While China is urbanising at an unprecedented scale and is using urbanisation as a major driver of economic growth, it is, of late, experiencing serious challenges to maintain the speed and magnitude of urbanisation. Though efforts were made to contain migration from villages to major or middle urban cities through the ‘hukou’ system (household registration), the government remained in a fix whether to maintain such a policy for long or not?
The current government, with Xi Jinping as lifetime president, is reconsidering making ‘big city urbanisation’ as the model of economic development by harnessing the role cities can play in the development process. It’s apparent that China wants to continue its approach of 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.
The government was quick to realise that if China has to grow at over 8%, it needs to develop mega cities. For this, manufacturing and services delivery needed to be improved immensely, thus better human capital was essential. The government, therefore, focused on accumulation of human capital—today, about 70% of Chinese professionals live in Shanghai and Beijing.
Latest statistics show that China’s urbanisation rate increased from 17.9% to 55.1% between 1978 and 2015, representing the biggest peacetime population movement in human history. The transfer of labour from the agricultural sector and rural areas to non-agricultural sector and urban areas underwrote the world’s fastest sustained period of economic growth in the past three-and-a-half decades.
Since the late 1980s, migration-driven urbanisation in China has steered the country meet strong demand for labour and provide employment to a large section. The pace of labour migration from rural to urban areas increased immensely in the last two decades, but 2011 onwards, China witnessed a slowdown—evidenced by the fact that the number of urban workers has been restrained due to hukou, which peaked in 2010. For policy-makers, the question is, how can China engineer a higher rate of mechanical growth in urbanisation? This challenge could be handled with new forms of reforms, which eliminate institutional obstacles to labour supply and encourage total factor productivity.
As the growth in the size of labour force attenuates, the sectoral and regional reallocation of labour—increasing non-agricultural labour force participation—is the only way to maintain labour supply. Given that the current patterns of urbanisation are no longer sustainable, hukou—which grants migrant workers and their family members legitimate local residency, including equal access to public services—will spur a more stable, socially-insured and inclusive form of urbanisation. Transforming migrant workers from guest workers to full local citizens via hukou may help generate a new type of reform dividend that can, in turn, propel growth.
The failure to grant rural-urban migrants permanent urban residency has left this important transformative group of workers in a vulnerable limbo with respect to access to public services. It has also undermined the stable flow of labour into urban sector job vacancies. While the population growth-driven demographic dividend may be beyond its contemporary peak, in the ongoing absence of hukou reforms, the demographic dividend and the role played by urbanisation retain uncaptured efficiency gains. As China’s demographic transition turns towards ageing, urbanisation will inevitably slow down—and possibly stagnate—and no longer support economic growth as it did earlier. The government, thus, needs to liberalise the hukou system.
Yet, with appropriate policy adjustments, China can make the most of its demographic potential. Urbanisation can be driven by population growth, as also by structural policy approaches. Acceleration of the transformation of migrant workers into full and equal urban residents will help capture the benefits of this next phase of urbanisation. This is what the current government is dabbling with.
China is handling its urbanisation issue in an innovative manner. A metropolitan area development strategy with a radius of 50km and connecting it and the surrounding small and medium sized cities with mass rapid rail transit to form an urban network is a progressive idea of urbanisation that made cities nerve centres of activities. A new pattern shaping China’s urbanisation is administrative redistricting—a government-led process that changes the administrative make-up of a municipality. For example, areas originally designated as ‘rural’ can be redistricted to qualify as ‘urban.’ Also, smaller cities can become larger by absorbing surrounding areas, and counties can be combined into districts. This strategy will lead to the next stage of China’s growth and attract better human capital.
The lessons that India can learn is that it’s important to provide basic permanent local residency in mega cities when people move from smaller cities to bigger. It is also important to create metro cities which are closer to mega cities and have a direct bearing in terms of economic and social life—so that forward and backward linkages can be established between neighbouring metro cities and mega urbanised cities, which are genuine drivers of economic growth. India should create mega cities as clusters of manufacturing and services centres—as China has done in Pearl River Delta region and eastern parts of the country.