Myths and Realities of China’s Urbanization

August 18, 2015 Lu Ming

Urbanization in China has attracted a great deal of attention, first, because of the sheer scale of the undertaking in that country, with hundreds of millions moving to the cities, but also because China’s leaders have identified urbanization as a principal strategic driver of their effort to rebalance the economy toward a new growth model.

But Lu Ming argues that a number of misunderstandings about the nature of urbanization have yielded big problems — and are driving a misplaced urbanization strategy. Lu is Distinguished Professor of Economics and Director of the China Center for Development Studies at Shanghai Jiao Tong University, and concurrently Professor at Fudan University.

The most common of these misunderstandings, Lu argues, are captured in several often-stated assertions: (1) urbanization in China will lead to a reduction of arable land; (2) urban expansion will inevitably mean a deteriorating quality of life, not least because of congestion and pollution; and (3) the costs of comprehensively reforming China’s system of residency permits (or hukou)—a system that, if reformed, would entitle migrant workers to the full range of public services—will threaten the country’s fiscal sustainability.

Taken together, says Lu, these three misconceptions have had a powerful impact on government policy in China. Indeed, as a direct result of these deeply held beliefs, Beijing has relied on administrative controls, not market mechanisms, to direct China’s urbanization process. But such an approach has yielded some major deficiencies in China’s overall urbanization policy. For one thing, Lu notes, Beijing has imposed tight hukou controls on the country’s biggest cities, thus restricting their ability to grow. Second, the Chinese government has relied excessively on administrative power to accelerate urbanization in China’s central and western regions, even though people are, in fact, moving largely to the country’s coastal areas. Third, Beijing has encouraged the development of small and medium sized cities, but these are usually scattered far away from regional economic centers.

Lu’s memo proposes several adjustments aimed at mitigating the distorted economic effects of the policies that have flowed from these misunderstandings. Five specific areas of China’s current urbanization policy require changes, says Lu. These are: (1) China’s hukou system; (2) the way that China allocates construction land quotas; (3) China’s fiscal transfer payment system; (4) the use of economic growth and tax revenue targets in the evaluation and promotion system for officials and cadres; and (5) the use of planning tools in metropolitan areas and urban cores. Lu makes a number of policy recommendations in each of these five areas, arguing that only in this way can China effectively respond to the challenges that have bedeviled urbanization in other countries.

 

About the Author

Lu Ming

Distinguished Professor of Economics and Director of the China Center for Development Studies at Shanghai Jiao Tong University and Professor at Fudan University

author

Lu Ming is a Distinguished Professor of Economics and Director of the China Center for Development Studies at Shanghai Jiao Tong University, as well as a Professor at Fudan University. He is also a Research Fellow of the Peking University-Lincoln Institute and of Hitotsubashi University in Japan. Lu was a Fulbright Scholar at Harvard University and at the National Bureau of Economic Research (NBER) in the United States. He has consulted for the World Bank and the Asian Development Bank. Lu’s recent research tries to link political economy with economic geography in an effort to analyze regional and urban issues. Lu is also interested in urban labor economics and studies how social interaction and knowledge spillovers affect employment and economic growth in the local labor market.