The Effectiveness Of Reforms Dealing With Urbanization In China
After three decades of double-digit growth, slowdown due to a diminishing technological gap and a declining working age population has furnished a compelling need for the 18th third plenum this year. The Party’s so-called “383 Scheme” provides a potential roadmap for a much more open and market-oriented China via a trio of reforms aiming at opening up the market, transforming the government, and reforming enterprises in order to fuel innovation.
After 30 years of reform and opening up, urbanization in China maintains at an annual growth rate of 1%. National Bureau of Statistics data shows that the level of urbanization in China increases from 17.9% in 1978 to 52.6% in 2012, comparable to the world average of 52% in 2011. Yet, using household registration (“hukou”) as the basis of computation, China's urbanization rate is only about 35%, far below the average of the world.
Both hukou and land reforms are two key issues if China is to succeed in its plan to persuade 390 million rural dwellers, equivalent to the U.S. population, to migrate to urban areas. This would ultimately boost domestic consumption and increase labor supply, achieving a more sustainable growth in the long run.
Background of Hukou System
Hukou, first introduced by the Communist Party in 1950s, is a legal document that records the household population’s basic information, including the name of the natural person, date of birth, relatives, and marital status. Unlike the international practice, its major role was to monitor its population by limiting access to work, food and welfare to individual’s registration location in order to achieve social stability. As China's economy matured and gradually transformed into market economy, there is growing consensus that the 260 million migrant workers who now exist present an obstacle to the new priority of rebalancing the economy to be more consumption centric. What’s worse, income inequality, restricted access to resources; and separation between household registered and actual residences brought by the dual social structure are of growing concerns.
“Blue Book, Chinese Social Management Innovation Report” published in 2012 stated that the urban-rural income ratio has attained 3.3 times, far above the international standard of 2.0, showcasing huge income inequality . Taking Beijing as an example, according to the sixth census statistics, rural migrants accounted for 27.5% of 12.6 million residents in 2010 and the average separation period was 5.5 years. Moreover, rules that limit access of rural hukou holders to urban services are still in place despite relaxation of restrictions on movement and work. This distinguishes their rights to social welfare system , resulting in unfair resource allocation and status alienation.
In light of this, the third plenum expanded the scope of social security and residential system; and extended rural migrants pension and medical benefits. The Central Urbanization Conference set the tone for the reform in December, 'to settlement problems brought by hukou system to rural migrants”, 'to fully liberalize restrictions settled in towns and small cities, relax restrictions in medium-sized city in an orderly manner, execute a strict control in large cities.'
However, not until migrants are willing to forego their land use rights and become permanent urban residents, urbanization will not fulfill its potential of maximizing consumption growth. This brings up another politically sensitive issue – rural land reform, which is the best solution to these problems.
Rural Land Reform
Reforms in the 1980s assigned farmland to households but reserved formal ownership to the village collective. Land certificates are imprecise at best and many rural households lack documentation. In contemporary China, the lack of clear land rights makes many farmers vulnerable to land grabs by local administrations for development. Villagers are compensated according to a fixed formula that has little relationship to the market value of the property . The immense difference between the legal cost of expropriation and the price of sale to a developer is a main source of revenue for local governments, as well as big temptation for corruption.
To this end, the third plenum charts out a roadmap for land reforms. This means giving farmers the right to transfer, manage and collateralize land; allowing collective land to trade as the equal to state-owned land and setting up a pricing mechanism based on a unified market; and giving market-price compensation to farmers whose lands are expropriated by the government.
If rural residents were given the power to trade or mortgage their land use rights, and be fairly compensated for doing so, not only would they be more willing to swap their rural hukou but also start their urban lives with capital. This would allow them to escape the poverty trap that has traditionally greeted migrants. Further advantages of allowing rural land to be freely traded are that it would become possible either to consolidate small plots into much more efficient large-scale farms or free up land for construction to further bolster urbanization.
This could be an ideal plan, but the question lies with how quickly that could scale up nationally. Previous policy reforms back in 1952, 1962, 1978 and 2005 evidenced difficulties to push forward. Not only is collective ownership a totemic issue but there are real concerns about both cutting rural hukou holders' ties to the land and food security. Pilot programs in Chongqing and Chengdu that allow farmers to lease or sell their land have shown the process is slow and tangled with problems. The measures will reduce local government land sales revenue significantly; we could expect lots of opposition from local governments as the scheme would disrupt their monopoly on land. There are also fears that liberalizing the ownership of rural land would endanger China's self-sufficiency in domestically produced crops and thereby threaten China's security.
In particular, we are interested in studying the long-term impacts brought by both reforms on economic growth and labour market.
The reforms are likely to bring a more consumption-driven economy, resulting in a more sustainable growth model. Large-scale investment has long been the driving force behind China’s economic rise, accounting for about 50% of growth over the past three decades. However, domestic consumption has remained at a comparatively low level, at 35% of GDP. Even combined with government expenditure, the total percentage is only slightly more than 50%. Therefore, increased investment in industrial development has led to oversupply and high pollution in major industries like iron and steel, cement, coal and solar power .
The security brought by relaxation of hukou and confirmation of rural land rights would provide incentives for rural migrants to expand their consumption and investment. It is worth studying the rural-urban disparity in home ownership in cities of residence. A 2011 survey showed that just 0.7 percent of migrants had purchased a home in their adopted cities. This compares with a permanent resident rate of typically between 60 and 80 percent.
On the other hand, the dynamic in the job market may change significantly. Potential competition between new migrant workers and local workers in the less skilled markets, shortage of vacancies due to higher labour force entry rate and a structural change in wage and employment benefits could result from the reforms. As a whole, China’s urban registered unemployment rate of 4.04% may experience a gradual rise in the coming decade.
Without reforms of land and residency rights, a government urbanization drive may fall behind, endangering broader economic reform and even risking social unrest. Genuine and substantive changes will only come if hukou reform is pursued as part of the comprehensive and coherent urbanization strategies that address rather than ignore many of the related but highly contentious issues like rural land reform.