MCLC: urbanization push runs into trouble

[Denton, Kirk]

MCLC LIST
From: kirk (denton.2 at osu.edu)
Subject: urbanization push runs into trouble
***********************************************************

Source: SCMP (8/14/13):
http://www.scmp.com/business/article/1296548/tomchinas-urbanisation-push-ru
ns-trouble-its-start

China's urbanisation push runs into trouble before its start
It could backfire spectacularly if new urban residents are left deprived
of their former ability to make a living from the land
By Tom Holland

Li Keqiang's flagship economic policy is running into problems even before
its official launch.

Although the Chinese premier's urbanisation plans will not be rolled out
until a party meeting scheduled for this autumn, they are already
provoking opposition from local government officials and drawing criticism
from economic analysts.

That's awkward for Li, who on his appointment in March made shifting more
of China's rural population into cities the centrepiece of his economic
rebalancing programme, declaring "urbanisation will usher in a huge amount
of consumption".

At first glance Li's policy appears to make good sense, considering that
China's explosive economic expansion of recent decades has accompanied the
rapid growth of the country's urban population.

City dwellers are more productive than their cousins in the country, so
they earn higher incomes. What's more, the holders of urban residence
permits, or hukou, enjoy better access to housing, health care,
unemployment insurance and pensions, while their children get a better
education.

As a result, they save less of their income as a precaution against hard
times ahead, and spend more. So, reason China's leaders, if we move more
people into the cities and give them urban hukou, they will both earn more
and spend more of what they earn, powering the next phase of
consumption-driven economic growth.

But Beijing's plans have run into trouble on two fronts. First, local
government officials and businesspeople have baulked at the cost involved
in granting urban hukou to hundreds of millions of rural residents, asking
where the money will come from.

If Beijing is to hit its target of 70 per cent urbanisation by 2030, the
authorities would have to grant urban registration not only to some 230
million farmers, but also to around 250 million holders of rural hukou who
currently live as second-class citizens as migrants in the cities.

With the cost of granting an urban residence permit with full benefits
reckoned at about 100,000 yuan (HK$127,000), the total cost of the
programme would come to roughly 48 trillion yuan. Spread evenly between
now and 2030, that would amount to more than 5 per cent of current gross
domestic product each year.

Inevitably, businesses would have to shoulder much of the cost in the form
of higher social insurance contributions on behalf of their workers. One
2010 study estimated these would push company payroll costs up by a third.

As a result, it's little wonder that local government officials and
businesspeople are leery of Li's urbanisation plans. But they are not the
only ones. Economists are also questioning whether they make good sense.

The doubters make a point that should have been obvious to China's
leaders, but that appears to have passed them by: it is not rapid
urbanisation that has powered the country's economic growth in recent
years. Rather, it is economic growth that has driven rapid urbanisation.
More specifically, China's growth has been propelled by industrialisation.

Urbanisation is merely a by-product of that industrialisation, as workers
have moved to industrial centres where they can be more productive.
Forcibly moving people from rural areas to urban ones will do nothing to
power growth unless they have productive jobs to go to in their new homes.

It could even backfire spectacularly, by depriving the new urban residents
their former ability to make a living from the land. As a result, instead
of concentrating on raising the urban population, Li and the rest of
China's new leadership would be better off focusing on creating new
employment opportunities, both in the cities and in the countryside.

tom.holland at scmp.com