Strengthening Effect of Scale Economies in Domestic Market Integration:From the Perspective of Reducing Institutional Trade Frictions
Country size is a major challenge for China's modernization,while it is also a potential advantage for economic development.With industry-level scale economies,domestic market size can turn into better economic performance,such as higher welfare and growth rate.This notion is confirmed by economic theories,especially in the realm of international trade and macroeconomics.However,empirical studies have not reached a consensus on the effect of country size on growth.This is probably due to the negative effect of higher domestic trade costs in a large country context.The case of China is in line with this argument.Owing to vast territory and complex geographical conditions,domestic trade cost in China is far from negligible.Besides spatial frictions related to geographical distances,there are notable institutional trade barriers between Chinese regions.The institutional trade barriers are deeply rooted in the institutional context of China's reform of fiscal regime.For concreteness,although the fiscal decentralization reform plays a big role in promoting economic growth,it raises the incentives of local government to protect local markets,which results in various forms of institutional friction.Recently,policymakers have acknowledged the urgent need to remove those institutional trade barriers.Under such background,this study investigates strengthening effect of scale economies brought by institutional trade barriers reduction.Strengthening effect of scale economies is defined as the welfare impact of productivity growth generated by the changes in sector size in response to institutional trade barriers reduction.This study uses a quantitative trade framework and integrates industry-level scale economy into a theoretical model.After constructing the model,the scale elasticity parameters,which are of key importance to the estimation,are estimated using regional trade data in a model and data-consistent way.Then,the baseline equilibrium is calibrated using regional and international trade data in 2017.Using calibrated model,this study simulates the counterfactual scenario that institutional trade frictions in China is reduced to 15％,which is exactly the level of cross-region institutional trade frictions in Canada.The results reveal that welfare increases in response to reducing domestic institutional frictions.Moreover,the strengthening effect of scale economies brings an additional 25％welfare gains to most provinces.At the national level,the strengthening effect of scale economies leads to a 3.626％increase in welfare,accounting for 32.6％of the total welfare effect.In search of the mechanisms,this study identified the strengthening effect of scale economies originated from the spatial division and regional specialization of industries.The results confirm that both mechanisms contribute significantly to strengthening effect of scale economies.This study also unveils the heterogeneous contribution of different industries to strengthening effect of scale economies.Furthermore,this study delves into other factors that affect the magnitude of strengthening effect of scale economies and finds that the input-output link between industries plays a crucial role in exacerbating strengthening effect of scale economies.The tradability of service industries and openness to international trade also play differentiated roles.This paper also compares the effect of reducing spatial frictions by improving connectivity and the quality of infrastructures.The welfare effect of reducing spatial frictions is much smaller than reducing institutional trade barriers;however,reducing spatial frictions can strengthen the effect of reducing institutional trade barriers.The results have several policy implications.First,this study finds that lowering institutional trade barriers can bring about significant welfare effects and strengthening effect of scale economies,so it is necessary to break down inter-regional institutional trade barriers,eliminate administrative divisions between regions,and ensure fair competition among market agents.Moreover,by constructing infrastructures of high quality and high connectivity,trade barriers arising from geographical segmentation between different markets can be reduced and the effect of reducing institutional trade barriers can be somewhat strengthened.Finally,this study demonstrates that the tradability of the service industry and openness to international trade are also vital for maintaining the magnitude of strengthening effect of scale economies;thus,it is beneficial to promote the service trade between regions and the international trade of regions.
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