The impact of China’s spatial development policies on urbanization and regional inequality

China has used two main spatial policies to shape its geographic patterns of development during recent decades: restricted labor mobility through the Hukou residential registration system and massive infrastructure investment, most notably a national expressway network (NEN). We develop a structural new economic geography model to examine the impacts of these policies. We fit this model to the data, and simulate various counterfactual scenarios that allow us to compare each policy’s respective impact on regional economic development and urbanization patterns across China. We find large overall economic benefits of both the construction of the NEN and of completely abolishing the Hukou system. However, they also result in much more pronounced agglomeration patterns and increased regional economic inequality. The construction of the NEN has only reinforced existing urbanization patterns, while a removal of the Hukou restrictions would also promote urbanization in currently lagging (inland) regions mostly by stimulating rural out-migration. The overall economic benefits are smaller in case of the construction of the NEN. The initially lagging regions not connected to the NEN do not benefit that much from its construction. A removal of the Hukou restrictions instead allows everyone to gain by moving to where he/she is most productive