The Economic Curse of the Underdeveloped Border Town

Khabarovsk is a city of more than half a million people, located more than twelve hours by train away from similar-sized Russian cities (Vladivostok to the south, Chita and Ulan-Ude to the east).  This very geographic fact should create a fairly big local market for consumer products that are not easily fulfilled by traveling elsewhere in the country.  People would buy locally simply because there are few choices to go buy somewhere else.  Yet, speaking to the city's Chinese merchants and a different picture emerges. 

The Chinese (and other foreign) merchants are surprisingly few and far in between in this massive city.  The city's centrally located markets are filled with local Russians selling fish and vegetables gathered from the Amur River or their own dachas.  Asked why foreigners are so underrepresented in the local marketplace even though the local consumer base is large, the Chinese merchants shrugs and points out that Fuyuan, the nearest Chinese border town, is a mere 90-minute, 15-dollar ferry ride away, and it makes much more sense for cost-conscious consumers to go there instead.

Indeed, the cost-conscious really think of every way to make their little amounts of money stretch.  They pool together money among friends and/or families, designated one or two people to cross the border (with everyone chipping in money for their ferry tickets).  The people who cross the border take along everyone's shopping lists and carry back suitcases full of products declared as "for personal use" at the border.  Haggle well enough on the Chinese side, and they can purchase for anything Chinese merchants in Khabarovsk can hope to offer.

For Chinese merchants, it makes sense to stay on their side of the Border as well.  Gone is the hassle of dealing with authorities and various taxes bringing products across the border.  The lower margins are comfortably made up with much lower costs for logistics, rent, and living costs on the Chinese side. Since the whole border town is designed for trade with Russians, plenty of local businessmen have strong grasp of what Russians want and where to get those products.  As long as the Russians keep coming, their business model continue to work, making cross-border trade unnecessary.

Of course, such arrangements make sense for Russian consumers too only because the border is so close.  It would not make economic sense for Russians from farther afield to cross the border for their purchases since the time and money needed to do so would be exponentially higher.  That explains why a town like Vladivostok, close to ten hours by bus from the Chinese border, has many more Chinese merchants who take advantage of more stationary local consumers.  Distance from the border, seemingly contradictorily, actually persuade more Chinese merchants to move in, not fewer.

For Khabarovsk, being on the border with fewer foreign merchants may hurt the local economy in the long run.  While local consumers can save money by making purchases across the border, the city itself loses out on not having foreign merchants that boose local spending.  Foreign merchants rent local shop fronts and apartments, eat, and use local transport services, all of which can bring extra income to the local economy and indirectly create extra jobs for the local population.  Having fewer foreign merchants just mean less local development. 

Economists argue that linear infrastructure like roads and railways benefits the ends while depressing the middle.  After all, such infrastructure is worthy of being built in the first place between economically dynamic places.  The greater ease and less cost of transport offered by the newly built infrastructure only convince people from other places on the "line" to move to the economically dynamic "ends" to take advantage of greater economic opportunities.  This ability for infrastructure to depress the "middle" can be evident even when crossing national borders. 

In the Sino-Russian border case, the more economically dynamic China, with its endless array of both industrial and agricultural products, is steadily acting as the "end" to the "middle" of the Russian Far East, steadily losing population due to decreasing real wages and lack of good employment opportunities.  Even if the Russians do not seek to move permanently across the border, their very decisions to do their regular shopping trips across the border is enough to continue hurting the local economy while making the Chinese side more vibrant.  Policymakers should take note.