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Speeches & Transcripts

Urbanization and Urban-Rural Integrated Development

Sri Mulyani Indrawati

China Development Forum

Beijing, China

March 23, 2014

As Prepared for Delivery

Thank you very much Vice Minister Liu Shijin for this very kind introduction. I am glad to join you and Chairman Xu Shaoshi today to discuss this very important topic.

Let me start by stepping back for a moment. I’d like to remind all of us why urbanization, and in particular, integrated urban-rural development, matters.

We at the World Bank Group have two goals: The first is to end extreme poverty by 2030. The other is to promote shared prosperity.

Getting urbanization and rural development right is essentially about sharing prosperity. It is about ensuring that the benefits of development and growth reach all citizens – whether they move to the mega cities, smaller towns, or live in a rural setting. 

So how does tackling urbanization fit into our current economic environment?

The world economy is entering a new phase. 

The effects of the global financial crisis are starting to wane, extraordinary monetary policies are being normalized, and for the first time in over five years, developed economies are not a source of instability, but of growth.  Developing economies will need to adjust to the realities of this post-crisis world. 

On the one hand, they will benefit from higher external demand, which would allow them to unwind some of the stimulus measures they themselves have put in place in the last five years. 

Doing so would reduce the risks that have built up through high credit growth and large fiscal deficits. 

On the other hand, a recovery of growth in the developed world could affect capital flows to developing countries, sometimes abruptly so. 

Normalization will also mean an increase in global interest rates. This in turn implies that investments in developing economies are set to become more expensive—the days of cheap capital are over. 

This comes at a time when most developing countries already grow at capacity, which is lower before the financial crisis. 

Thus, to keep growing at the same pace, or even accelerate growth countries would need new engines of growth and reforms in areas that may not have received the necessary attention when growth was fast and capital easily available.

Urbanization can be such an engine of growth—if handled well – but it needs attention and sound policies. Indeed, few countries become high income without high levels of urbanization.

Urbanization is a recent phenomenon:  in 1800, barely 3 percent of the world’s population lived in cities, and by 1900, it was less than 15 percent. 

Today, more than half of the world’s population lives in cities and by 2030, it is estimated that two-thirds of the world’s population will be urbanized. 

Nearly all of the increase in urban population is now happening in developing countries where more than 5 million people, or about the population of Suzhou, migrate to urban areas every month

Urbanization is generally associated with higher income and productivity. In fact, it can be an important driver of productivity increases and growth. 

Urban areas offer positive agglomeration effects including larger, more efficient labor markets, lower transaction costs, and easier knowledge spillovers. 

They also provide easier access to markets, and links with the global economy.

Indeed, almost no country has reached income levels of more than $10,000 before reaching about 60 percent urbanization. Urbanization is inextricably linked to economic transformation; although more urbanization does not always mean more economic growth.

So what are the challenges we are facing?

In the absence of sound public policy, the positive effects of urbanization may be easily outweighed by costs — pollution, traffic congestion, and higher costs of living.  

Further, in many countries around the world, urbanization did not bring the promised productivity increases and rising standards of living.  Instead it was accompanied by slums, urban unemployment and squalor.  Indeed, more than one billion people call slums their home today.

Even if managed well, urbanization and economic transformation raise the issue of equality and integrated development.

These issues are at the center of the debate here in China, where rapid urbanization went along with a rapid increase in income inequality and rural-urban income differences.

Which brings me back to our goal of promoting shared prosperity:

The challenges China faces today are shared among many of the developing world in the course of urbanization—and not dissimilar from the challenges that advanced countries faced in the past.

History suggests that countries that rapidly urbanize see their rural-urban income gap rise at first, and decline only after a considerable part of the population has shifted to urban centers. 

This phenomenon was already observed in the 1950s, empirically by Simon Kuznets, and underpinned by Nobel Prize winner Arthur Lewis’ theory of economic development.

Clearly, integrated urban-rural development is a challenge around the world.  Incomes are higher in urban areas, while rural areas see more extreme poverty.  Indeed, three quarters of the poor live in rural areas.

This disparity is similar for other Millennium Development Goals. For example, improving basic sanitation is one of the goals that proves difficult to achieve globally. But 80 percent of urban residents versus 50 percent of rural residents had access to a toilet in 2010.

Growing disparities amidst development is a policy issue for many governments in the developing world.  It is also a major challenge for the World Bank.  We have set ourselves goals not only with regards to poverty alleviation but also for inclusive development.

So how can governments manage more inclusive development in the course of urbanization? 

Our research shows that economic development will not come to every place at once, but no place needs to remain mired in poverty. The challenge for governments is to further rapid economic growth in urban areas, and yet ensure inclusive development. How can this be done?

First, by ensuring concentration of economic activities in cities.  Providing cities the tools and resources that allow for this to happen is crucial, including good city planning, and sound land policies while using fiscal and financial tools for cities to expand. 

