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Speeches & Transcripts

Remarks by World Bank Country Director for China Klaus Rohland: Building More Efficient Cities in China

Klaus Rohland

ECOSOC Integration Segment

New York, United States

May 28, 2014

As Prepared for Delivery

Thank you, Dr. Clos, Ambassador Wang, Dr. Ba, for this wonderful event. As Dr. Ba has mentioned, our report, Urban China, was jointly produced 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.

Our cooperation has offered us a unique opportunity to bring local expertise and global knowledge together. DRC, as you all know, is a preeminent think tank in China under the State Council, with an impressive capacity for research and valuable insights into policy making in China. The World Bank can bring to the table its global knowledge about what has worked and what hasn’t in other countries. Fusing local and global knowledge 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 30 years, urbanisation has contributed enormously to economic growth and modernization in China. About 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 income levels comparable with those of some OECD countries. Importantly, China has avoided some of the common ills of urbanization, notably urban poverty, unemployment and squalor.

Urbanization has been a global phenomenon 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 90 years later. Countries experience urbanization spurts, such as the United States of America, as well as England in the mid‑to‑late 19th century and Germany around the turn of the 19th to the 20th century. Urbanization rates increased in Japan later during the last century and in Korea after 1960. Sometime during the first decade of this century, the tide turned and more than 50% of the world’s population were living in cities. By 2050, it is projected that more than 60% 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 at their own pace, of course, but urbanize they will. And 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 that the DRC and World Bank work on urbanization.

Urbanization 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 did in the last 30 years. Second, the demographic dividend of China—a young population with concomitant low labor 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, this will have huge implications for wages and increase labor cost. 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. Adaptation to global 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, unsustainable strategies. There is a limit to economic growth based on the exploitation of natural resources. Learning from this experience, before becoming rich, China has to shift to a new strategy to make sure that its development is sustainable for China, as well as for the rest of the world.

Sustainable urbanization is at the center of such a new strategy. It must address the problem of urban sprawl in China: its cities are growing much faster in space than in population. The effects are clear, as 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, such as water supply, roads and public transportation, will rise to unsustainable levels. Efficient and sustainable spatial development will be a priority.

China’s urbanization also 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 countryside, the villages and hamlets of rural China. If unattended, this gap may well turn into a chasm. There is another gap within cities, between those registered as citizens and those who have migrated to the city, with fewer rights and lesser access to public services.

Three considerations must therefore shape a new urbanization strategy. The urban economy should be efficient in productivity and innovation. It should provide social justice and equal access to social services, which will help address the rural‑urban inequality, as well as within‑city inequality. Also, the issue of sustainability 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 have already been announced by the Chinese government as policies, in parallel to our work. Indeed, as we worked on our ideas, there has been a constant exchange between policy makers and the study team. This was indeed policy advice in real time.

The efficiency of cities is really about improving the density of cities. Sprawling urban conglomerations entail huge costs. Think of the infrastructure for roads, water, sewerage and public transportation. It also stands in the way of improving productivity and innovation, which require cooperation between research and production, between all economic sectors, to achieve a synergy, as well as a productive, well-educated workforce. Think of cities like Stockholm, Barcelona or the Boston metropolitan area, as good examples. All of these are 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 4.2 million more people, 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 planning is a guiding consideration for internal city design. Think of the superblocks in Beijing, sometimes 500 meters wide. 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 traffic.

The density of cities is also about more space for rural 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, they would need to convert rural to urban a land area 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 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 converting rural land into urban use. 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 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 farmers’ property rights, moving away from the dichotomy of urban land and rural land, and eventually, to a unified land system. There should be legal limits to 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 two trillion renminbi below the market value. Assuming that those 2 trillion would have generated returns similar to overall growth, farmers would have more than 5 trillion renminbi 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 are registered with the city hukou, a household registration system, and have access to public services, but 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 overall is 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 origin.

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

How is all this 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 find new sources of revenue, through property taxes or local surcharges on income taxes. Environmental levies, such as higher motor vehicle licence fees, pollution charges and cost recovery on utilities, will raise revenues while addressing environmental problems at the same time.

To finance long-term investments in infrastructure, there needs to be reforms of the financial system at the city level. Local government financing vehicles need to be brought in to reduce debt levels. Cities in good financial standing should also be allowed to issue their own bonds.

More efficient cities will yield major savings. At the current rate and without reforms, China’s cities will spend about $5 trillion on infrastructure over the next 15 years. In a reform scenario, China’s more efficient and denser cities may save some $1.4 trillion in 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 the 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 third Plenary outcome from last November. And this is what we are proposing as well.

Thank you.