Urbanisation and economic growth have been linked since the founding of the People’s Republic in 1949. For the first 30 years under Communist Party rule, China saw little of either. In 1960, 20% of China’s population lived in cities; two decades later, in 1980, 19% did. Then as central planning and stagnation gave way to reform and growth, China urbanised at a spectacular pace. According to official figures, the country’s urban population expanded from 191 million in 1980 to 793 million in 2016, boosting the urbanisation rate to 57%.
The narrative arc of reform-era China suggests a strong connection between urbanisation and economic growth. But the extent to which urbanisation has caused economic growth, or vice versa, is far from obvious. Correlation does not establish causation.
Rather, urbanisation and economic growth can both be thought of as by-products of labour migration from the largely rural agricultural sector to the largely urban industrial and service sectors. Moving workers from farms to factories and storefronts boosts productivity, expands economic output, and urbanises the population. Spatial, from rural to urban, and sectoral, from agriculture to industry and services, labour reallocations go hand in hand.
This process tends to lose steam as a country climbs the income ladder. Low-income countries, with enormous agricultural workforces, can reap enormous productivity gains by transferring labour from farms to cities. Middle-income countries, with smaller slices of their workforce engaged in farming, cannot. Consequently, labour migration and urbanisation both tend to slow as incomes rise.
China appears close to exhausting the seemingly limitless pool of “surplus” rural labour that fuelled rapid urbanisation and productivity gains in the reform era. The Chinese economy is far less dependent on agriculture than it was when the urbanisation process kicked off in earnest. As of 2016, agriculture accounted for less than 9% of China’s GDP, fairly typical of a middle-income country. Following massive migration from rural to urban areas over the past several decades, a much smaller share of China’s workforce is engaged in farming—probably about 20% based on academic studies that adjust for the overcounting of agricultural employment in official statistics.
Data on migrant labour also suggest China’s rural labour surplus is drying up. Labour migration has slowed meaningfully in recent years to 4.2 million in 2016 from an average of 10.9 million in 2010-12. The aging of the migrant workforce points to a similar conclusion. The population of migrant workers under 30 years old has been declining since 2008, slipping from 104 million to 92 million. In this case, the data would seem to support anecdotal evidence of a barbell age distribution in China’s rural villages: children and older adults with no younger adults in between.
The tendency for urbanisation to decelerate among middle-income countries like China is also evident in the global relationship between income and urbanisation. The link between urbanisation and income is not linear. A country that doubles its GDP per capita from $2,500 to $5,000 is likely to see a 31% increase in its urban population. Doubling incomes again to $10,000 is accompanied by 24% growth in the urban population. The next doubling generates a 19% increase in urbanites and the next, a 16% increase. Over the past 30 years, China traversed the steeper portion of the income-urbanisation curve as it moved from low-income to middle-income status. Going forward, the country will move along the flatter portion.
Although the process of moving farmers to factory floors and storefronts is far from over, it is likely to slow over the next 10 years. Accordingly, we expect China will continue to urbanise, but at a decelerating pace. We project urban population growth of about 100 million over the next 10 years, a huge figure, but considerably less than the 209 million expansion of the past 10 years.
While fewer migrants will move to cities, the quality of life for those who do is likely to improve. Reforms of the household registration, or hukou, system will see more of China’s estimated 245 million unregistered migrants gain access to publicly funded healthcare, education, and pensions and increasingly spend like full-fledged urbanites.
But hukou reform is likely to be slow and uneven. Extending full and immediate rights to all migrant workers and their families would be unpopular with many registered urban residents. Public schools and hospitals would be unprepared to accommodate a massive increase in system usage. Local governments balk at the cost, estimated at between 1.2% and 4.5% of GDP per year. There are also fears that full liberalisation might trigger a flood of migration to urban areas, disrupting social stability while exacerbating any service capacity and cost problems.
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