Prospects and the City

By JOHN ROSS

CHINAs economic policy makers iden- tify urbanization as key to unifying the countrys long- and short-term goals. And rightly so. Taking a long view， all advanced economies are urban； in the immediate short-term， city incomes in China are three times rural ones， reflecting the higher productivity of urban employment.

Urbanization allows China to immediately raise productivity and living standards. The China Development Research Foundation estimates the countrys urban population could increase from just over 50 percent at present to approximately 70 percent by 2020.

At the national level， however， not all the implications of continued urbanization have been properly analyzed.

This key interrelation between the financial and physical aspects of city development is something I am acquainted with. During my eight years in charge of Londons business policy， drawing up economic perspectives for city development was one of my chief responsibilities. As Senior Fellow at the Chongyang Institute for Financial Studies， Renmin University of China， discussions with Chinas urbanization experts have confirmed that the key principles of city development necessarily apply in both the initial stages of urbanization and during its subsequent development.

The fundamental principle of successful urban progress is that physical development must logically express and flow from the underlying economic， social and environmental dynamic. This applies to all stages of a citys development. With China aiming to create advanced cities， and as London boasts the highest productivity of any major urban center outside the U.S.， it was fascinating to discover in discussion with Chinese experts the universality of the “logical-flow” dynamic.

The first key issue in city planning is making correct estimates about the nature of future city economies. The future is not far away in China -the countrys next stage of urbanization will occur over the next 10-20 years.

Naturally there will be differences between cities. But this does not alter an essential reality： taking into account Chinas overall level of development， the industry-based city type will be dominant in the urbanization process. Lack of clarity on this point would necessarily lead to poor planning decisions.

An example is useful here. A citys transport system is simultaneously one of its most expensive pieces of infrastructure. It is a critical part of city budgets， and very important for residents. Severe traffic problems in cities such as Beijing create significant economic losses and lower the quality of urban life.

The transport requirements of industrial and service-based cities differ substantially. Industrial or factory-based development is generally best not located in city centers for both environmental and economic reasons – it produces emissions， and land prices are usually the highest in city centers. Transporting industrial products through city centers is impractical and undesirable. Because of these factors， significant parts of the transport system of an industrial city should be oriented towards its outskirts. The idea is to get large numbers of people to work away from the city center and transport goods out from city peripheries.

Service-based cities are different. International experience shows that huge benefits derive from clustering services such as finance and creative sectors in， or close to， city centers. Service-based cities transport systems must therefore be constructed to allow them to take huge numbers of workers to the city center. New York， with its super-dense Manhattan skyline， and London with its extreme concentration of financial services in the Square Mile and clusters of creative industries around it， are extreme examples of this.

Environmental choices are likewise linked to the type of city development that will occur in China.

U.S. and U.K. approaches to cities environmental problems are dictated by the movement toward deindustrialization， which involves a rapid shrinkage in the relative and even absolute size of industry. Pollutions heading down is par for the course.

China is different. Over the next 10-20 years， its economy will remain centered on industry， although a shift from medium to high technology production will take place. The key examples China needs to study are therefore cities in countries that combine advanced industrial production with successful environmental protection. Germany and Japan are the most advanced examples of this.

That Chinas urbanization will be dominated by industrial base cities is determined by the fundamentals of its economic development. In 2012， Chinas GDP per capita was slightly over US $6，000. The goal is to double the 2010 GDP per capita figure by 2020， taking China slightly above US $12，000 a year per capita GDP. According to World Bank definitions， China will then be on the threshold of possessing a “high income”economy.

Lets look at another example： South Korea. The country is still dominated by industry， and has not yet made the transition to a more advanced， service-based economy. South Koreas 2012 per capita GDP was slightly above US$23，000 – almost four times Chinas. Even at current growth rates it would take China 20 years to catch up with South Korea. It is a certainty， therefore， that Chinas next phase of urbanization will be based on the construction of industrial cities. Its just too early in Chinas development to undergo a widespread transition to service-based cities. Creating high quality industrial-based cities is the key issue in Chinas urbanization.

Finally， financing is also an issue in urbanization. City development requires gigantic investment. Hundreds of billions of dollars can be spent on housing， transport， the power supply， sewerage， information technology infrastructure， environmental protection and numerous other fields. In some circles in China there is an illusion that as the countrys economy develops and urbanization proceeds， the role played by the state in the economy will decrease in importance. Government spending will also go down， the argument goes. Strong evidence against this line of thinking is present in the chart， which shows percentage of GDP accounted for by state expenditure in the U.S.

All the factual evidence demonstrates that as an economy develops and urbanizes， the role of the state and the percentage of expenditure accounted for by the state will increase.

We can see in the chart that even in the U.S.， which is home to strains of “anti-statist” ideology， state expenditure has significantly increased with time and economic development. American civilian state expenditure， only 7.5 percent of GDP in 1952， had almost quadrupled as a percentage of GDP to 29.5 percent by the beginning of 2013. Even a president such as Reagan， who in rhetoric opposed state expenditure， increased the share of civilian state expenditure in GDP – from 23.5 percent to 25.0 percent. Highly developed cities， such as New York and London， are also the most highly taxed parts of the economy due to enormous infrastructure and other spending requirements. As China urbanizes and develops， the role played by the state and government expenditure will increase， not decrease.

Urbanization will dramatically transform the lives of Chinas citizens. But it will also transform the countrys economic and financial structure.