Editor’s note:

This article is based on the executive summary of the OECD’s Urban Policy Review of China, the first review of its kind ever conducted by the Paris-based organization on a non-member country. Initiated by the OECD and the National Development and Reform Commission, China’s top economic planning body, the report is intended to provide the NDRC with a review of China’s urbanization policies and also provide recommendations for future urban growth measures.

China’s urban population has roughly quadrupled in the last 35 years to more than 700 million, thanks chiefly to internal migration, and is likely to rise by a further 240 million over the next 35, lifting the urbanization rate to around 75 percent.

China’s urban system is growing more concentrated. Analysis based on functional urban areas, rather than cities defined by administrative borders, suggests that China now has 15 urban areas with more than 10 million inhabitants, and the concentration of population in the largest cities is continuing.

Altogether, over 60 percent of the population lives within the functional labor market area of a city of at least 200,000 inhabitants.

Urbanization is driven by China’s fast economic growth but is also an important contributor to it. Chinese cities clearly generate — and benefit from — the agglomeration economics associated with urbanization. Overall, large cities enjoy high levels of income and productivity, although there is also some evidence of convergence in per capita output, with poorer cities growing faster.

Interpersonal inequality

Urbanization has raised the living standards and transformed the lives of hundreds of millions of Chinese, but it also generates important social challenges. Interpersonal inequality has risen sharply, with the Gini coefficient for income rising to above 0.4, higher than in the United States but below the levels of Turkey and Mexico.

Inequality is reinforced by the household registration — or hukou — system, which affects access to education, health care, pensions, social protection and other key services.

Rapid urbanization is also contributing to major environmental problems. Air quality is extremely poor in many Chinese cities, and the economic and human costs of air pollution are high and rising. Urbanization has also generated important stresses with respect to arable land and water supply in some regions.

The quality of urban development is increasingly important for economic growth. There is some evidence to suggest that when countries cross the 50 percent urbanization threshold, as China has recently done, the relationship between urbanization and growth becomes less automatic and depends critically on how urbanization processes are managed.

China needs a new model of urbanization. Urbanization in China was long underpinned by cheap labor, cheap land, the under-pricing of environmental externalities and rising export demand.

None of these factors can be counted on in future. Recently, Chinese policymakers have therefore begun to place greater emphasis on domestic consumption, efficient resource use and productivity.

At the same time, urban policies must become an instrument to achieve greater equity, environmental protection and quality of life for citizens, in addition to output growth — what Chinese leaders call “people-centered urbanization.”

Labor-market duality must be overcome. As many as 275 million migrant workers live in Chinese cities but hold rural hukou; as a result, they suffer from systematic disadvantage on the labor market and with respect to education, health care, the pension system and other forms of social protection.

As well as being unfair, such discrimination undermines labor market efficiency and thus growth.

The authorities have been working to correct this but much more needs to be done. Making it easier for migrants to change hukou is desirable but matters less than simply breaking the link between hukou and public service provision.

Equal access to education is perhaps the most critical challenge of all. The disadvantaged position of migrants’ children when it comes to education is a particularly serious problem.

Most children of migrants (around 60 million) remain in their home regions; a minority (estimated at 35.8 million in 2010) accompany their parents to the city. Both groups face systematic disadvantages when it comes to education.

The long-term costs of under-educating a generation of Chinese young people are likely to be substantial, particularly as China’s working-age population peaks and then declines.

With the population aging and a shrinking labor force, labor productivity will be a more urgent priority.

Land conversion processes need reform. Rural land is owned by village collectives, and land converted for urban development belongs to the state.

Local governments have the largest say in determining when and how rural land is converted to urban uses, and it is they who then sell urban land-use rights to developers. This creates strong incentives for them to make the most of their ability to manipulate the land market, particularly because the sale of land-use rights is their most important source of income.

The result is often unfair treatment of rural dwellers, inflated housing costs for urban residents and inefficient land use in cities.

The government urgently needs to proceed with plans to strengthen the protection of rural dwellers in connection with land conversion and to make requisition procedures more regular, transparent and market-oriented.

Improving foot traffic

Better urban planning can make cities greener as well as more efficient.

Despite a strong tradition of urban planning, economic and political pressures ensure that much new urban development is characterized by extreme functional segregation, the development of very large superblocks, poor internal connectivity and inadequate investment in public transport.

Desirable steps include building economic indicators into planning processes and designing road networks to better support foot traffic and public transport.

Managing density at smaller scales could allow more transit-oriented development, more multi-functional urban spaces and greater competition among developers.

Reform of local public finances is critical to improving the quality of urbanization decisions.

Fiscal relations across levels of government should be changed to eliminate the perverse incentives that many local governments face. Such changes can also help open up new ways to finance for urbanization. These reforms, in turn, need to be linked to a clearer allocation of competences across levels of government, with a better matching of resources to responsibilities.