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Monitor
PUBLISHED : Wednesday, 03 July, 2013, 12:00am
UPDATED : Wednesday, 03 July, 2013, 4:48am

Urbanisation not the cure-all China's leaders are hoping for

Rising household incomes are touted, but construction expectations may be built on shaky ground and it's no sure bet moved farmers will benefit

Any conversation about China these days rapidly turns into a discussion about the economic promise of urbanisation.

Urbanisation is not just the centrepiece of new Premier Li Keqiang's economic policies. According to enthusiasts, it is the engine that will power China's future development, justifying sky-high investment levels, and even propelling a long-sought switch to a more sustainable consumption-driven growth model.

Believers in the potential of urbanisation point out that today only just over half of China's population lives in cities. If that proportion were to rise over the next couple of decades to 75 per cent, in line with the rich world's levels, they reckon 300 million people - equivalent to the entire population of the United States - will have to migrate from the countryside to the cities.

To accommodate them, China would have to build a new city the size of Shanghai every year for the next 20 years. That would entail massive investment in housing and infrastructure, supporting everything from commodity to property prices.

What's more, argue the enthusiasts, because city-dwellers earn more than their country cousins, urbanisation will boost consumer demand, accelerating China's economic rebalancing.

That, at least, is the idea. Unfortunately, however, there are signs China's urbanisation is not the economic cure-all its proponents expect.

For one thing, urbanisation doesn't necessarily involve mass migration. In fact, it needn't even require much new building. In many cases, urbanisation will simply involve the reclassification of areas that have already been developed but that are still designated as rural. That might help officials meet their targets, but by itself it will do nothing to boost the economy.

Of course, urbanisation frequently does involve construction, for example when farmers are moved off their land and into apartments in newly built tower blocks. But the economic benefits are dubious. Often the urbanisation process is simply an excuse to enable officials to seize village land, which they can then sell on at a handsome profit.

The displaced farmers are supposed to receive compensation, but if the loss of their land leaves them without a regular income, the urbanisation process will leave them worse off, not richer.

Aware of the difficulty, officials have suggested a number of proposals aimed at solving the problem. Under one, former farmers would be compensated with an annual income stream. In effect, they would be handed a bond that would pay a coupon related to the value of their former land.

It sounds like a good idea, but the precedents are not encouraging. During land reform in Japan in the late 1940s, dispossessed farmers were compensated with 30-year bonds paying a coupon of 3.6 per cent.

Unfortunately, the valuations placed on redistributed farmland were artificially low. Meanwhile, high inflation rapidly eroded the real value of the cash flow generated by the bonds. As a result, millions lost out.

This doesn't doom Li's urbanisation plans to failure. One of the main strands of the policy is to reform China's hukou household registration system, which designates families as either rural or urban. By gradually removing the distinction, Beijing hopes to extend to rural families and migrants the health insurance, job protection and access to education and housing that registered city dwellers already enjoy.

The idea is that if they get access to these social welfare benefits, rural households will no longer feel compelled to save so much of their incomes as a precaution against future hard times. Household spending will pick up, and China's economy will rebalance.

It's a nice theory. But things may not work out quite so neatly. It's true that China's national savings rate - total savings as a share of gross domestic product - is high. But it does not follow that China's consumers are unusually thrifty. In reality, the household savings rate - families' savings as a proportion of their income - is comparable to rates in other Asian economies.

The real reason consumer spending is so feeble at just 36 per cent of GDP is that household incomes are low relative to overall output. Equally, savings are high because so much of China's national income is retained by the state and corporate sectors.

So urbanisation and hukou reform are only likely to succeed if they are accompanied by a deliberate policy to raise household incomes by shifting more wealth away from the state and companies and into consumers' pockets.

To achieve that, however, will mean directly challenging some of China's most powerful entrenched interests.

Urbanisation won't succeed in its core objectives without a fight.

tom.holland@scmp.com

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johnyuan
jve,
Dividing economic development into three progressive stages as I learned them in my Economic Geography 101 in college in the 60s of last century is more an (American?) academic economist’s theory. In retrospect, it is more a theory than actual practice or actually it may not have insisted or implied that one stage of economy displaces the other in moving up the economy ladder. In fact, America despite it has developed into a tertiary economy; it has never given up its primary activity – farming as part of its economy. I may not like how agriculture in the US being amalgamated into the secondary and tertiary economy by engineering food production and marketing food for the best profits – transporting food long distance, nevertheless US is still producing abundant food. 1.
impala
I am not dividing anything in three progressive stages. There are examples of economies skipping industrialisation, and even if they don't, these days, industrialisation hardly happens without the rise of a service sector at the same time. And what we classify as 'industry' and 'services' is also increasingly up for debate.

I am simply signalling that by definition, you can't have a modern economy with the majority of people employed in rural agriculture. In China, over 60% of employment was in agriculture up to about 25 years ago. Now this has fallen to below 35%. And my point is that the huge economic changes that this is an indicator of (industrialisation, modernisation, high-speed growth, call it whatever you want to call it) is what has led to urbanisation. Granted, with some feedback loop built-in.

