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Remarks by World Bank Country Director for China at Foreign Correspondents Club of China

Klaus Rohland

Foreign Correspondents Club of China

Beijing, China

May 16, 2014

As Prepared for Delivery

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Dear Ambassador Freden,

Thank you for hosting this event. Thanks to the Foreign Correspondent’s Club to give me the opportunity to speak on Urban China, a report that has been jointly written by the Development Research Center and the World Bank over the last year. It follows on the heels of the China 2030 Report that DRC and the World Bank did two years ago. Both reports were done at the request of China’s leaders and we are proud of the excellent relationship and, dare I say, the friendship developed between the team members of the DRC and the World Bank over these years.

To develop such a report jointly has provided us with a unique opportunity to bring local knowledge and global knowledge together: DRC as you all know is a preeminent think tank in China under the State Council with impressive capacity for research and valuable insights into policymaking in China. The World Bank can bring to the table its global knowledge about what has worked and was has not worked in other countries. Fusing local and global knowledge, working and cooperating with local research institutions and building on comparative advantages is the way ahead for the World Bank as our client countries are getting ever more sophisticated. I believe that we have charted a path for new ways of doing business for International Institutions through our work.

Let us talk about urbanisation in China. You are all aware of the facts. In the past thirty years urbanisation has contributed enormously to economic growth and modernisation in China. In the process 500 million people have been lifted out of poverty and about 260 million migrated to cities to seek better opportunities. Today China’s mega cities have now income levels comparable to those of some OECD countries and, importantly, China has avoided some of the common ills of urbanization, notably urban poverty, unemployment and squalor.

 Urbanisation is and has been a global phenomenon ever since the onset of the industrial revolution in the 18th century. In England, for example the share of urban population rose from 17% at the beginning of the 19th century to 72% some ninety years later.  This process was by no means a gradual one. Countries experience urbanisation spurts, like the United States of America and in England in the mid‑to‑late 19th Century, and Germany for around the turn of the 19th to the 20th century. Urbanisation rates increased in Japan later last century and in Korea after 1960 onwards. Sometime during the first decade of this century the tide turned and more than 50 percent of the World’s population were living in cities. Come 2050 it is projected that more than 60 percent of the developing world and a staggering 85% of the developed world will be urbanized.

The trend is clear. It is also unstoppable: all countries of the world will urbanize each in their own ways and pace of course, but urbanize they will. 

Urbanisation does not happen by administrative fiat or by policy choice. The challenge for governments around the world is to manage it in such a way that their countries and their people benefit from it to the maximum possible. 

And that is also what the Prime Minister of China had in mind, when, in November 2013, he proposed to DRC and World Bank to work on urbanisation.

Urbanisation is linked to productivity growth. China’s economy needs this for its future economic development. Most of the observers agree: China’s growth model of the last 30 years has run its course. I would like to highlight three points to make the case.

First, China, as it moves to the technological frontier, can no longer benefit from the advantages of backwardness as it could in the last thirty years.  Secondly, the demographic dividend of China – a young population with concomitant low labour cost – is also diminishing, as China’s demographic profile is turning.  Within this decade, some say as early as 2016, more people will leave than enter the workforce.  Needless to say that this will have huge implications for wages and entail growing cost of labour. Fewer people will have to work more efficiently:  Productivity will be the new source for economic growth.  And productivity and its twin, innovation are intrinsically linked to urban agglomerations. 

Finally, China is also constrained by one overarching consideration: Climate change and the need for mitigation, and adaption to the Earth’s warming will limit its choices for growth. Earlier on developed countries of today were ignorant of the dangers of climate change and built their progress, on what we by now know, were unsustainable strategies.  There is a limit to economic growth that is based on natural resource exploitation.  Other than western countries in the past and before becoming rich China has to shift to a new strategy: to make sure that its development is sustainable for China and also sustainable for the rest of the world.

Sustainable urbanisation is at the centre of such a new strategy.  It must answer to the problem of urban sprawl in China: its cities are growing much faster in space than in population. The effects are clear to see: air pollution and its long term effects have become a pressing concern for citizens. Traffic congestions are occurring daily in China’s metropolises, wasting energy and time. The cost of infrastructure: water supply and sewerage, roads and streets and public transportation will rise to unstainable levels.  Efficient and sustainable spatial development will be a priority.

Secondly, China’s urbanisation has come at a social cost.  There is a growing welfare gap between urban and rural populations. The working young are moving into the cities, yet the old and the very young are left behind in the remote country sides, the villages and hamlets of rural China. If unattended, this gap may well turn into a chasm.  And there is another gap opening within cities between those that are registered citizens and those that have migrated to the city and have lesser rights and lesser access to public services.

Three considerations must therefore shape a new urbanisation strategy:

Efficiency of the urban economy as defined by productivity and innovation; 

Social justice and equal access to social services: This translates into addressing the urban rural gap and the inequality of access in the cities and what to do about Rural‑Urban inequality, but also within‑city inequality, and thirdly the issue of sustainability that looms large in the minds of the Chinese people 

Let me briefly outline the policy areas for reform that our study identifies. Some of those proposed reforms are already announced as policies have been evolving in parallel with our work. Indeed, as we worked on our ideas there has been a constant exchange between policymakers and the study team, through the established channels of communication that were open to DRC that reported on a regular basis   our findings to their authorities. This was indeed policy advice in real time. 

