Can China’s urbanisation save the world?

Last year marked a milestone in China’s several-thousand-year history: for the first time, more people lived in cities and towns than in the countryside.

The country’s 690 million urban dwellers now account for 51.3% of China’s total population of 1.35 billion. China’s recent urban transition is definitely a historic event of global importance. Nobel laureate Joseph Stiglitz has called the process one of the two main forces shaping the world in the 21st century.

In 2012, China’s urbanisation landmark has assumed even more significance for the global economy. With Europe’s debt crisis, and the US and Japan struggling to maintain growth, many look to Asia as the saviour of the world economy. The huge potential of the Asian market, based on the assumption of a rapidly rising middle class across the continent, has fuelled hopes for a global rebound and growth for the next two decades.

Not surprisingly, China has played a major role in that scenario of Asian consumer growth. Today the “China dream” is more vivid than ever. Another 300-400 million are expected to be added to China’s cities in the next 15 years. As a result, many business writers and consultants have presaged a surge in consumers in China.

Yet internally, China continues to face the problems of re-balancing its economy, away from its heavy reliance on investment and exports to domestic consumption. Can urbanisation do the trick by expanding China’s middle class rapidly to raise the consumption share and have the economic machine running on a more sustainable basis?

China’s urbanisation has fascinated observers for generations, but misinterpretations and mis-prognostications abound. China’s urbanisation is indeed complex and it would behove us to look beyond simply extrapolating the Western experience of urbanisation.

Among the most optimistic prognoses, Brookings Institution analyst Homi Kharas has put forward a scenario of China’s middle class rising from 12% of the population in 2010 to about 50% in 2021. That means that the size of this consuming class will surge from about 150 million to about 670 million, a leap of about 520 million in a span of slightly more than a decade.

But where, exactly, will this newly-prosperous half billion people come from? Is this a mirage, or is it based on reasonably expectable true economic and social mobility?

In many other developing countries, traditionally the major gains to the middle class were found among rural migrants arriving in cities. When a migrant leaves the farm and shifts to an urban job, he or she receives a higher wage and can afford to consume more. Trading their farm jobs and subsistence lives for industrial or service jobs in the city, migrants can now live in apartments furnished with appliances.

It is true that China is undergoing rapid urbanisation “on paper”, if one simply looks at the number of people relocating to cities and the new buildings being erected. But although China’s rural-urban transition has many of the trappings of recent urbanisation elsewhere in the world, the process there is a much more complicated phenomenon.

The popular narratives have too often overlooked China’s special set of conditions, especially how the rural-urban divide is buttressed by such institutions as the hukou (household registration) system.

Under the present hukou system, peasants are allowed to go and work in the city but at the same time are not permitted to acquire an urban registration.

My recent analysis shows that out of the 666 million Chinese urban dwellers in 2010, at most only about 460 million had urban hukou status. The difference – 206 million – is made up mostly of migrants, who live and work in cities but still have rural hukou status.

This labour force with rural hukou is what has supplied China with a huge pool of cheap labour and largely driven the country’s phenomenal boom of the last 30 years. But the majority of these migrants are prevented from fully participating in the urban prosperity.

Lacking urban hukou, these low-income workers and their families cannot access public education, public housing and social security programs in the city. The consequences of this exclusion are a wider income gap between rich and poor, and only a very limited contribution by rural-urban migrants to the growth of the middle class.

With upward mobility through migration largely blocked by the hukou barrier, and the urban natural increase rate likely to hover at very low levels for decades, one really has to consider this projected rising prosperity a myth, unless major changes in the urbanisation model are enacted.

That well-trodden urbanisation path to prosperity is premised critically on having most migrants being able to move up eventually. To follow that path, China will have to treat migrants more than merely labour but as equals in the city. This would mean granting them urban hukou, giving them the same rights and opportunity as natives of the city.

In late February the central government renewed its modest hukou reform effort by publicising new rules for migrants to apply for hukou in cities except the largest 40. While this provides a glimmer of hope, much more action is needed.

As equally important as boosting domestic consumption, a new condition has emerged in the wake of the global financial crisis that is also pressing for stronger action: more and more of the migrants, being better educated than their parents, have greater aspirations to stay in the city. They are also far more aware of their rights and what unsatisfactory conditions they face than the previous generation – and are demanding change.

In China, there is a broad consensus for more hukou reform. Of course, it would be unrealistic, perhaps even reckless, to dismantle the hukou system overnight. Neither would it be desirable to continue the slow pace of small hukou reforms, as has been done in recent years. In my view, a program to phase out the hukou system over the next 10-15 years is not only reasonable, and workable, but also very desirable, especially in view of the new conditions described above.

To meet this time frame, China will have to speed up hukou reform, by converting about 15-20 million migrants to urban-hukou residents every year in substantive terms (not just in name, as some cities have done).

This is far greater than the average of about three million conversions per year that I have estimated for the last decade. To reach that higher number, deeper hukou reform will be needed in the largest 40 cities, including places such as Beijing, Shanghai, and Shenzhen, where most migrants congregate (because that’s where most jobs are found).

Moreover, the central government has to lead in that endeavor as migrants in large cities are mostly from afar and any serious hukou reform will inevitably involve interregional fiscal, population and administrative issues.

It would be grossly inadequate to simply let local governments try out piecemeal and limited, and at times, distorted, hukou reforms within their own jurisdictions.

China has had some 30 years of economic growth, but this has been done through a rather skewed urbanisation model. Hampered by an obsolete hukou system, that model has constrained the growth of the middle class and consumption demand. A major overhaul is needed to unleash the economy from that shackle. Once that is in place, one can begin to envision China urbanising its way to prosperity — and taking the rest of the world along with it.

This piece first appeared on China Daily USA and The Conversation. It has been reproduced with permission from the author.