Equitable and Sustainable Development Based upon Population Urbanization

  Time:2012-11-09   Hits:0

Equitable and Sustainable Development Based upon Population Urbanization

---China’s Next Decade

Chi Fulin

November 3, 2012

 

Against the backdrop of complex and profound changes in China’s internal and external development climate, where are the opportunities and driving forces for its development and transformation in the next 5-10 years? My personal view is, thanks to the enormous space for urbanization in general and population urbanization in particular, China’s economy will keep on growing in the next decade. Here is my main idea: with the support of population urbanization, accelerating consumption-led economic transformation and adequate release of the huge domestic demand, particularly consumption demand, will be the unique advantage and driver for China’s development and transformation in the next 5 to 10 years. In this way, China will march onto a new road of equitable and sustainable development.

 

. Urbanization has huge domestic demand and population urbanization will be China’s choice of strategy for equitable and sustainable development in the next decade

 

As it is very often said, the first 20 years of the 21st century is a strategic opportunity period that means promising prospects for China and China must grasp. In the first 10 years of the new century, China took advantage of external opportunities for its economic development and became the second largest economy in the world. In the next decade, though confronted with many changes in and challenges out of the reshuffling of the world economic landscape, China will enjoy incomparable advantages and strategic opportunities in economic development, by virtue of huge demand from urbanization.

1. China is still in an important phase to speed up its urbanization development. According to international experience, the period in which urbanization rate is between 30% and 70% is a period in which urbanization will be very fast. With an urbanization rate of 51.3%, China is still in the period when urbanization picks up speed. In the next decade, China will enjoy a large space for urbanization the speed of which will be quite fast. If its annual urbanization pace remains at the rate of 1.2%, it’s urbanization rate will be as high as 60% by 2020. 

 

2. China’s population urbanization has a vast space. The urbanization rate of 51.3% is calculated on the basis of permanent resident population with 160 million migrant rural workers included. If it is calculated based on household registration, the rate is only 35%, falling far away from the world’s average rate of 52%. Even urbanization keeps growing at the rate of 1.2 per year, it will be only 47% in 10 years, still lower than the world’s average. Taking into account of China’s development in the next 10 years, a rational rate should not be lower than 50%. That is to say, the average annual rate of urbanization in China should be around 1.5%. In reality, it is possible that the urbanization rate can increase up to 50% or more in the next 10 years, if implementation of the policy of citizenizing migrant workers goes well.

 

3. Urbanization promises huge investment and consumption demand. If urbanization develops at an annual rate of 1.2%, another 200 million rural residents will become urban dwellers. Taking the existing 160 million migrant rural workers, the total urban population will grow by around 400 million in the next 10 years. Calculated with the lowest estimate that every person urbanized will require 100,000 Yuan basic construction investment, there will be an investment demand as large as 40 trillion Yuan. Moreover, the ratio of the consumption per urban resident to that of per rural resident is 3.3:1. Such a large rural population to work and live in urban areas, the consumption demand is sure to markedly expand.

 

It can be said that speeding up population urbanization, expanding domestic demand and releasing demand potential by accelerating urbanization will be a strategic foothold for China to develop its economy in an equitable and sustainable way.

 

.The increasing consumption demand released by urbanization can keep China’s economy growing at a rate of 7% to 8% in the next decade.

 

Today, there are many different judgments about the outlook of China’s economic growth in the next 10 years. In my view, this year’s downfall of economic growth rate is a manifestation of both short-term fluctuations and long-term trend. On one hand, it’s not realistic to keep the economy growing at the rate of two digits in the next 10 years; while on the other, the outlook of China’s economic development is still good in view of the strong domestic demand in the next decade. Speeding up population urbanization and economic transformation and upgrading to be led by consumption, the growth rate in the next 10 years may be slower than that in the past 10 years. This will be favorable for transforming economic models, upgrading consumption and raising the living standards of both urban and rural residents.

