Urbanization and economic growth: A dynamic panel data study

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Abstract  - With  the panel data of China's 31 provinces  in
1997-2004,  the  paper  uses  dynamic  panel  GMM  estimation
to  test  the  impacts  of  urbanization  on  economic  growth
taking  the urbanization ratio and  the urban primacy ratio as
urbanization  index.  The  result  shows  that  the  urbanization
ratio  has  a  negative  but  small  impact  on  economic  growth.
Furthermore,  it  also  refects  urbanization  boosts  economic
growth  within  a  certain  economic  development  degree  and
the  growth  efect  of  urbanization  turns  negative  beyond  it.
Now all provinces are above  the critical  level, which means a
simple  extension-type  expansion  will  impede  economic
growth  with  the  evolution  of  urbanization.  In  addition,  the
urban primacy  ratio does not have  a  signifcant  infuence on
economic  growth,  which  is  inconsistent  with  the  prior
fnding  of  Henderson.  Therefore,  this  paper  provides
suggestions  of  urbanization  in  order  to  promote  china's
economic growth.
Keyords  - Urbanization,  economic  growth,  dynamic
panel data, GMM estimation
I.  INTRODUCTION
Since economic reforms  in 1978,  the Chinese economy
has maintained  an  average  annual  economic  growth  rate
of  9.7%.  While  in  the  meantime,  the  urbanization  rate
fom 17.92%  in 1978  rose  to 45.68%  in 2008. The main
impetus for this change is market-oriented reforms. Along
with  deregulation  of  institutional  mechanisms  and
changes  in  capital,  labor,  land  and  other  production
factors  in  a  more  fexible,  effcient  way  into  economic
process  across  the  30  years,  China  has  carried  out
industrial  expansion  and  fast  growth  by  the  factor  input
and  exports  demand  actuation.  However,  a  series  of
ensuing  questions  such  as  resources  shortage,
environmental  damage,  imbalance  between  investment
and consumption,  labor insuffciency and the interational
market  saturation  have  given  a  challenge  to  China's
economy,  which  have  started  to  reveal  gradually  since
2008.  How  to  maintain  sustained  and  rapid  economic
growth has become a major issue China facing.
Many  scholars  believe  that  urbanization  as  the  hub  of
stctural change and revitalizing domestic demand  is  the
main  driving  force  by  that  the fture  Chinese  economy
can maintain a high growth rate in fture, while expansion
of  industrial  scale  is  unsustainable  (Research  Group  on
China's Growth  and Macroeconomic  Stability,  2009).  In
general,  urbanization  rising  fom  industrialization  is  an
important  process  the  current  developing  coutries,
including  China,  are  experiencing,  during  which  the
population  and  industry  gather  together  in  urban  areas
under  the  action  of  agglomeration  economies  and
economies  of  scale.  The  natural  concentration  of
population, capital,  information and other resouces to  the
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