed input subsidies and output subsidies. We discuss the overall economic effect of these three production transfers by analytical derivation. We find: Firstly, the economic effects of transfer payments will strengthen with the increasing integration level. Secondly, the three transfers can reverse the unequal distribution of industry, but they are different effect on reversing interregional income inequality. In detail, contrary to the general understanding, profit subsidies and fixed input subsidies will exacerbate income inequality between different regions. Production subsidies reduce income gap between regions because of increasing income levels of workers in the backward region. Finally, there is uncertain effect of profit subsidies and fixed inputs subsidies on labor demand of industrial sectors in the backward region. Not as we usually think that the entry enterprise can create more jobs, possibly because the entry of new firms will lead to the production shrink of the original enterprise or close down.Thirdly, we put consume heterogeneity and the local knowledge spillover into footloose entrepreneurs model to study the welfare effects of various transfer payments. Our analysis shows that the welfare effects of transfer payments not only depend on the level of transaction costs (market integration), degree of consume heterogeneity, local spillover effects within industry and inter-industry and substitution elasticity between products, but also depend on social values as a main factor. In particular, if there is relatively low level of market integration, relatively low degree of consumption heterogeneity and less obvious local spillover effects, the transfer payment for industry transfer is optimum. On the contrary situation, income-based transfers are optimum. If people pay great attention to fair from the main social value, and if they incline to support government intervene market operations, the government which pursuit fair will implement industry type transfer payments. And vice versa, the income-based transfers will be taken.Finally, with the background of China's western development and the corresponding simulation results, we design a specific measure of transfer payments. We should not only focus on indirect effect and short-term effect of policy, but also pay attention to its possible indirect effects and long-term effects. Most importantly, we must consider the fitness between transfer payments and the region which receive transfer payments, because the roles of transfer payments on different economic variables are through different mechanisms and turn out different impact.In this paper, by developing New Economic Geography model, we study the "efficiency" and "fair" trade-off of transfer payment, the effect of transfer payment on the overall economic of the backward region and on the welfare effect of different individuals and the whole society. This paper can further enhance the understanding of how to use transfer payments to achieve the coordinated development of regions. It is almost a new research direction of studying the effect of transfer payments on the regional coordination development in new economic geography framework. There is still much space to explore.