 

1. Consumption release in the new historical stage.

After the entry into a developmental phase where the overall development of the human being is the main goal, there are profound changes in the content, structure and scale of urban and rural residents’ material and cultural demand. The consumption structure is changing from subsistence demand to development demand and from material demand to service demand. So the space for upgrading consumption is quite large in the next 5-10 years. In addition, with the acceleration of population urbanization and breakthroughs in reforming income distribution, the proportion of the middle-income group will grow from 23% of the total population at the rate of 2% each year to 40% by 2020. Then the middle-income group in China will be as large as 600 million. This hopefully will make China an important force to drive up the global consumption market.

 

2. The release of consumption demand in China is now at a historical turning point.

International experience shows that the predominant role of consumption in driving economic growth is usually established and gradually strengthened when GDP per capita reached $3000 to $5000. China’s GDP per capita exceeded $5000 in 2011. In the first three quarters of this year, the final consumption accounted for 55% of China's GDP growth, which marks the first time when the contribution of consumption to growth exceeded that of investment (50.5%) and shows that  consumption has started to replace investment to be the main driving force for economic growth.

 

In the next five years, the population urbanization rate is likely to reach 42.4% if citizenization of migrant rural workers is quickened by systematic and policy innovations. Then the total consumption demand of urban and rural residents will increase from rmb16 trillion in 2011 to rmv30 trillion, the household consumption rate will rise back to around 40%, and the final consumption rate to 55%. In this way, it will be possible to materialize consumption-led economic transition.

 

In the next 10 years, the population urbanization rate may climb up to 50% or more by breaking the urban-rural dualistic structure. Then urban and rural residents’ consumption demand is expected to reach rmb45 - rmb50 trillion, the household consumption rate back up to around 50%, and the final consumption rate back up to 60%. In this way, it is quite likely to basically form a consumption-led economic growth pattern.

 

3. Release of the consumption potential is expected to support an economic growth rate of 7 ~ 8%.

The scale of the effectual demand, to some extent, determines the growth potential and growth outlook of a country or a region. An analysis of the trend of China’s economic growth in the coming 5 ~ 10 years should be based on an objective judgment of the consumption demand growth and relevant policy prospects. The consumption potential as large as rmb45 trillion to rmb50 trillion, if effectively released by population urbanization in the next 10 years, will largely support the economy to grow at the rate of 7 ~ 8% of economic growth, which will enable China to become a high-income country.

 

In order of realize the objective of medium growth rate, it is necessary to regard improving consumption environment and promoting the release of consumption demand as indicators of transforming economic development models and the important task of the governments work. That is to say, accelerating consumption-led economic transformation is not only the ultimate goal of short-term policies but also as important priority for long-term development, not only serious contradiction at present, but also a big challenge confronting reforms.  

 

. Though urbanization can bring along large investment demand, advancing population urbanization requires transforming investment

 

Will China’s economic growth in the next 5~10 years be driven mainly by investment or consumption? Personally, I agree that maintaining a rational investment rate conforms China’s basic national realities because China is still in the process of rapid economic transition and development. The problem is that, the lingering ever high investment rate and the overquick expansion of investment scale have led up to serious imbalance between investment and consumption, which has gradually become a prominent contradiction in the economic life. In order to adapt to the trend of changes in the structure of consumption demand to be brought along by population urbanization, it is imperative to transform investment.

 

1. Promoting investment transformation by expanding consumption. Consumption is not only the purpose but also the driver of growth. It not only drives economic growth and creates investment opportunities but also leads to optimization of the investment structure. In a short run, consumption is a slow variable and investment is more important in stabilizing growth. Thus, stabilizing growth does need stabilizing investment. In a medium and long run, however, consumption is the ultimate purpose of investment. Only when investment is turned into consumption, can it be regarded effective and become an endogenous driving force for growth. It should be noted that ending of the low-cost expansion period and decline of demographic dividend are both irreversible. And the prolonged investment-driven growth is unsustainable. Although investment without support of consumption demand has the role in stabilizing short-term growth, it will most likely create more obstacles to growth and lead up to more structural contradictions, such as distorting industrial structure, reducing marginal efficiency of investment and resulting crisis of overproduction. The core of accelerating investment transformation is to achieve dynamic balance between investment and consumption in order to enable investment growth to reflect the basic direction and objective tendency of transformation of urbanization development and structural changes in aggregate demand of the society.

