Cai Fang: The Connotation of Urbanization
Created On : 2018-08-24    Views : 53

When China’s economic aggregate surpassed that of Japan to become the world’s second largest economy in 2010, China’s demographic transition also crossed a watershed: the working-age population reached the peak and then entered a stage of negative increment; the decline in the dependency ratio of the population hit the bottom and then accelerated its increase. This demographic trend not only adversely affected the potential growth rate and then actual growth rate in fields of labor supply, human capital improvement, return on invested capital and resource reallocation, but also tended to lead to a slowdown in urbanization. Between 2010 and 2017, the urbanization rate was still growing, but its annual growth declined at a rate of 6.7%, while the annual growth rate of urbanization rate fell from 3.33% to 2.04%.


From the perspective of the demographic trend, after reaching the peak in 2014, the rural population aged 16-19 has been in negative growth so far. This age group, equivalent to the rural students who have just graduated from junior and senior high schools, serves as a main source of the increase in rural migrant workers, thus the size decline of this age group must slow down the annual growth of rural migrant workers accordingly. It’s thus clear that the slowdown of urbanization is completely caused by demographic factors. In terms of general laws of development, China hasn’t completed its task of urbanization yet. From the perspective of urbanization indexes, there is a gap of 8 percentage points for China to bridge, if China expects to reach the income group category that China belonged to—the average level of 65% of upper-middle-income economies determined by the World Bank.

In the past 40 years, the demolition of institutional barriers has promoted the withdrawal of labor from low-productivity sectors, and the flow between urban and rural areas, between regions and between industries, and into the urbanization path characterized by high-productivity sectors, which is the effective experience in the development stage of dual economy In the wake of the demographic transition and the changes in economic development stages, these experiences should be updated according to their internal logic to promote the urbanization to transform from a high-speed expansion into high-quality improvement. Next, this article will give a comprehensive overview of the new connotations that the urbanization with Chinese characteristics should have in three aspects.

Motivation to exit: from incentive mechanism-related productivity to production mode-related productivity

Because the rural areas take the lead in embarking on the incentive mechanism-centered reform, a giant leap in agricultural labor productivity and the convergence with non-agricultural industries happened in the 1980s. Since the 1990s, although the agricultural labor force has been undergoing large-scale transfer, the productivity gap between agricultural and non-agricultural industries has not been significantly reduced. In fact, as the agricultural surplus labor gradually moves out, particularly in a situation of a labor shortage in both urban and rural areas, the use of agricultural machinery becomes more and more labor-saving, and the process of capital substitution for labor in agricultural production has accelerated.

Yet, the constraint of China’s agriculture is that the agricultural operation scale is too narrow. The land area per household in China is only 0.6-0.7 hectares, equivalent to one-third of the size of “small landowners” (2 hectares), defined by the World Bank. Due to this restriction, in the context of a substantial increase in material costs in agricultural production, the phenomenon of diminishing returns to capital has led to an increase in labor productivity that has not been accompanied by an increase in capital investment. Comparing the situation at the beginning of the reform (1978-1984) with that in 2007-2013, take grain product as an example, the marginal productivity of agricultural labor increased dozens of times, while the marginal productivity of capital decreased significantly. In other words, if we want to further release labor from agricultural production, we must break the bottleneck that restricts the modernization of agricultural production mode according to the changed new situation. Its breakthrough is to encourage the land circulation and expand the scale of operation through rural land system reform.

Since the beginning of the 21st century, the Chinese government has carried out a set of favorable agricultural policies, which have significantly increased financial investment in agriculture and direct subsidies to producers. The reform of land ownership, land contract rights and land management rights has also created the institutional conditions for land circulation. Yet, for a long time, the policy orientation on the countryside, agriculture, and farmers (three rural policies) has focused mainly on the transformation from a policy of giving less and taking more to a policy of giving more and taking less, but not enough to reform agricultural production methods and achieve their modernization. The modernization of agricultural production methods on the one hand depends on the self-development ability and competitiveness of the industry and on the other hand is the basis for the enhancement of labor mobility and resource reallocation efficiency. Thus, the three rural policies should pay more attention to the production method itself, and government investment should be oriented towards expanding the size of land.

