Growth in China's rural enterprises: impacts on urban-rural relations

China's rural enterprises are economic units established by local government in the countryside or by the peasants and they operate outside the planning system. Rural enterprises have grown twice as fast as the rest of the economy since 1984. The rural enterprise sector has so far challenged the urban economy, in both product markets and markets for raw materials. What are the prospects for their relationship - competition or cooperation? To answer the question, we develop a well-specified but simple model of the rural and urban economies. The rural enterprise boom was caused in this model by the presence of barriers to factor mobility within China, price distortions and the pool of available labour in the countryside. The origins of the boom imply that rural enterprise exports tend to be relatively labour intensive. The complementarities between rural and urban enterprises are likely to dominate their future economic relationship and lead to further growth in the rural enterprise sector.Zhang Xiaohe, Christopher Findlay & Andrew Watso