rural-urban integration reforms undertaken in Chengdu prefecture followed a more integrated approach that could hold broader lessons. We describe the nature of the reforms and our analytical approach to evaluating their impact.

# **2.1 The challenges of rural-urban land conversion in China**

In the 2000-2010 period, the size of urban areas in China expanded enormously: use of satellite imagery to define ‘urban’ consistently across countries reveals that, with an average annual area expansion of 9.8% for Hangzhou, 8.1% for Shanghai, 6.1% for Chongqing, 5.9% for Chengdu, 4.5% for the Pearl River Delta and 4.0%, for Beijing, most Chinese cities expanded at a rate well in excess of the East Asian average of 2.8% (World Bank 2014).<sup>1</sup> At the same time, and despite numerous measures to the contrary, rural-urban income inequality widened. While clear causality is difficult to establish, most experts agree that high rates of land conversion make a key contribution to this and, in addition, give rise to factor market distortions and often inefficient and unsustainable land use. This can largely be attributed to structural factors, most importantly the fact that, as rural land is owned by village collectives and not tradable, conversion of land from agricultural to non-agricultural use is possible only via acquisition by local governments. While farmers receive compensation for their agricultural land based on the value of land for agricultural production,<sup>2</sup> land acquired in this way can be transferred by local government at prices a hundred times or more what was paid in compensation.

The scope for realizing such windfall gains made land acquisition a preferred means for funding local governments, with far-reaching implications for overall land supply, land prices, and the operation of land and other factor markets. Land lease fees accounted for an average of 60% of local budgetary revenues in 2003/04 (Su _et al._ 2013), a figure that has risen further as fiscal decentralization reduced alternative revenue sources for local governments (Qun _et al._ 2015).<sup>3</sup> Revenue generated in this way provides a huge implicit subsidy to industrialization (Ding and Lichtenberg 2011), with negative impacts on availability of land for residential and housing purposes (Peng and Thibodeau 2012).

This pattern of land development, which would be difficult to maintain without complementary restrictions in labor markets that in and of themselves may lead to considerable efficiency losses (Au and Henderson 2006b), has several consequences. First, as local governments compete to attract industry, prices for industrial land in China have remained very low (World Bank and DRC, 2014). Supplying land to industry below its real value led to inefficient use of a valuable resource; in fact a nation-wide survey in 2003

> 1 The average is for urban areas in East Asia with more than 5 million inhabitants in 2010 (World_Bank and DRC 2014).

> 2 Farmers’ residential land is often not expropriated, something that led to the spread of ‘urban villages’, i.e. unplanned neighborhoods that tend to provide shelter for migrants tend exert negative externalities on prices for neighboring properties (Song and Zenou 2009). It is estimated that 140150 mn migrants are estimated to live in some 50,000 urban villages (Tan _et al._ 2011).

> 3 Total construction land in 2005 was estimated at about 17 million ha, about 64% of which in rural areas. A number of innovative, though not entirely legal models whereby villages brought this land directly to the market and reaping large profits from doing so (Su _et al._ 2013).

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