Trade, production agglomeration, and regional disparity in developing countries: Theoretical models and a case study of China

Along with new opportunities in trade and external finance offered by globalization has come the problem of increasing regional disparity in some developing countries. In China, for example, the gap between the coastal provinces and the hinterland has grown quickly since the country opened its doors in the early 1980s. The changing trends in regional disparities in developing countries have raised a number of important questions: What is the effect of international trade on regional development in developing countries? Does globalization increase regional disparity? Are there empirical causal relations between globalization and regional disparity? What kinds of regional policies are effective in preventing the disparity from increasing? This dissertation addresses the regional disparity issue in developing countries, and explores these questions from the viewpoint of agglomeration economies.; Firms and production activities often tend to locate together; this is referred to as production agglomeration. Economic agglomeration is created through both first-nature advantages and positive feedback mechanisms (self-agglomeration), often working together. When cross-region labor mobility is restricted, production agglomeration can lead directly to income disparity.; This dissertation develops two spatial general-equilibrium trade models to explain the mechanisms of production agglomeration and the increasing regional disparity associated with globalization. The first model explains the positive-feedback mechanism caused by increasing returns to the varieties of intermediates, and discusses the roles of transaction cost and high-skilled labor in the formation of manufacturing agglomeration. The second model extends the two-country model to a three-location framework: two regions within a developing country, namely the coast and the interior, and the rest of the world. The model explicitly addresses the globalization and regional-disparity issues in developing countries. It explains the increasing trend of regional disparity, incorporating both the first-nature reason and the self-agglomeration mechanism.; The empirical study focuses on the changing trends in China's regional disparity during the past decade. Detailed data analysis shows that the income disparity between the coast and the interior has increased along with the improving trade condition of the country. In addition, there has been a significant movement of manufacturing production toward the coast. Econometric analysis shows that biased central-government investment has had some effect on the increasing disparity, but is not the only cause. Globalization (measured by export and FDI) and economic liberalization (indicated by the decline of the share of state-owned enterprises, the growth of township and village enterprises, and other market economic reforms) have had significant effects on the increasing regional disparity.