 

2. Changing the investment structure as soon as possible

At present, we need to change the investment structure as quickly as possible to adapt to the general trend of changes in consumption demand. Firstly, investment in public projects has to be increased. In order to adapt to the basic trend of the overall rapidly growing demand for public goods in the period characterized with shortage of public goods, investment in public sectors such education, health care and social security should be markedly increased, which will produce positive results in many respects such as substantially advancing population urbanization, improving residents’ consumption propensity, effectively narrowing down urban-rural disparity and resolve many social conflicts. The second priority is to increase investment in the capacity of providing consumption goods and services, because, due to lagging readjustment of the industrial structure, much of the developmental consumption demand can hardly be satisfied. For example, in the next five years, the added value of China’s cultural industry may rise from 3% of GDP to 5% with the growing demand for cultural products. So investment in this sector is estimated to be rmb4 trillion. If investment in the cultural industry is increased, it will not only change potential cultural consumption demand into factual demand, but also make a breakthrough in service-led transformation and upgrading of the industrial structure.

 

3. Optimizing sources of investment

Under market economic conditions, sustainability of investment depends on whether private capital can take up the larger chunk of investment. Only when private capital takes the larger part of the total investment, can there be economic vitality. The current problem is that investment by the government and state-owned enterprises has been growing too fast while investment by private enterprises has been too small. Therefore, the precondition for stabilizing economic growth is to stabilize the confidence of private enterprises in investment. Though investment by private enterprises has started to grow, the difficulties in their entry into public sectors and monopolistic sectors have not yet substantially removed. In fact, the development of private sectors is confronted with not only barriers of the “policy glass door” but also the resistance of “interest glass door”. Without substantial breakthroughs in reform monopolistic sectors as soon as possible, it will remain very difficult for private enterprises to enter.

 

4. Changing state-owned capital allocation pattern. Investment transformation raises new requirements for allocation of state-owned capital. It should be recognized that state-owned economy deserves the credit of building up the total size of China’s economy. Nevertheless, if the situation of state-owned capita operating in too many competitive sectors is not to be changed, it would be very difficult to stimulate the vitality of private capital. My view is that allocating state-owned capital mainly to sectors of universal public interest so as to create enough space for the investment by private capital is an objective requirement to adapt to changes in and upgrading of the structure of aggregate demand of the society after China’s entry into an era characterized with shortage of public goods. It is also an important measure to prevent capital outflow and to shore up the confidence of private capital in investment. For this purpose, allocation of state-owned capital should regain its nature of public welfare. State-owned capital should gradually exit from general competitive sectors and then should be allocated to sectors concerning universal public welfare, to strategic emerging industries that will determine medium and long term growth of the national economy such as energy, resources and high-tech industries in order to bring the role of state-owned capital into full play in strategic readjustment of the economic structure. For part of the state-owned that has to be retained in other competitive sectors, the rent and dividend paid to the state revenue must be raised. This part of the state revenue should be mainly invested in social development and sectors of universal public welfare in order to create favorable conditions for population urbanization.

 

The next 10 years will be a crucial period of historic significance for China’s transformation and development. Marching along a road of equitable and sustainable development is the strategic goal of the second round of transition and reform in China’s modernization drive. To take advantage of the opportunities offered by urbanization requires consensus on transformation in general and on reforms in particular. First, we must stick to consumption-led transformation and regard population urbanization to release of the consumption demand of the 1.3 billion people as the most important economic and structural readjustment. Second, we must stick to the principle of enriching the people first so as to enable urbanization to expand the middle income group and form a social structure with the middle income group as the mainstay. Third, we must stick to green growth and promotion of green urbanization. Fourthly, we must stick to market orientation and promoting urbanization by mobilizing private capital. And fifthly, we must speed up government transformation with public service as the focus so that the government will effectively play its public roles. 

 

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Note: This is Prof. Chi Fulin's key-note speech at the opening ceremoney of the 2012 Economic Policy Dialogue among Think Tanks of the Emergign Economies, held on 3-4 November 2012 in Haikou.

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