China’s challenge: urbanisation

While China is urbanising on an unprecedented scale and is using city urbanisation as a major driver of economic growth and development, it is of late experiencing serious challenges to maintaining the speed and magnitude of urbanisation. Though efforts were made in the past to contain migration from the villages to cities through the ‘hukou’ system, the government remained in a fix over maintaining such a policy for long.

Under Xi Jinping, China is reconsidering the efficacy of making big city urbanisation the model of economic development. It looks apparent that China has used and wants to continue to use big cities as ‘engines of growth’. So far, it has followed a well-conceived, doable development strategy that has delivered good dividends. But, increasing urbanisation is posing too many social and economic challenges.

As urbanisation is proving to be a nightmare for many developing economies in the world, China is also struggling to cope up with such challenges. But the Chinese leadership sees urbanisation as the driver of growth and development well into the future. What the Xi dispensation is doing through cities, though, is important.

First, the accumulation of human capital has been recognised as a driving force. Human capital externalities and skill complementarities between high and low-skilled labourers due to agglomeration of economic activities in the city have led to the expansion of the cities. As a result, cities have accumulation of human capital and increased the return on human capital.

In the future, competition between countries will be among a few mega cities and metropolitan areas, with their competitiveness in R&D, science and technology and modern service industries. How China is going to maintain such an edge is critically dependent on the future policies it adopts in relation to development of human capital, a significant challenge.

Second, the decision to develop a metropolitan area development strategy with a radius of about 50 km and at the same time connecting the metropolitan area and surrounding small and medium-sized cities with mass and rapid rail transportation was a sensible progressive idea of urbanisation that made cities nerve centres of activity.

This strategy will create momentum for the next stage of China’s growth and will also attract better human capital. Metropolitan areas will increase per capita resources and per capita income by strengthening their comparative advantages and specialised division of labour.

Third, the negative impact of declining demographic dividend can be hedged by a freer flow of population between urban and rural areas. In 2017, more than 90% of China’s GDP came from manufacturing and services, with services accounting for almost half of it. The services industry, especially the consumer industry, mostly needs low-skilled labour.

Free population flow to cities, especially to bigger cities, can increase the urban labour supply and reduce the cost and labour shortages occurring in the coastal areas, mostly in first-tier cities such as Shanghai, while providing more job opportunities and helping poverty reduction.

Fourth, the process of population urbanisation and concentration in mega cities will release huge demand, increase consumption and re-adjust the economic structure. Some studies have already observed that non-local permanent residents’ per capita consumption is about 16-18% lower than that of local permanent residents. This household consumption is significantly less in major cities.

Fifth, with population urbanisation, the education quality can be improved, which will again help in accumulation of human capital. Currently, a third of school-age children are left behind by the schooling system in rural areas and among migrant children in urban areas. If quality education is delivered to them, they can enrich cities’ economies. If China fails to do so, then it will impact urbanisation and disrupt social harmony.

Sixth, the supply of land and housing should be consistent with the direction of population flows. In cities with high population growth and increasing real estate prices, the supply of land should be increased faster, while the supply of land should be reduced in areas with outflow and high stock of housing.

The stock of construction land should be allowed for interregional transactions and re-allocation to improve the efficiency of its use and promote mutual division of labour among regions. This will not only provide adequate land supply for large cities and their metropolitan areas but will also prevent unaffordable housing prices.

Seventh, urban pestilence can be alleviated in large cities, especially in downtown areas, by considerably improving basic and tertiary healthcare services from the supply side. At present, the population and land planning of mega cities are not in accordance with the general trend in global cities in the world. China will need to follow a PPP model to deliver effective healthcare services.

If China wants to fully leverage its growth potential, it needs to scientifically understand the laws of urban development and regional balance and break the constraints of allocation of resources.

(The writer is a professor at the Lal Bahadur Shastri Institute of Management, New Delhi)