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China's Risky Love Affair With Urbanization

The migration of rural population into Chinese cities is seen by some as the way to ensure a new burst of economic growth. But urbanization-by-state-planning is not the right road.

A construction worker in Shenzen, Guangdong Province
A construction worker in Shenzen, Guangdong Province
Wang Jilin

BEIJING — As the world’s most populous country, China has a general economic advantage in its lower labor costs and huge domestic demand. To a certain degree, both can raise the economy’s potential for growth. Indeed, the so-called “demographic dividend” helps explain a large part of China’s economic growth and rapid industrialization over the past dozen years.

From a global economic perspective, China’s manufacturing with cheap wages and the economic model of encouraging exports to Europe and the United States’ are jointly responsible for creating the “made in China, consumed in the West” model.

After China joined the World Trade Organization in 2001, its demographic dividend also sparked major demographic changes. A mass of labor shifted from the rural regions to the coastal areas to mostly wind up in export-oriented manufacturing. The Chinese economy was soon soaring under the stimulation of new factories, supporting infrastructure and real estate investment.

The “Dual Sector” model of economic development introduced by Nobel-prize winning economist William Arthur Lewis does well to explain China’s economic growth path over the past dozen years. Under the binary economy, the agriculture-based rural labor productivity is significantly lower than that of the industrial and service-oriented urban labor. The steady stream of rural migration into urban, manufacturing areas greatly improves productivity while simultaneously bringing in huge investment demand.

But eventually, the Chinese economy began a steady decline in 2010. Its GDP growth has fallen from 12.1% in the first quarter of 2010 to 7.8% in the third quarter of this year. America’s financial crisis and Europe’s debt are the twin fuses that have sparked China’s economic downturn. Even more important, China’s own economic structural imbalance also began to be exposed — the over-reliance on investment led to its sensibility to the problem of debt. Meanwhile, insufficient domestic consumption has stalled China’s economic transformation.

A singular fix-all

The process and concept ofurbanization jumped into people’s vision precisely at this moment, and is assigned with the mission of fueling continued economic growth and guiding people to revise their pessimistic forecasts.

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In Shekou, Shenzhen — Photo: Thomas Galvez

Since the new Chinese administration came to power, it has mentioned urbanization much more frequently than any of its predecessors. According to data from China’s National Bureau of Statistics, China’s urban resident population rate was only 52.57% in 2012, which is still a long way from the developed countries’ average rate of over 70%. Assuming that China’s urbanization rate increases by 1% each year, it means there will be continual rural migration into cities. This signifies huge infrastructure and real estate investment demand, as well as other sustainable consumption needs. This process could last for the next 20 years.

This emphasis on urbanization by many scholars and the press leads to an illusion — the various economic structural imbalances that used to worry us suddenly become irrelevant, and the doubts about whether China’s economic growth is sustainable seem but a pessimistic argument of the past.

But when we put too much faith in urbanization, and local authorities collectively undertake the large-scale transformation of villages and old towns, aren’t we imposing too much subjective control over the economy? Besides, how much do we really understand about urbanization itself?

Under any good framework, economic growth is but a result. When an economic growth problem appears, we should reflect on the economy itself — not the search for a quick source of economic growth. As such, urbanization itself should be a spontaneous result of economic development.

Of course, China’s hukou — the urban household registration system and land system — to a certain extent hinders a spontaneous urbanization process. But when the hukou system no longer stands in the way of the rural population’s free movement, and when they are allowed to freely dispose of their land and migrate where they choose, then the economic individual’s spontaneous choices and free trade combine to form an optimal and sustainable path to urbanization.

In other words, the best we can do is simply remove institutional barriers to people settling in cities. The rest should be left to the market.

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