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Journal of Happiness Studies

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23-06-2023 | Research Paper

Who Benefits from Domestic Market Integration?

Authors: Xin Fan, Shan Jin, Zeyu Chen

Published in: Journal of Happiness Studies | Issue 6/2023

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Abstract

The historical integration of economic markets between and within nations has profoundly altered human society. Nonetheless, existing literature on this topic has seldom gone beyond the economic repercussions of this phenomenon. Accordingly, this study examines the relationship between domestic market integration and subjective well-being, of which very little is known. Taking China as a case, we match individual-level data from a longitudinal survey with province-level data to construct panel data and use the fixed effect model to estimate the welfare effect of market integration. Our studies suggest that market integration has a positive effect on welfare overall, contributing to approximately 11.4% of the rise in life satisfaction among Chinese residents from 2010 to 2018. In addition, we found that low-income populations had a relatively large increase in subjective well-being, which implies that market integration is a significant mechanism of redistribution and contributes to reduced happiness inequality. We also discuss the different effects of goods, labor, and capital markets, which are further impacted by heterogeneity in China’s household registration (hukou) system and labor skills. Our findings emphasize the broader importance of reduced market segmentation and are of relevance to policymakers and stakeholders involved in economic reform.

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Some studies have employed quantitative trade models to evaluate the welfare effects (e.g., Atkin & Donaldson, 2015; Caliendo et al., 2021; Caliendo & Parro, 2015). This technique begins from assuming a particular utility function (usually a function of some economic variables, particularly real income) for residents, and then solves the general equilibrium through multi-sector optimization. By analyzing the changes in utility at equilibrium resulting from changes in certain exogenous parameters that symbolize the extent of market segmentation, these studies quantitatively discuss the welfare effect of market integration. Nevertheless, due to the fact that these assumed utility functions include only economic variables, the analysis of quantitative trade models can only capture one aspect of the welfare effects of market integration.

Reform and Opening-up refers to the series of economic policies introduced by the Chinese government since 1978 to carry out economic reforms and enhance the accessibility of international markets. These policies have facilitated China’s transition from a planned economic system to a socialist market economic system and have contributed to the establishment of formal institutions.

In 1980, the fiscal contracting system—requiring the central and local government each to “eat in separate kitchens”—replaced the highly centralized fiscal system. Under this system, the central government established rules for the division of fiscal revenue into “within-budget revenue” and “extra-budgetary revenue”, with only the former being required to submit a portion to the government with higher administrative level. This arrangement allowed local governments to come to an agreement in advanced on the amount of fiscal revenue to be submitted to their higher administration, and anything excess could be retained (Shen et al., 2012). This gave them increasing autonomy in arranging local expenditure, which greatly increased the incentives to develop local economies.

The tax-share reform divided the taxes into three categories: central taxes, local taxes, and shared taxes. Among the three major taxes (value-added tax, business tax, and enterprise income tax), value-added tax was a shared tax, with 75% allocated to the central government. Initially, enterprise income tax was a local tax, however, the central government reclaimed 50% of it in 2002, and further increased its share to 60% in 2003 (Tao et al., 2010).

The drug market in China is a relevant example. According to Eberhardt et al. (2016), the vague definition of “illegal” allows the local Food and Drug administration to selectively interpret rules, thereby providing protection to local drug producers while exposing nonlocal ones.

In 2013, the Third Plenary Session of the 18th Central Committee adopted several key decisions pertaining to the comprehensive deepening of reform, including the call for an improvement in the evaluation system so that development results and political performance were not solely based on the economic growth rates.

Labor mobility is a poignant example. According to Zipf’s law, the population of the largest city is \(i\) times that of the \(i\)-th largest city. Unlike most Asian countries, China’s large cities are smaller than what Zipf’s law predicts, suggesting an inadequate inflow of people (Li & Lu, 2021).

For example, in March 2020 the central government released the “Opinions of the State Council of the Central Committee of the Communist Party of China on Building a More Perfect Institutional Mechanism for Market-Oriented Allocation of Factors” (hereinafter referred to as the 2020 Opinions), which gave specific guidelines on the market-oriented allocation of land, capital, labor, technology, data, and other factors.

For a more detailed description of the Hukou system in China, see Bosker et al. (2012) and Song (2014).

The 2020 Opinion advocated for the relaxation of household registration restrictions, except in certain mega cities, and the implementation of a system based on permanent residence for household registration.

For instance, the basic health insurance system offered by the Chinese government comprises of Urban Employee Basic Medical Insurance (UEBMI) for the employed in the urban areas, Urban Resident Basic Medical Insurance (URBMI) for urban residents not covered by the UEBMI, and New Rural Cooperative Medical Scheme (NCMS) for rural residents. Rural–urban migrants are eligible for NCMS at their hometown, however, owing to the inadequate of healthcare resources in urban areas, they are required to seek pre-approval or reimbursement in their hometowns instead of at city healthcare facilities. This process is cumbersome and results in insufficient protection at their current place of residence and employment (Ma et al., 2020).

An interviewers’ traits may affect respondents’ answer (Stefkovics & Sik, 2022). To avoid any measurement bias resulting from the “interviewer effect”, we control the interview-wave interactive fixed effects referring Biermann et al. (2022).

