Essays on urban and environmental economics in developing countries

• Main Author: Chen, Ying
• Published: London School of Economics and Political Science (University of London) 2018
• Subjects: HC Economic History and Conditions
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.762906

My thesis is comprised of essays that study urban and environmental economic topics in developing countries. Three of the four essays study causal drivers behind the phenomenal urbanization and local economic growth in China. Its rapid growth in the recent decades provides an illustrative case for understanding how the spatial distribution of economic activities is affected by policies regulating factors of production. The fourth essay extends to another developing country, Tanzania, where the challenges posed by climate change faced by populations agglomerating in fast growing urban centers are substantial. This thesis strives to contribute to current research with my understanding of the contexts, utilization of new yet publicly available data, and novel methodology. The fist chapter, Political favoritism in China's capital markets and its effect on city sizes, examines political favoritism of cities and the effect of that favoritism on city sizes. To study favoritism we focus on capital markets, where defining favoritism is more clear-cut and not confounded with issues of city scale economies. Efficiency in capital markets requires equalized marginal returns to capital across cities, regardless of size. We estimate the city-by-city variation in the prices of capital across cities in China from 1998 to 2007. It shows how the prices facing the highest order political units and overall cross-city price dispersion change with changes in national policy and leadership. Next, the effect of capital market favoritism on city growth after the national relaxation of migration restrictions in the early 2000's is investigated. We develop a simple model to show that those cities facing a lower price of capital respond with larger population increases over the next decade, with the change labor mobility. The elasticity of the city growth rate with respect to the price of capital is estimated to be - 0.07 in the OLS approach and -0.12 in the IV approach. The second chapter, Early Chinese development zones: fist-mover advantage and persistency, studies the heterogeneous effects of China's special economic zone program by their level of government support and timing of designation. Using a difference-in-differences (DID) approach, I observe that the early national development zones in China have substantially greater and persistent success in attracting FDI compared to national zones established later, or those at the provincial level. Early national zones persistently attract higher levels of FDI inflows, attract more internal migration and are of significantly larger city sizes. To investigate whether the persistent success of early national zones is driven by their first-mover advantage or their unobservable high growth potential, I use their stronger ties to overseas Chinese investors in past waves of political instability as instrumental variable. The IV estimates are comparable to DID, suggesting the success of early national zones relative to newer and provincial zones can be attributed to their first-mover advantage. This conclusion also suggest that the large positive impacts found in China in the existing literature of evaluating place-based policies can potentially be driven by a small group of first-movers. In the third chapter, Air pollution, regulations, and labor mobility in China, I study the local economic impacts of pollution regulation in China at the time when migration costs fall. On the one hand, environmental regulations impose costs on firms, which tend to reduce local employment. On the other hand, lower pollution levels are an appealing amenity that attracts human capital to the region, possibly providing a boost to economic activity. The overall net effect of these two opposing forces is ambiguous. To investigate this, I study how local economies in China between 2000 and 2010 are affected by two significant reforms in environmental regulations and internal migration. Following the environmental reform, Chinese prefectures face new national air quality standards whose enforcement intensity can be proxied by their existing air quality at the time of the policy introduction. Meanwhile, the migration reform reduces migration costs and allows workers to relocate based on their preferences for air quality across prefectures. To formalize how air quality regulation affects local employment and city sizes by skill types following the two reforms, I first develop a spatial equilibrium model to guide the empirical analysis. To address the non-random spatial distribution of local air quality, I construct a novel instrumental variable of power plant suitability to capture a prefecture's likelihood to pollute heavily. Thermal power plants are major contributors to China's emissions, while electricity distribution and pricing are centralized. Therefore, locations with comparable economic characteristics may differ substantially in their air pollution levels simply because that some host thermal power plants and some do not. The estimation results show that air pollution regulations have an overall adverse impact on local manufacturing employment, with modest reallocation from heavy to non-polluting industries locally. There is little reallocation across space of low-skilled workers, whose employment prospects are more vulnerable under pollution regulation. However, the population of high-skilled workers in heavily polluted prefectures declines, showing their strong preference for air quality as migration costs fall. The last chapter, Cholera in times of floods: weather shocks and health in Dares Salaam, takes a slightly different perspective on urban and environmental issues in developing countries. We examine the challenges faced by urban population in Tanzania as the result of growing urban density and increasing extreme weather occurrences. Urban residents in developing countries have become more vulnerable to health shocks due to poor sanitation and infrastructure. This paper is the first to empirically measure the relationship between weather and health shocks in the urban context of a developing country. Using unique high-frequency datasets of weekly cholera cases and accumulated precipitation for wards in Dar es Salaam, we find robust evidence that extreme rainfall has a significant positive impact on weekly cholera incidences. The effect is larger in wards that are more prone to flooding, have higher shares of informal housing and unpaved roads. We identify limited spatial spillovers. Time-dynamic effects suggest cumulated rainfall increases cholera occurrence immediately and with a lag of up to 5 weeks.