What impact will a slowdown in urbanization have on the economy?
From July 31 to August 1, the 2015 (Summer) Chongli China Urban Development Forum was held in Chongli, Zhangjiakou. Cai Fang, Vice President of the Chinese Academy of Social Sciences, delivered a speech at the forum. The following is the transcript of the speech:
China's urbanization is developing rapidly, and China's urban research is also developing very rapidly. Recently I saw a television news program in which the host asked Nobel laureate Paul Krugman to recommend a book for everyone. The book he recommended was called "The Triumph of the City." The main content of this book is that the city is one of the best things humanity has invented since the beginning of history. Its core lies in the fact that cities achieve the most intensive use and most efficient allocation of production factors and resources, thereby obtaining the best and most economical output. Therefore, such a platform, such a carrier, is the best invention and will ultimately triumph. So the city will always be a theme of our research.
However, to date, I believe China's cities have not yet triumphed. Although over the past 30 years our urbanization speed has been the fastest in the world in history, and you cannot find any other country with such a growth rate. But so far, according to our level of development, stage of development, and per capita GDP level, our urbanization level is still lagging. Lagging first refers to the urbanization rate of 54% of permanent residents.
What are cities for? Cities are not only a concentration of factors, but also an improvement in people's quality of life and the environment for cultivating human capital. Therefore, we should pay even more attention to the proportion of people in cities who have a sense of participation and enjoy equal basic public services and basically equal economic opportunities. China happens to have an indicator with Chinese characteristics, called "the proportion of registered urban population," which so far is still only about 37%. Therefore, judged by a urbanization rate of 37%, our population urbanization is already very lagging and does not match our stage of development. So we still need to study cities and towns.
Therefore, I want to discuss two viewpoints: how our urbanization can be advanced to a deeper level from both connotative and extensional perspectives.
First, relative to urbanization, we now face two enormous challenges. The first challenge comes from the slowing of urbanization speed. Although I have not looked at the statistical data, I am certain that it will truly slow in the future. The slowdown of urbanization speed and the slowdown of economic growth speed are mutually causal. Look at the speeds of urbanization and economic growth. In the past, China's more than 30 years of rapid economic growth have been decomposed. Economic growth first comes from the input of various production factors.
The second challenge comes from the allocation efficiency of these factors, that is, total factor productivity, which is increasing. In the past, our economic growth mainly came from the contribution of capital, and this part is a manifestation of the concentration of production factors. It appears that reform and opening up flowed from places rich in capital to places where it was scarce, but in fact this is not so. On the contrary, it all flowed from poor places to rich places. For China, whether capital, labor, or land, all important production factors have concentrated toward cities. Therefore, the contribution of capital, the contribution of labor, the contribution of land, and the contribution of resource allocation, that is, the very process of our labor force shifting from agriculture and rural areas with surplus to cities, constitutes an important reason for the improvement of our entire total factor productivity. In other words, urbanization is one cause of rapid economic growth. If we build a model, we would absolutely build one showing urbanization supporting economic growth. Conversely, economic growth also affects urbanization. When the speed of economic growth slows, the ability to absorb production factors, to attract them, and to gather various high-quality production factors will also weaken, so urbanization will also slow. Mutually causal, this constitutes a new challenge for the Chinese economy.
We have made a simple judgment about the speed of China's urbanization and the speed of economic growth. We believe that urbanization is a process in which surplus agricultural labor shifts to non-agricultural industries and cities, but this sentence is only an academic one. The real phenomenon is not that agricultural labor transfers out, because those who farm are all relatively older, the vast majority are over 40 or 50 years old, and they no longer transfer. When we talk about transfer, we actually mean newly graduated rural middle school students. After graduation, they choose to go to cities rather than farm. We originally assumed they should farm, but in the end they did not farm, so we call them transferred agricultural labor. Therefore, the rural labor force that truly transfers is the population aged 16 to 19.