As market segmentation is much more pronounced between provinces (Tombe & Zhu, 2019), it is reasonable to expect the ties within provinces may be much stronger than across them, providing a natural way of clustering at a high level of aggregation. However, it should be noted that for all specifications, the number of clusters by province is not more than 30, which may incorrectly estimate the standard errors (Bertrand et al., 2004; MacKinnon et al., 2023). Therefore, we interpret our estimation results mainly based on the standard errors clustered at province-wave level, and provide the standard errors clustered at province level and county level as robustness checks.

Data of the CFPS are available at http://www.isss.pku.edu.cn/cfps/en/index.htm.

The CFPS surveys excluding Hong Kong, Macao, and Taiwan. In addition, we dropped the sample from the Tibet Autonomous Region due to the lack of price index data.

The Gini coefficient is a common measure of inequality, however, Kalmijn and Veenhoven (2005) documents that Gini coefficient is not suitable for variables measuring “strength” (e.g., happiness). Therefore, we use the standard deviation, which is also frequently used, to portray happiness inequality as well. The two measures give similar results.

Despite their usefulness, trade-based methods are not without limitations, with some being quite critical. One such limitation is that the mapping between volume of trade and the degree of market integration is not necessarily monotonic. This is due to numerous factors that influence trade, and if not adequately controlled, can lead to misleading results, as noted by Xu (2002). Additionally, the heterogeneity of traded goods and residens’ preferences can result in different changes in trade volume for various countries even with similar reductions in trade costs, making comparisons difficult to establish. Parsley and Wei (2001) illustrated that high substitutability between products of two regions can significantly reduce trade volume with even a small cost, while high complementarity results in minimal impact. Furthermore, scholars have acknowledged the existence of the “distance puzzle”. Despite the significant advancements in transportation and communication technologies, standard gravity model have not found a notable reduction in the obstacles to trade resulting from geographic distance (for some discussion, see Coe et al., 2007, Disdier & Head 2008, Yilmazkuday 2017, etc.).

In addition to trade-based methods and price-based methods, there are some other relatively uncommon measures not mentioned here, including the business cycle approach (Xu, 2002) and the specialized index method (Kim, 1995), etc.

They are food; fresh vegetables; beverages, tobacco and alcohol; clothing, shoes and hats; Chinese and Western medicines; books, newspapers and magazines; daily necessities; and fuel.

Indeed, the fluctuation of the relative price should be written as:

\(\Delta p_{m,n,k,t} = \left| {\ln \left( {P_{m,k,t} /P_{n,k,t} } \right) - \ln \left( {P_{m,k,t - 1} /P_{n,k,t - 1} } \right)} \right|{.}\)

Since we did not have the data of real price, we leveraged the properties of the logarithmic function to transform the equation into an equivalent form, resulting in Eq. (2). The term \({P}_{m,k,t}/{P}_{m,k,t-1}\) and \({P}_{n,k,t}/{P}_{n,k,t-1}\) derive from the price indices.

For example, Han et al. (1990) found that some exogenous shocks (e.g., monetary policy shock) could produce greater price fluctuation in agricultural products than industrial products.

The 3 kinds of employed persons are those work in state-owned urban units, collective-owned urban units, and urban units with other types of ownership. The 3 kinds of fixed assets are construction and installation, equipment and instruments, and other fixed assets.

Although these individual-level controls are usually included in happiness studies, it is important to note that some of them may be colliders (e.g., the household income, the work status, and the housing situation), which intervenes in the relationship between market integration and subjective well-being (Bartram, 2021). Adding these variables may lead to biased estimates of the main explanatory variables. Such concerns, however, will be alleviated in the following empirical analysis, as we find that the coefficients of the main explanatory variables vary little after including individual-level controls.

With including individual fixed effects, we find a noticeable decrease in the estimated coefficient, which raises concerns about whether our results are caused by selection effects of unobservables. In Table S.2 of the Supplementary Material, we use the strategy of Nunn and Wantchekon (2011) to discuss the potential selection effects from unobservables and we believe selective bias due to unobservables cannot overturn our findings.

After adding individual fixed effects in column 6, some individual-level controls are no longer statistically significant, possibly due to the lack of variation over time (e.g., the partisan, the religion, and the educational attainment), but they still keep the same sign as in column 5.

Indeed, the authors have conducted estimations of trade costs for the agricultural and non-agricultural sectors separately, and the simple average of the two sectors is employed herein, and likewise in subsequent discussions.

The goods market integration level we calculate is 0.024 and 0.033 in 2002 and 2007, respectively.

The labor market integration level we calculate is 0.021 and 0.028 in 2000 and 2005, respectively. Therefore, a unit decrease in mobility costs calculated by Tombe and Zhu (2019) corresponds to a 0.013 unit increase in our labor market integration level.

In the Table S.4 of the Supplementary Material, we report the welfare effects of each the three types of market integration on different hukou. Once again, the results align with expectations, indicating an overall positive impact of the goods and labor markets on the subjective well-being of a vulnerable population, namely people with agricultural hukou. Moreover, capital markets primarily influence people with non-agricultural hukou, which is also to be expected given that capital holders are more likely to obtain a non-agricultural hukou.

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Title: Who Benefits from Domestic Market Integration?
Authors: Xin Fan
Shan Jin
Zeyu Chen
Publication date: 23-06-2023
Publisher: Springer Netherlands
Published in: Journal of Happiness Studies / Issue 6/2023
Print ISSN: 1389-4978
Electronic ISSN: 1573-7780
DOI: https://doi.org/10.1007/s10902-023-00672-0

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