Why is low-cost urbanisation unsustainable?

In 2013 China's urbanisation rate reached 53.7%, with 730 million people included in the urbanisation process; since the start of the new century, an average of more than 20 million people have entered cities each year. This should be the largest-scale and fastest population urbanisation process within a single country in the world. Looking domestically, the urbanisation rate of the eastern region has already reached 62%, the central region 48%, and the western region 44.5%, leaving an 18-percentage-point gap between the western and eastern regions. If it grows by 1 percentage point each year, that means an 18-year gap between the central and western regions and the eastern region, which is a very large chasm.

This article mainly discusses the emergence of China's low-cost urbanisation model, the problems that have already appeared, and how to solve them in the future through reform.

Rapid urbanisation has benefited from the low cost of land, labour and the environment

Throughout China's entire economic growth process, the greater advantage lies not only in the role of marketisation, but more in the fact that the government can allocate resources through powerful means and a special system, artificially driving down factor prices. Compared with other countries in the world, this low cost has raised competitiveness, and it is precisely this competitiveness that has driven the rapid development of urbanisation.

The low cost is reflected in three aspects: first, land; second, labour; third, the environment. Low costs can enable enterprises to complete capital accumulation rapidly, and towns and cities can obtain more revenue, which ultimately leads to a rapid acceleration of urban construction. This model of rapid development at low cost is unprecedented in the world.

How did China form this low-cost development model? This requires studying China's special pattern of development. In the 1950s, two major institutional transformations continuously influenced the course of China's economic development.

First, the cooperativisation movement in the mid-1950s, through the public ownership of land, attempted to complete an idealised, planned, publicly owned development model. This development model was consolidated in 1958 and led to severe economic decline. However, public ownership of land did not fully withdraw under conditions of severe economic decline, and after the 1980s it became a cheap basic resource for industrial and urban development. Lowering the cost of urban development through the land system gave rise in China to a land management system whose outward appearance was the division between urban and rural areas, and it influenced the future course of China's urbanisation.

Second, the household registration management system allocated public-owned rural land according to a welfare-oriented model. The allocation mechanism for contracted land and homestead land among members of rural collective economic organisations, combined with the household registration management system, created enormous obstacles in the circulation of urban and rural factors. The rigid land management system forced rural land to be expropriated by cities at low prices, and also strictly restricted the circulation of land as a basic rural economic factor. The household registration management system, by excluding large numbers of rural people from urbanisation, and then by driving down land prices and workers' wages, achieved low-cost industrial accumulation.

After the 1960s, economic growth became unsustainable, and the ills produced by the system not only affected economic development but also caused severe social stagnation. So in the 1960s a kind of “exit mechanism” emerged: although land was publicly owned, the right to operate the land was moderately loosened. By the 1970s, the development model characterised by public ownership and the exclusion of labour from the urbanisation process faced severe challenges again, and plunged the country into a huge economic crisis.

This crisis was released after the Third Plenary Session of the Eleventh Central Committee. What were its manifestations? First, continuing to return to the approach of the 1960s, releasing the right to operate land without touching ownership; second, in order to keep cities low-cost, continuing to exclude all rural people from the urbanisation process. So by the 1980s and 1990s, for nearly 20 years policy did not mention urbanisation, continuing to maintain low-cost urban accumulation, while at the same time another new policy appeared, namely the policy of unfair exchange between urban and rural land.

Rural land could only be converted into urban development land after nationalisation, which created the conditions for city governments to drive down factor prices for industrial accumulation, and also created the conditions for improving urban infrastructure. In the 1980s there was also a special phenomenon: when the government resolved the accumulation of the urban economy by driving down factor prices, the countryside was undergoing the same social transformation, and large numbers of farmers in Guangdong, Jiangsu, Shandong, Zhejiang and other regions used cheap land to create their own industrial systems and industrialisation processes, driving the country's entire economic growth and urban development process.

The development of township and village enterprises in the 1980s had two most important characteristics. First, it continued to use land under the original public ownership, mobilising the lowest-priced land resources through public ownership. Second, because of the household registration system, large numbers of migrant workers from other places were excluded from the urban and rural public service systems. Over these decades of development, differences in the pace of development formed a new pattern of urban and rural development.