We recently looked at forecasts of the population age structure and found that in 2014 the total number of rural junior high and senior high school graduates aged 16 to 19 reached its peak. That is, starting this year, the number of people in this group will experience negative growth and will continue negative growth forever. If we draw the chart of the age population, after reaching the peak in 2014, it is an inverted "U"-shaped curve, and it is related to the growth speed and total number of rural migrant workers. Therefore, if we also draw the chart of rural migrant workers, in earlier years the two figures overlapped and were the same. Naturally you can judge whether the rural population aged 16 to 19 will have negative growth in the future. We think it is very likely that rural migrant workers will have negative growth. In the first quarter of this year, what we saw was negative growth. Although the second quarter recovered somewhat, the growth rate for the entire first half of the year was 0.1%, while last year it was still 1.3%, and before 2010 it was a growth rate of 4% per year. Therefore, the slowdown in the speed of transfer of the migrant labor force is also a reason for the slowdown in urbanization, and this will further affect the speed of China's economic growth. The future speed of productivity improvement can be assumed. During the "12th Five-Year Plan" period, we have already fallen from a potential growth rate of about 10% over the past 30-plus years to 7.6%; starting next year we enter the "13th Five-Year Plan." Assuming the reform effects have not yet been released and there are no other factors, the potential growth rate during the "13th Five-Year Plan" period may be only 6.2%.
We do not want an economic growth speed of only 6.2%, so we are exploring the dividends of reform. A very important part of the reform dividends comes from urbanization, and urbanization contains many reform contents. But urbanization has also slowed. What can stimulate it? I think urbanization faces a challenge. The previous challenge is slowdown; the second challenge is that at a particular stage of development, the city's management capacity and resource allocation capacity are limited, because this capacity is a product of the stage of economic development, or a function of the stage of economic development. That is, first, the speed of urbanization itself will slow; second, urbanization and the economy are mutually causal, and a decline in China's economic growth speed will lead to a slowdown in urbanization speed, constituting a new challenge for the Chinese economy.
Although we are constrained by resources, human capital can improve these constraints. The simplest example: Beijing is short of water to such an extent, yet every one of us uses tap water as if it were air. The price of tap water is virtually nonexistent in our lives. This is caused by management capacity and governance capacity. So at this stage of development, you should not expect it to have such strong resource allocation capacity and urban management capacity. Therefore, "urban diseases," pollution, PM2.5, the environment falling beyond the top 1000, traffic congestion, and the sharp surge in living costs mainly driven by housing are bound to appear. The result of the surge is not our complaint; more importantly, it reduces the attractiveness of high-quality resources concentrating here. Good talent may still come, but after coming, do they truly apply their real human resources to creative activities? For example, people who should steadily pursue scholarship and work in think tanks, because life pressures force them, have no choice but to use more resources to earn extra income. I think these are all manifestations of urbanization.
Therefore, at this particular stage of development, with insufficient capacity, the marginal returns of cities begin to diminish, and resource allocation is no longer so high. Therefore, at this time, we must advance urbanization, otherwise the speed of economic growth will become lower and lower. But conversely, the marginal returns of our urbanization have already diminished. What should be done? Regarding this pair of contradictions, I think there are two ways out. One is connotative: we turn back and no longer look at the percentage of permanent residents, but look at the percentage of registered residents. That is, if the migrant workers and their family members who already permanently live in cities are turned into registered residents, we will obtain the continuation of the demographic dividend and new potential growth momentum. Therefore, I believe this is an immediate demographic dividend.
The other is the extensional path of urbanization, namely regional integrated development, like the idea of coordinated development of Beijing, Tianjin, and Hebei. That is, Beijing may have a CBD and Financial Street, but it does not have ski resorts or Chongli's environment; it may have mountains of gold and silver, but perhaps not green mountains and clear waters. Therefore, different endowments of production factors will give us some new opportunities for reallocation. In the past, of the part of productivity improvement in China's economic growth, the efficiency of resource reallocation accounted for nearly half. Therefore, in the future, to raise our productivity, we will rely even more on this resource reallocation. So the greater the differences, the more opportunities we have for reallocation.