BEIJING – Measured by the percentage of people living in its cities, China’s urbanization rate currently stands at about 48%, according to official statistics. Given that the share of city dwellers was only 18% just 30 years ago, this is remarkable progress.

But it is still unsatisfactory, because most other countries at a similar stage of development experienced faster urbanization than industrialization.

China’s urbanization has lagged behind its industrialization, which now is around 70% when measured by the percentage of the labor force whose income is derived mainly from non-farm activities.

Another striking difference between China and some other developing countries is that Chinese cities, large and small, lack any sign of significant urban poverty or slums.

People often attribute this to China’s hukou, or household registration system, which separates the urban privileged and the rural poor from the start of their lives. But, although the hukou system may prevent rural people from enjoying some urban benefits and public services, such as public education, health care, or employment insurance, it has never kept rural laborers from moving into cities.

Indeed, China’s government has actually been encouraging rural laborers to move to cities to find better jobs. That is why more than 40% of China’s labor force, some 300 million people, has shifted over the past 30 years from agriculture to industrial and service sectors, which are now increasingly concentrated in cities.

As a result, migrant workers with a rural hukou now outnumber workers who hold an urban hukou on average in Chinese cities.

So if it is not the hukou system that has prevented the growth of slums in China, what has? I believe that the most important institution in preventing dire urban poverty is a unique land system for China’s rural areas.

China’s entire reform process started with the adoption of the so-called "rural household contract system,” which leases productive land to farm households. This meant that collective production was dissolved early in the reform process and private farming prevailed.

Though farm "collectives” have remained the owners of rural land, households may obtain all "residuals” of their production, which creates the necessary incentive to use land productively. They may even transfer the lease to other farm households if their members find better jobs in the cities.

Households can keep this entitlement for the term of the lease (now 30 years), but they do not have a property right in the land itself.

If rural workers have financial difficulties, which in other countries often lead to land sales, they can work harder to find other jobs or seek government help.

But land can never be sold or mortgaged, and its use cannot be changed from farming to other commercial purposes without government permission.

This peculiar arrangement has generated an important result: if migrant workers lose their urban jobs, they retain some income from their land lease and can return to their village and reclaim the land (normally within one year).

The small piece of land allocated under the rural household contract system may not make farmers rich, but it serves as a social safety net of last resort.

This goes a long way toward explaining why China’s urbanization has lagged: the system of land tenure – which seems impossible to replicate in other developing countries – ensures that the reservoir of labor for industrialization and urbanization remains located in country villages, rather than in city slums.

Although this arrangement provides a smoother path to urbanization, it is a transitional, not a permanent one.

Migrant workers still feel unable truly to integrate into cities, because their social safety net remains anchored to their rural origins. Indeed, the segregation caused by the land system has enlarged rather than narrowed social disparities.

Given these circumstances, and that Chinese are highly mobile, the country’s urbanization is far from stable. To achieve "permanent urbanization,” China must develop a new safety net.

Announcing the abolition of the hukou system might be easy, but it would mean little without institutions that can cushion the risks faced by rural migrant workers in China’s cities.

Making public services like education and the formal social safety net available to rural immigrants, even at a lower level due to limited public resources, is the key to success here.

When that is achieved, rural immigrants will eagerly settle as permanent urban residents, and Chinese society will become more equal in terms of access to public services.

China’s new five-year plan for economic and social development, to be implemented starting in 2011, may address the issue in a meaningful way, by aiming for the establishment of a national, universal, and portable social-security system.

The plan may also require city governments to increase the provision of public goods – including education, health care, and a minimum level of income protection – to non-hukou regular residents.

Some experiments in this regard have already taken place in cities such as Chongqing and Chengdu.

Urbanization in China may take generations to complete. But, after long debate and hesitation, it is clear that policymakers seem ready to move into the next phase of urbanization by adopting new approaches.

The main challenge is not infrastructure and urban facilities, however important they are. Rather the key to success will be to make rural immigrants to Chinese cities equal citizens in terms of opportunities and public services.

That may not be achievable overnight. But, step-by-step, it can and must be done.

Fan Gang is Professor of Economics at Beijing University and the Chinese Academy of Social Sciences, Director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a former member of the Monetary Policy Committee of the People’s Bank of China.

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