Labor flow objective: vertical flow caused by horizontal flow

In the context that urban and rural labor markets become increasingly matured, rural migrant workers have moved within a larger geographical range. The general direction of labor flow is from central and western regions to coastal regions, from rural areas to urban areas at all levels. For instance, in 2017, among 172 million rural migrant workers away from the villages and towns for six months and above, 44.7% moved across provincial boundaries; and among the rural migrant workers away from the central and western regions, 56.5% moved across provincial boundaries. In fact, this percentage was much higher in 2016. With the transfer of manufacturing industry from the coastal regions to the central and western regions, more job opportunities are created in the central and western regions. Plus the aging of rural migrant workers due to labor shortages, both opportunity and psychological costs on those away from homeland increased, and the percentage of labor mobility within provincial boundaries have risen slightly

The increasingly abundant labor transfer and flow and the expansion of mobility scope not only began to narrow the income gap between rural and urban areas but also dramatically narrowed the wage gap between different regions. The income ratio between urban and rural residents dropped from 2.67%, the highest point, in 2009 to 2.35% in 2017. In 2017, the average wage of rural migrant workers in central and western regions was respectively equivalent to 90.6% and 91.1% of the average wage level in the eastern region and wage convergence becomes increasingly prominent. However, this can only explain the effect of horizontal labor flow. The complete process of social flow should be that, individuals and families at different social stratification have more opportunities to rise along the hierarchical structure through the increase of horizontal flow, i.e. realize vertical flow characterized by changes in social identity.

The failure of large-scale migrant workers to achieve vertical flow is shown in several aspects. Firstly, although the average monthly wage of migrant workers in 2017 was RMB3,485 (of which, the average wage of migrant workers leaving their villages and towns was RMB3,805), which reached the normal middle-income group standard. However, they do not have a local hukou in the city and are unable to enjoy basic urban public services equally, with relatively low consumption tendency, and therefore cannot be regarded as the middle-income group in its true sense. Secondly, the children of migrant workers either stay in their hometown as left-behind children, or migrate with their parents as migrant children, as a result, the opportunities and quality of compulsory education they can receive are insufficient, which can easily lead to intergenerational occupational solidification and consequently social stratification. Thirdly, the living and employment expectations of migrant workers are unstable, with few opportunities and low willingness to receive training, so the space for career development is greatly reduced.

In order to give full play to the function of urbanization to enhance social mobility, it is necessary to promote the vertical flow of population and family on the basis of the horizontal flow of labor force. Social (vertical) mobility, which reflects the degree of social equity, is the comprehensive result of a whole set of social policies and an important basis for policy adjustment. To achieve the social policy objectives of significantly improving income distribution and narrowing or even eliminating differences in access to basic public services, the most critical link and the acting point with the most obvious expected effect is to cultivate migrant workers and their families into the middle-income group in the real sense starting from meeting basic public service needs and eliminating the drawbacks of the system and mechanism of population mobility.

Entry status: from entering as a laborer to entering as a resident

In today’s China, the key to enhancing the vertical flow of labor force is to open the door for migrant workers to enter urban sectors and society at a higher level and to a greater extent. The core of breaking down the institutional and mechanism barriers that hinder this flow is the reform of the household registration system.

The reform of the household registration system is not set in stone, nor has a major breakthrough not been possible from the beginning to the end. If we consider the household registration system to be composed of "kernel" and "periphery", as a matter of fact, the reform has been actively promoted on the periphery. For example, it is precisely because of the reform of the people's commune system, the coupon system and the urban employment system that the long-term employment and residence of migrant workers in cities has been realized. However, the fact that migrant workers cannot become urban residents in a complete sense shows that the core of the system has not yet been touched at all so far. Therefore, migrant workers enter the cities only as employees, and the channel for them to enter the cities as residents has not been opened after all. Statistically, there has always been a gap between the urbanization rate of the permanent population and that of the registered population, with 58.5% for the former and 42.4% for the latter in 2017.

