About 100 million Chinese live in extreme poverty and about 275 million live on only US$2 a day. The overwhelming majority of China’s poor live in rural areas and, for most, hope for a better life lies in the cities, where better-paying jobs are easier to find. Indeed, over the past three-and-a-half decades, a staggering 500 million Chinese have already made the move, raising the urban proportion of the country’s population from less than 20 percent in 1980 to 50 percent today. By 2030, 70 percent of all Chinese are expected to live in cities.
Urbanization has undoubtedly supported the country’s impressive growth and rapid economic transformation. Its cities have provided cheap land and abundant labor and local governments have been eager to attract investment and create jobs.
However, strains are beginning to show. China’s growth model, driven by investment and exports, is running out of steam. Urban sprawl and congestion are spreading, fueling unrest among farmers who feel inadequately compensated for the loss of their land — a vital source of collateral for local-government debt — which now amounts to 30 percent of GDP.
Moreover, the widening urban-rural divide has increased the country’s income and wealth disparities. Stark inequalities also exist within cities, mainly between those with a hukou — a record in China’s official household registration system — and migrants without one. Although migrant wages have now caught up, inequality in public services, access to which requires an urban hukou, ensures that this divide persists, risking the prospects of migrant children and welfare and deterring future migration.
Environmental pressures are worsening. Despite some measures of urban pollution improving, urbanization exposes more people to bad air, increasing the total human and economic costs.
The authorities are aware of these issues and have announced plans for a new, “people-oriented” urbanization model that is be more efficient, inclusive and environmentally sustainable.
A joint report by the World Bank and the Development Research Center (DRC) of China’s State Council recently outlined how to make this plan a reality. Its successful implementation would undoubtedly improve conditions for the poor during China’s next phase of urbanization.
First, the plan would reform land policies. Under China’s constitution, urban land is owned by the state, and rural land by collectives. Though land reforms over the past three decades have recognized property rights for individuals and enterprises, rural land rights remain weak relative to those in urban areas.
By strengthening farmers’ property rights and restricting local governments’ power to expropriate land for urban growth, cities would become more compact and efficient, especially in their energy use. Reform would also help to consolidate farmland, facilitating better agricultural techniques. It would also help to spread wealth, because stronger property rights boost rural land prices.
According to one estimate, total compensation received by farmers for land over the past 20 years was 2 trillion yuan (US$320 billion) below market value, about 4 percent of China’s GDP last year. If invested at rates in line with China’s GDP growth, that unpaid compensation would now be worth about 5 trillion yuan, or almost 10 percent of GDP.
Second, reform of the hukou system could increase labor productivity, reduce income inequality and accelerate urbanization. Despite the high level of rural-urban migration so far, it is still below what is to be expected, given China’s size and income level. Preventing the one-third of city dwellers who lack an urban hukou from accessing public services means that too many people who would have left rural areas remain tied to the land. This discourages people from seeking higher incomes in the cities, while keeping rural labor productivity and wages low.
While any rapidly expanding city experiences public-service bottlenecks, these can be overcome. Japan and South Korea, extended public services in their fast-growing urban areas without restricting mobility. As the World Bank Development Research Center of the State Council report points out, China can do the same by linking public services to place of residency rather than to place of origin. Moreover, when migrant children are able to join their parents in the cities and get a good education, the next generation will have a better chance to escape poverty, too.
Making migration easier would not only open up opportunities in the cities; it would also accelerate agricultural transformation, as the fewer remaining agricultural workers would need to acquire new skills to raise productivity and wages.
However, to implement land and hukou reforms, China’s fiscal system must be overhauled. Stronger land rights for farmers will deprive city authorities of the land-conversion revenues needed to provide public services to new urban migrants, and more migration will mean more demand for those services.
Cities will therefore have to find new revenue sources. A property tax or a local surcharge on personal income taxes would target those who most benefit from urban living. Environmental charges and levies — such as higher registration fees for motor vehicles, pollution charges and improved cost-recovery on utilities — might also help, while simultaneously addressing urban environmental problems.
There are big potential savings, too. China’s cities are forecast to spend about US$5.3 trillion on infrastructure over the next 15 years; but denser, more efficient cities would save about US$1.4 trillion (15 percent of last year’s GDP) of these costs. This money could then help to finance the additional healthcare, education and low-income housing required by new migrants.
China’s citizens, especially the poor, would benefit from a shift in policy from the expansion of cities and infrastructure to the delivery of better, more fairly distributed public services. Achieving this would truly represent the people-oriented urbanization that the authorities seek to achieve.
Bert Hofman is chief economist for the East Asia and Pacific region at the World Bank.
Copyright: Project Syndicate
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