Jun 13, 2013 06:23 PM

Urbanization and the Chinese Dream


Urbanization is an important part of the Chinese dream, a concept touted by the new leadership. Among the priorities of urbanization is turning migrant workers into urban citizens, which requires a fundamental change to the hukou system.

It's nothing small. In 2012, the migrant population in the country's urban areas was about 230 million. Rough projections show that by 2030, the floating population, made up mostly of migrant workers from the countryside, will reach more than 300 million. To change the household registrations of these 300 million people over 15 years will require resolving the household registration issues of about 20 million people per year.

How should this 20 million annual quota be allocated? In my opinion, we can adopt the methods that developed countries use to take in immigrants, plus taking cues from the policy installed by the city government of Shenzhen. It could work in several steps: young college graduates would have first priority, followed by skilled workers and stable self-employed workers. Last would be low-skilled workers. This is an "easy-to-difficult" solution, more in line with the country's economic and fiscal situation as well as social expectations.

Three Steps

Graduates are the main taxpayers for social welfare. In the United States, many states and businesses are aware that developing a high-value local economy requires a large number of college graduates, regardless of their origin. But in China, until recently, the various household registration reform measures discriminate against graduates coming from other localities, the actual numbers absorbed by large cities annually have been very small – ranging from hundreds to a few thousand. Compared to the more than 100,000 students from other localities coming to cities like Beijing and Shanghai looking for jobs, this is a drop in the bucket and totally inadequate.

Shenzhen last year made efforts toward household registration reform. Through a points accumulation system, the city admitted several hundred thousand people, mainly university graduates, as permanent residents. The number far exceeds similar practices in many other large cities and represents an important step.

A key part of "turning migrant workers into urban residents" lies in the second stage: lowering the threshold for obtaining an urban household registration for skilled workers. For the country to upgrade its industry and move toward the high end of the value chain will urgently require a large number of better-educated, skilled workers and technicians able to operate high-tech equipment. Skilled workers can receive higher wages, and they are also capable of paying more into the social welfare system. Welcoming them to the city is basically a win-win approach. Giving skilled migrant workers urban residency will also cause a large number of unskilled migrant workers to move in the direction of skilled workers, improving the overall technical level of workers and enhance the country's economic competitiveness.

It will take probably seven or eight years to resolve the household registration issues of these two groups. Then, beginning in 2023, the country should concentrate its efforts on resolving the household registration issues of the remaining migrant workers. By then, after another decade of development, China will be a stronger nation and be able to invest more financial resources in improving social equality.

The government will thereby be able to provide more advantageous conditions for resolving the permanent residency issues of ordinary migrant workers and provide more material benefits to low-income migrant workers. Only this sort of urbanization will expand the middle class and domestic demand. Only then will the virtuous cycle of "urbanization-economic growth" be achieved. After migrant workers become permanent urban residents with stable living expectations, they will be able to transfer the use rights for their contracted land in the countryside and give up their idle rural homes. This will greatly improve the productivity of rural land, which is particularly important for China with its scarcity of land.

Budgetary Burden

Exactly how much financial burden is on the government for promoting the urbanization of migrant workers? In recent years, there have been several estimates using detailed, comprehensive and publicly available statistical data. The results show that the cost of "urbanizing" each person is approximately 20,000 yuan in a small city and 100,000 yuan in a large city. In 2010, the State Council Research Office conducted detailed survey and analysis in four medium-sized and large cities. The results showed that the urbanization of a typical migrant worker, including their children, requires total public spending of about 80,000 yuan.

Below we use the maximum of 100,000 yuan to calculate the overall cost of urbanizing the entire floating population and the economic and fiscal impact on the national economy.

To transfer the household registrations of all of the 230 million floating population to urban household registrations in one year would cost 23 trillion yuan, or 44 percent of the 2012 GDP, which is an astronomical figure that cannot be borne. However, if we use the 15-year timeframe and take into consideration projections that the migrant population will reach 300 million by 2030, we would have to transfer the household registrations of 20 million people per year at an annual cost of 2 trillion yuan, or 3.8 percent of the 2012 GDP. It is a much more manageable amount.

However, this method assumes spending the 100,000 yuan of per capita social welfare and public service costs for the floating population in one year. Reality would be different.

