• Thu
  • Dec 18, 2014
  • Updated: 6:48am
PUBLISHED : Tuesday, 30 July, 2013, 12:00am
UPDATED : Tuesday, 30 July, 2013, 3:40am

China's urbanisation policy is based on flawed thinking

Policymakers in Beijing think moving people out of the countryside will spark growth. But growing cities are an effect of wealth, not a cause

In their search for a new driver of economic growth, China's leaders have fixed on urbanisation as the main engine of future development.

Their policies are based on flawed reasoning.

Beijing's leading economic policymaking body wants the proportion of China's population living in cities to rise from around 50 per cent today to 70 per cent in 2030.

In bald numbers, that would entail some 300 million country-dwellers moving to cities, or almost the population of Beijing each year.

China's planners believe this enormous shift will power the country's economic growth over the next couple of decades.

You can see why. City-folk tend to work in factories or in service industries, rather than in agriculture. As a result, they are more productive than their country cousins.

And because they are more productive, townies are better paid, which means they spend more than peasant farmers.

China should invest more in education and infrastructure for country-dwellers

As a result, reason China's planners, urbanisation will both lift per capita incomes, driving economic growth, and boost household spending, rebalancing the economy towards more consumption.

It's a neat idea, but there are some big problems with it.

For one thing, there is surprisingly little evidence that increasing urbanisation really does propel economic growth.

Sure, there is a correlation between increasing urbanisation and rising gross domestic product per head. But as any statistician will tell you, correlation is not causation.

In a new study, Wan Guanghua at the Asian Development Bank and Anett Hofmann of the London School of Economics have attempted to tease apart cause and effect.

To work out what drives what, they built a model relating income growth to urbanisation rates, as well as to a range of other factors, including education standards, prevalence of industry, extent of trade and quality of infrastructure.

As they expected, they found a strong link between income and urbanisation. But when they controlled for other elements like education, the correlation immediately disappeared.

In other words, it is not urbanisation itself that powers growth, but rather advances in education, gains in technological sophistication and other improvements in economic structure.

Urbanisation is just an effect. As Wan and Hoffman put it: "the direction of causality runs from GDP growth to urbanization, rather than vice versa".

Far from urbanisation powering growth, they estimate that a 1 percentage point increase in GDP growth tends to cause a 0.9 percentage point rise in the urbanisation rate.

This conclusion carries important implications for China's growth strategy. Clearly urbanisation by itself will not ensure future economic growth.

Of course, it is likely that families will still move from the country to the cities to take advantage of better schooling for their children, and better pay for themselves; both of which will boost their incomes.

But the availability in cities of better schooling, more productive jobs and better infrastructure is not the result of urbanisation, but the upshot of government policies which have cosseted an urban elite by allocating them a disproportionate share of public resources at the expense of the countryside.

As Chandran Nair, chief executive of Hong Kong's Global Institute for Tomorrow, points out: "In China, less than 10 per cent of government spending in the 1980s and 1990s was allocated to the rural economy, despite the fact it supported 75 per cent of its people."

So if China's leaders really want to find a new source of growth, they shouldn't blindly pursue urbanisation. By itself that won't work.

Instead they should invest more in education and infrastructure for country-dwellers, boosting their incomes for the good of China's future growth.



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This article is now closed to comments

I am glad Mr Holland has now put the horse (economic development) back before the cart (urbanisation), unlike in his column of July 3 entitled 'Urbanisation not the cure-all China's leaders are hoping for'.

The study by Wan and Hoffman sounds interesting enough, and I am sure that they have proven the conclusions you mention convincingly vis a vis Chinese urbanisation. Yet, as I and other mentioned in the comments section on July 3, urbanisation is almost always an effect, not a cause, of economic development. We have two centuries of urbanisation data (and a large body of demographic academic literature built on it) in Europe and the US to make this point, and of course also the more recent experiences in other parts of the world. Let's hope China's policy makers know this too (they surely must if they have even just read a single demography textbook).
1. I don’t think the policy on further urbanization by rural migration in China’s cities has been set yet. Such a move won’t succeed in creating prosperity in the absence of employment opportunities for the new comers. It is neglecting the cause and effect reality how city comes into being. On the other hand, the negative effects are plenty. There will be a cultural crash between urban and rural settlers in social manner and public hygiene standard. The fact that there would be more rural than urban residents, the old urban population would be more assimilated by the new ones thus setting back the social and hygiene progresses made over time achieved by urban residents. China would than take more time to become a modern nation.
2. There are good reasons to urbanize appropriately in rural area to create denser settlements in order to create more land for farming and to provide more efficent public services. As part of rural-urban settlement form, China should encourage the use of its strength in the knowledge of its traditional farming to produce safe and nourishing food. The rural urban population will be fully employed in farming and nation’s food security will be more assured. In fact, the reversal by urban population to be farmers should be welcomed. It will obliterate the poor perception of farming and it will also speed up a higher standard in social and public hygiene for the rural population.


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