If we say that the reform of the household registration system, which has promoted urbanization in the past 40 years, has followed a path from “periphery” to “kernel”, it now needs to focus on tackling the key problems and achieving a breakthrough in this “kernel” part. The reason that the most crucial step in the reform of the household registration system, that is, the citizenization of migrant workers, has difficulty in taking a step is because of the asymmetric relationship between reform benefits and reform costs. Studies have shown that the reform of the household registration system can significantly increase the potential growth rate of China’s economy by improving the labor participation rate of non-agricultural industries and the efficiency of resource reallocation. However, this real reform dividend cannot be obtained exclusively by local governments that bear direct payment responsibility for reform costs, leading to the incompatibility of incentives between central and local governments in promoting reforms. 

Therefore, the key to promoting the reform of the household registration system and realizing the entry of migrant workers and their families into the cities as citizens lies in the central government's top-level design for the reform, and innovative arrangements for sharing the costs and benefits of the reform, so as to form incentive compatibility. In view of the potential benefits obtained from the reform of the household registration system, there is a huge positive external effect on the sustainable economic growth and the improvement of social equity and justice in China. This reform has the nature of public goods at the national level. The central government’s greater spending responsibility to pay for the necessary reform costs can become a tipping point for driving the reform and achieving results.


China's economic reform, which began in the late 1970s, has gradually broken down the institutional barriers to the accumulation and allocation of production factors and created sufficient conditions for China's rapid economic growth. The specific demographic transition phase highly coincides with the reform period, which provides the necessary conditions for high-speed growth; urbanization with Chinese characteristics is a practical carrier that integrates reform, development and sharing into the same process and translates the potential growth rate into a miracle of economic development. The agricultural surplus labor force withdraws from low-productivity agriculture and flows between urban and rural areas, between regions and industries and then into urban sectors with high productivity, which constitutes the process and connotation of urbanization with Chinese characteristics. It is also a useful angle to explain the success story of China's economic development, to enhance its general significance of development economics, and to reveal the logic of further reform and development.

First, the implications of these experiences for China's own sustainable development. The experience of urbanization with Chinese characteristics shows that China's economic development is realized through the reform of the traditional system. It not only creates micro incentives but also obtains macro efficiency, which accords with almost all the laws of economic growth, structural adjustment, and social change, while at the same time closely combining China’s national conditions, and corresponding to the stage of economic development, the stage of demographic transition, and the institutional legacy that China is facing in a specific period. We should follow the same logic and build on what has already worked, while at the same time adapting to the changed situation, renewing the connotation of the existing experience and  completing the unfinished reform and urbanization, so as to promote economic development.

Second, what are the more general implications of these experiences? All countries have the necessary conditions for their own development, which are often unique. This paper emphasizes necessary conditions for economic growth rather than comparative advantage, because compared with the concept of comparative advantage, necessary conditions are conceptually richer in connotation and more comprehensive in extension; and in practice, necessary conditions need to be considered only from supply-side factors, there is no need to consider the factors of trade, so it is concrete and controllable.

From this point of view, China's reform and development experience, represented by urbanization, can answer the following questions to address general development issues. First, the incentive for the accumulation of production factors and the mechanism for reallocation of production factors should be addressed through reform, so as to translate the necessary conditions into actual economic growth. Second, the reallocation of labor force should be based to promote fuller employment; and reform, opening up, development, and sharing should be integrated, so as to obtain the consensus of the whole society on reform and enable it to proceed continuously. Third, the focus of reform should be constantly adjusted as the development stage changes to maintain and explore the necessary conditions for economic growth.

(The author Cai Fang is a member of the Academic Committee of Shanghai Academy)