This 100,000 yuan would be spent over the remaining lifetimes of the urbanized migrant population. Currently, the average migrant worker is between 27 and 30 years old. Assuming he lives for another 40 years, this 100,000 yuan would be split over 40 years, or 2,500 yuan each year. To transfer the permanent residences of 20 million people per year would cost 50 billion yuan, or 0.1 percent of GDP. This is approximately one-fifth the cost of the Beijing Olympic Games and something the country should be able to afford.

A more reasonable approach would be to calculate the cost of urbanizing migrant workers as a proportion of total government revenue.

I calculated that 50 billion yuan is 0.4 percent of tax revenue in 2012. Of course, this is just the cost of the first year, and the cost would increase each year. By the last year of the plan (the 15th year), the cost would accumulate to the equivalent of 6 percent of 2012 tax revenue. Even so, I think this is still affordable. Even at the highest of 6 percent, this is only a small portion of the growth rates in tax revenue over the past two years (23 percent in 2011 and 13 percent in 2012).

Leaving aside discussion of figures, we can also see that today the majority of migrant workers are young, with the average being less than 30. In the early days of the program, the expenses of "urbanizing" will be low, and migrant workers may be net contributors in the early stages of settling in the city, paying into the welfare system rather than receiving benefits. With the aging of the current urban population (especially in large cities), the social security contributions of young migrant workers could fill the fiscal gap for urban welfare benefits caused by the aging of urban residents.

More important, the annual "social value" that each farmer creates through his work upon coming to the city is certainly several times the 2,500 yuan average cost of "urbanizing" mentioned previously, possibly several dozen times, far exceeding the cost of urbanizing migrant workers and their salaries. Once migrant workers settle in cities and have long-term expectations, they will make more investments in their own human capital, such as learning skills, as well making "investments" in the urban community in which they live and consuming. In this way, the dividends they create for cities will be higher. This is different from real estate speculation, the short-term, bubbling "urbanization" of urban land expansion, as well as the urbanization in some Latin American countries where farmers come to the cities but cannot find employment.

Government Responsibilities

In household registration reform, the central government must play a leading role in guidance and implementation. Authority over household registration reform has basically been decentralized and given to local governments. Thus, household registration reform is also limited to the small scope of local governments. In many areas that have liberalized permanent residency and awarded it to farmers and migrant workers, the targets of the policies are only the agricultural population of the province or municipality, and the policies basically do not involve the core group of migrant workers from other provinces.

Household registration reform is an important measure in a comprehensive development strategy that urgently requires the strong leadership and planning of the central government, which should consider establishing an authoritative and responsible household reform leadership agency solely focusing on this.

In recent years, the State Council, the cabinet, has proposed implementing a policy encouraging migrant workers to settle down in small and medium cities. Permanent residency for the largest 40 cities would not be liberalized. Many commentators have high hopes for this policy, saying it is an urbanization path with Chinese characteristics that can avoid "big city disease." I think this is a misunderstanding.

This policy basically follows the old path in 1980s of controlling the population of large cities. The reality is that the country's investment is still tilted toward major cities, and large cities develop quicker. Migrant workers have for the most part not followed policy to small cities and towns but have followed jobs to the large cities. With the current local government tax revenue system dominated by land transfer revenues, local governments cannot afford to develop small cities and towns because the land there cannot be sold at a good price.

I agree with the argument of Xu Xiaonian, professor of economics and finance at the China Europe International Business School, who said that the actors to achieve the agglomeration economies effect are businesses and urban and rural residents, not government policy. Because government officials cannot grasp such detailed information, argued Xu, they do not know which businesses have economies of scale or which cities are good. They can't know whether farmers will be able to find work. These should all be decided by businesses, workers, and the market rather than through across-the-board policies encouraging farmers to settle in small cities and towns.

Therefore, substantive household registration reform must be rolled out simultaneously in all cities and towns, including Beijing, Shanghai, Shenzhen, and other large cities, because there are more employment opportunities there.

I hope that using a gradual approach will reverse the negative trend of the expanding gap between the populations of de facto  residents and residents with local household registration in cities and towns. Following this plan, within 15 years, we can gradually eliminate the gap between the two and return to the same point, returning urban and rural population to a normal state by 2030. I hope by then there will be no difference in household registration status, and just like in other countries, citizens will be able to move freely within the country's borders. This will not only add a huge new driving force to the economy, but it will also establish a fair society and a modern country. It is the only way to fulfill the Chinese dream.

The author is Professor of Geography at University of Washington, and a former consultant of urbanization and urban migration projects for the United Nations and the World Bank. The above are selected excerpts of an article translated from Chinese to English

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