Efficiency of cities is really about improving density of cities.  Sprawling urban conglomerations entail huge cost: Think of the needed infrastructure for roads and streets, water and sewerage and public transportation. It also stands in the way of productivity and innovation that require communication and linkages between research and production, between all economic sectors to achieve synergetic solutions and a productive well educated workforce. Think of cities like Stockholm in Sweden, Barcelona in Spain or the Boston metropolitan area in the USA, as good examples.  All of this is intimately related to the spatial dimension of cities. 

It may come as a surprise to many but Chinese cities are not dense. Guangzhou for example could accommodate 4.2million people more had it the density of Seoul in Korea. Actually, many modern Chinese cities have dense city cores. But beyond the third ring road in Beijing, the urban sprawl begins.  And that is where density efficiencies can be achieved, and where they should be achieved. 

Smart density is also a guiding consideration for internal city design.  Think of the superblocks in Beijing, sometimes 500m in width. Their very existence reduces the number of traffic arteries because they only allow for a limited amount of junctions and crossroads thus causing widespread congestions.  A finer grained network makes it much easier to manage the traffic in this regard.  

Density of cities is also about more space for rural land and agricultural land. There is a widespread assumption that China needs around 120 million hectares for food production. If China’s cities were to continue their urban sprawl of the past, they would convert rural land to urban equal to the size of the Netherlands over the next 14 years.  That is clearly not sustainable.  It would threaten the 120 million hectares red line. 

Inequality and the need for inclusion is the second challenge. That is where the issue of land reform, comes in. Part of the reason for urban sprawl is that cities tend to finance their expenditures by the conversion of rural land into urban land.  In this process, cities compensate farmers at the price of agricultural land, convert it into urban land, sell it to developers at urban land prices and take the difference to finance their expenditures.  Farmers are rightly aggrieved and their demand for better compensation has led to social tensions and manifestations. No wonder that the bulk of social unrest in China occurs at the urban periphery, where these two land systems – the rural land system and the urban land system – collide. 

In terms of policies in China, we propose to focus on the property rights of farmers, moving away from the dichotomy of urban land and rural land and   eventually to a unified land system.  There should be legal limits for land expropriation and eminent domain actions by local government. Fair and equitable compensation for expropriation would go a long way to redress grievances of farmers. From 1990 to 2010 local governments expropriated land at an estimated RMB two trillion below market value. Assuming that those 2 trillion would have generated returns similar to overall growth farmers would have more than 5 trillion RMB in household wealth by now! 

Inequality is an issue that is hotly discussed worldwide these days as evidenced by the global success of Thoma Piketty’s  book on Capital in the 21st century.  It is also an issue in China: some urban residents possess a hukou and  have access to public services and others, mainly migrants are left out. Things have somewhat improved over the years and many cities are striving to provide social services for those migrant workers but access is overall still restricted.  We argue in our report that the hukou system needs to be abolished over time and access to services should be based on residency, not on origin. 

Sustainable urbanisation needs to redress environmental deficiencies: air pollution degradation of land, water.  We find that, by and large, China has good laws and regulations, comparable to many OECD countries. At issue is implementation, weak capacity of environmental agencies, the single minded myopic future on economic growth that is only now given way to a new emphasis on the quality of growth, of life. Administrative boundaries of the past, the cities, the provinces are no longer adequate to deal with environmental degradation that transgresses administrative boundaries. Beijing will not be able to handle air pollution on its own since polluters are mainly, in neighbouring Hebei province, for example. 

 How is this all going to be financed?  China’s fiscal system needs comprehensive reforms. With better and stronger land rights for farmers cities will lose revenues from land conversion. Cities need new sources of revenue.  Now is the time to empower cities to raise own revenues; , property taxes or local surcharges on income tax. Environmental levies, such as higher motor vehicle licence fees, pollution charges and cost recovery on utilities will also raise revenues- and are addressing environmental problems at the same time. 

There will also be a need to reform the financial system at the city level to finance long term investment in infrastructure. UDICs and local Government financing vehicles need to be brought in sustainable debt and borrowing frameworks so that they can fulfil their role as a provider for long‑term financing.  Cities in good financial standing should also be allowed to issue their own bonds. 

More efficient cities will also yield major savings. At the current rate and without reforms China’s cities will spend about five trillion USD on infrastructure over the next fifteen years. In a reform scenario China’s more efficient and denser cities may save some 1.4 trillion US Dollars on infrastructure investments, more than enough to finance the expansion of health, education and low income housing to cope with the influx of people. Shifting from physical expansion of cities and infrastructure to delivering services to China’s citizens would truly be the people oriented urbanization that is the ambition and aspiration of the 3rd Plenary outcome from last November. And this is what we are proposing as well. 

Thank you.