Research on effects of integration of primary, secondary, and tertiary industries in rural areas of developing countries: an approach of rural capital subsidies

ABSTRACT

We set up a four-sector general equilibrium model and a rural industrial integration indicator to investigate impacts of capital subsidies given to capital-using sectors in rural industrial chain on rural industrial integration and social welfare. Our findings are as follows: Rural capital subsidies can enhance rural industrial integration (but need to satisfy certain conditions in the short-run) and reduce the economic gap between urban and rural areas. In numerical simulation part, we discover that capital subsidy for rural secondary industry has a more favourable impact on rural industrial integration, social welfare, and narrowing urban–rural economic gap than rural tertiary capital subsidy.

KEYWORDS:

• Rural capital subsidy
• general equilibrium analysis
• rural industrial integration
• urban–rural economic gap
• social welfare

JEL Classification:

• J21
• Q18
• R13

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Refer to the ‘Sixth Industrialization Strategy’ of Japan, which promotes using locally produced agricultural product as raw material for processing and selling to prevent the value of agricultural product from spilling over through manufacturing and marketing links (Yamashita 2015).

2. http://www.moa.gov.cn/ztzl/yhwj2015/zywj/201502/t20150202_4378754.htm.

3. In theoretical studies, the phase where capital is sector-specific is often designated as the short run, where capital is mobile between sectors is typically designated as the long run (See Corden and Findlay 1975; Gupta 1995; Rapanos 2007; Choi and Yu 2010; Li and Zhou 2015).

4. To measure industrial integration, academics primarily use Input-Output method, Technology coefficient (such as the Herfindahl index, Patent coefficient, etc.) and Econometric method (such as Stochastic frontier, VAR model, Spatial measurement model, etc.). The Input-Output approach, among others, is more appropriate to measure the rural industrial integration designed in this paper because it depicts how intermediate inputs and outcomes are interdependent across industries.

5. To highlight the targets of our investigation, we assume that the source of subsidies is the general tax revenue that does not cause economic distortions. Therefore, we do not take the source of subsidies into consideration when analysing consumer income.

6. We obtain $0.24={\mathrm{\Omega }}_R^2<\frac{-[{\mathit{\alpha }}_{\mathit{K}3}({\theta }_{\mathit{K}3}+S_{KK}^3)+{\alpha }_{\mathit{K}2}(S_{KK}^2-{\theta }_{\mathit{K}3})]}{{\alpha }_{\mathit{K}2}{\beta }_K^R}=5.08$ by using China’s macroeconomic data in 2018. Thus this assumption may be established in developing countries with characteristics of China’s economic development.

7. The condition for $\frac{\hat{I}}{{\tau }_3{\hat{\tau }}_3}>0\$$ in the short-run is: ${\theta }_{\mathit{K}2}<\frac{1}{\varsigma }[\mathit{\upsilon }{S}_{X_1\mathit{K}}^2+S_{X_1\mathit{K}}^3(1-\mathit{\upsilon })]$.

8. More labour can be used to replace capital when the substitution elasticity of capital for labour in the rural tertiary industry is large enough to reach:$S_{LK}^3>{\theta }_{\mathit{K}3}$; when $S_{LK}^3={\theta }_{\mathit{K}3}$, there is: $\frac{{\hat{L}}_3}{{\tau }_2{\hat{\tau }}_2}=0$.

9. Our field study revealed that the shortage of labour in agricultural sector in developing countries has become a widespread social phenomenon.

10. We use the growth rate of endogenous variable relative to its base value ${\tau }_i(\mathit{i}=2,3)=0.01$.

11. In developing countries, the urban–rural capital ratio is sufficiently large and $\frac{{\mathit{\lambda }}_{\mathit{K}4}}{{\lambda }_{\mathit{K}2}}>\frac{1-{\mathrm{\Omega }}_R^2}{{\beta }_{K2}^R{\mathrm{\Omega }}_R^2}$can be met; our 2018 data satisfy this assumption.

12. According to the China Statistical Yearbook 2019, we obtained that the average wage for urban and rural workers were, respectively, 87881 and 36,470 yuan (In software simulation, we unified the unit to: ten-thousand yuan) and referred to Li and Wu (2020), interest rate of China in urban sector: $r_4=6.9\mathrm{\%}$ and rural sectors: $\mathit{r}=10.35\mathrm{\%}$.

13. Products of agricultural sector was consumed by urban and rural consumers in the ratio of 0.672:0.328, and the ratio for rural secondary industry product is 0.764:0.236, as measured by the 2018 China Input-Output Table.

14. We allocated 7.2% of the output value of ‘accommodation industry’ in the Input-Output 2018 table to rural accommodation industry (considering the share of China’s rural GDP was 7.2% in 2018).