But it is not the case that urbanisation is a policy tool that will cause economic growth or even just economic change by and in itself. You don't just put farmers in a concrete block and wait for the economy to grow or change. They will move there voluntarily when there are better jobs (and healthcare, and education) to be had in the city. And those will be in the higher added-value industry and service sector.
johnyuan
2. Quite obvious the 75% of urbanization of population, the remaining 25% there are those busy in the agricultural and fishery and not to mention that a percentage of 75% too are busy tinkering the food market out from their Madison Avenue office in New York City. China is no exception, or any country, should misinterpret the food ladder progression and lead the country to become instead the biggest importer of pork and rice. All from America!China may have an opportunity for a new form of habitation in rural area to provide what remains after the building of ghost towns or living by idled residents who are once farmers displaced from their fields. Let the debate in China to continue. Yes, I propose organic farming -- labor intensive and healthy food as the support for a new form of human existence.
impala
I am not sure what point you are trying to make with regards to the US and its agriculture. Less than 3% of the US workforce is employed in agriculture. Sure, there are many more who work in the food processing, packaging and distribution industry, and a bunch more who work in food services like restaurants, supermarkets and so on. So? That doesn't make them agricultural jobs, and all of those fit in the picture I described above.

Again: people don't move to the city because they think 'hey, let's move to the city so that other people will have a job bringing food from the countryside to me in the city.' They move to the city because they heard from Aunt Wong, who moved there from the village three years ago, that they can work in the city supermarket for 5 RMB more than they earn running the rice shop in the village. And the hospital is nicer too, and the toilets cleaner etc. Chain migration we call this, and it is a very powerful force when it comes to urbanisation.
johnyuan
More or less we are on the same wavelength – city is the effect not the cause for economic activity. My proposal for China is to recognize its strength in agriculture and use it to balance off the rapid development of city. Urbanizing a population by 75% has consequence. US is a good example despite it is still a food export country. The food quality it produces is much to be desired. China itself knows better of its neglect in safety and sufficiency in food production. Buy local has been a movement in food production in the US for a while. It will gain more popular over the food produced and managed by agribusiness – tomato tastes like cardboard. By the way you overlook in counting the seasonal migrants which are substantial enough to be a issue from local population in the US. Waiters and waitress are in the service sector. Canning food is factory work and they all don’t produce food like farmers do.
impala
Cart before horse alert. Urbanisation is a normal side effect of an economy shifting from agriculture to industry and services. The pattern is well-studied and well-understood. If anything, China has been slowing it down by the hukou system, and preventing the emergence of urban slums like we see in many other middle-income economies. Saying you want to slow urbanisation implies you want to slow economic modernisation and industrialisation. All fine by me, but these are forces not easily tempered with, and I doubt you want to explain to youngsters in rural Shaanxi that they can't have that city apartment with television but have to stay with the oxes and chickens in the village.

For that reason alone I do agree with Mr Holland though: urbanisation is an effect, not a cause or valid policy tool (let alone objective) to achieve economic progress.
megafun
It certainly is not a Cure-all, I reckon it is more a Kill-all. Urbanization is not sustainable, as the source of food for urban dwellers is not secure. Moreover, the recycling ability is lower and energy needs are higher. I, presently spend a large amount of time living next to a "urbanization village", in eastern China mainland. This "village" houses over 20,000 relocated people, mostly farmers and their families. All relocated farmers are now mostly jobless, since they have no skills for urban jobs. For now, this community can survive on their compensations; and benefits from the rise in local property value. I dread to think what will happen if these people's "invested" compensation crashes with a stock market -****- property market down turn!
zreal
Many wrongly think urbanization could lead to rising real estate prices and better economies. In fact, both urbanization and rising real estate prices, if any, are effects-results of causes-factors which are usually of an economic nature.
Cities arise because there are reasons for them to arise, e.g. industrialization in the 1800s led to the sprawl of cities, and not the other way round. Creating cities simply for creating them may lead to slumps.
However, there could be a delusion that urbanization, which invariably imply construction of all sorts, that it does lead to better economics and higher real estate prices, especially for some 3rd tier and lower-rung cities because the construction volumes alone can sustain employment and GDP for a while. Yet when the urban sprawl is over, cities without some non-real-estate-construction industry(ies) to sustain its economy will have doomed real estate markets.
For more, I had written an analysis on urbanization 2 years ago:
****www.real-estate-tech.com/articles/RET3Q11.pdf [2nd article]
johnyuan
A well-informed and thought out comment. The antithesis is to question the desirability of more urbanization. China should put importance in food security and food safety. Reduction in farmland also would fundamentally weaken what the culture really excels in – farming. As such, the preservation of farming as a means of livelihood can check the expansion and balance the indefinite urban growth with jobs. The drive for further urbanization is in fierce debate in China. China with such large population and land mass surely can do well in developing both of its urban and rural (farming especially organic farming -- traditional way).

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