The downsides of concentration—congestion, pollution, and possibly slums and urban squalor, will need to be managed to assure continued economic benefits. 

Equally important is to recognize the social tensions that come with rapid urbanization: Migrant families living apart, children being raised by grandparents, elderly left behind in rural areas, tensions in urban areas where new arrivals crowd public services and compete with established residents. Managing these tensions is an integral part of managing urbanization, and is needed to ensure continued support for it.

Second, connecting people with rapidly growing regions. Governments would need to focus on delivering those services in rural and urban areas that improve human capital, like health and education.

Those services equip people with skills and keep them healthy wherever they are and wherever they go. It will prepare them better for the jobs they seek when migrating to an urban area or improve their productivity in the rural economy. 

At the same time, not all people will migrate, and some never will.  So public services that are important for poverty alleviation—such as water and sanitation—should still be promoted.

But they require a fiscal system that provides sufficient means.  Innovative delivery mechanism, including public private partnerships have emerged in rural areas that can deliver for example water without the need for bulky network investments and consequently at reduced costs. 

Third, connecting places through better infrastructure, which brings lagging and leading places closer together in economic terms. 

If well connected by transport and linked to the electricity grid, smaller cities can attract industries for which the more advanced cities have become too expensive. Industries that can be efficient without the benefits of agglomeration that a large city offers can provide the economic basis for smaller, connected cities.   

Take, for example Sriperumbudur, a town of 17,000 people near Chennai, India.  Basic infrastructure, proximity to a port, and basic education and health services were enough for Hyundai to put an auto factory there in 1999.  By 2006 it had produced a million cars.  The small city was large enough for Hyundai to realize the scale for cars to be produced competitively.

The added benefit of connecting smaller cities is that migrants need not move to large cities to find jobs; instead they can find work in smaller cities closer their hometown.   

Again, given the limited means in developing countries not all places can be connected. So prioritizing is critical. Focusing on connecting those areas with the largest populations makes most sense.  More remote, less densely populated areas are likely to benefit more from the public services that allow people to move, such as education and health, and portable pensions.

Agriculture is of particular importance in the course of urbanization—and of concern to policy makers around the globe. It is critical for inclusive growth, but also to ensure food security.

Arguably, it was the agricultural revolution in 17th century England that preceded the industrial one—and made it possibly by releasing labor from the countryside.

Countries such as Japan and Korea that rapidly urbanized in the last century also saw a major agricultural reform alongside urbanization and industrialization.  The mechanization of agriculture dramatically increased labor productivity, although not enough to keep up with growing demand. 

Clear property rights on agricultural land, agricultural extension services and rural infrastructure such as irrigation, rural roads, power and rural organizations were important too.

As incomes rose, however, the concerns over food security receded, and Japan and Korea now import a considerable share of their food needs.

So what does that mean for China?

China’s urbanization is in many ways an unprecedented success.  In the course of rapid urbanization and economic transformation over the past three decades, China has lifted more than 500 million people out of poverty, in rural and urban areas alike. 

More than 250 million migrants moved to the city in search of a better life for their families.  My colleagues and I at the World Bank are convinced that China can repeat the enormous progress it made in fighting extreme poverty. Promoting shared prosperity through smart urbanization is the next – logical – step.

And in the current economic environment it is a necessary step to come out of the crisis strong and with new energy for better growth.

Together with the Development Research Center of the State Council we have studied urbanization in China in the past year or so. With analytical rigor and openness we jointly developed a set of comprehensive suggestions on how a new model of urbanization can overcome the challenges China faces.

So it will be critical to address key area first and foremost land. This will include stronger property rights for farmers and zoning that transfers industrial land to residential and commercial areas.

Second, financing for local governments needs to improve and may need sources of income like property taxes and adequate charges for services.

Third, the change of the hukou system needs to be changed so that people can move freely to where they are most productive and where their families get their services where they need.

Finally, the environment needs to be protected. The impressive laws China has already in place need to be put in action.

China’s leadership has recognized the challenges that have come with this success—including rising inequality, urban pollution and concerns on productivity and sustainable growth.

I am very excited to see that the Chinese government is already implementing many of the recommendations our joint study produced. The plans I have seen so far put people squarely at the center of the reforms: they focus on providing services to all citizens in cities, regardless of their residence permit; they emphasize better city planning and better coordination, among other things.

This is a very strong sign that policy makers are not only recognizing the challenges, but also the opportunities sound urbanization bring for more and better growth.

Together with our friends from the Development Research Center of the State Council, we have been studying China’s urbanization, and have tried to contribute to the domestic debate on the topic. 

Two days from now we will present a report on the topic in a conference here in Beijing, and we hope that, as in so many other ways, countries around the world can learn from China’s successes and how it will overcome its challenges going forward.

Thank you.