What China can teach Europe in economics

FROM the outside, China often appears to be a highly centralised monolith.

Unlike Europe’s cities, which have been able to preserve a certain identity and cultural distinctiveness despite the homogenising forces of globalisation, most Chinese cities suffer from a drab uniformity.

But China is more like Europe than it seems. Indeed, when it comes to economics, China is more a thin political union composed of semiautonomous cities – some with as many inhabitants as a European country – than an all-powerful centralised government that uniformly imposes its will on the whole country.

And competition among these huge cities is an important reason for China’s economic dynamism. The similar look of China’s mega cities masks a rivalry as fierce as that among European countries.

China’s urban economic boom began in the late 1970s as an experiment with market reforms in China’s coastal cities.

Shenzhen, the first “special economic zone,” has grown from a small fishing village in 1979 into a booming metropolis of 10 million today. Many other cities, from Guangzhou to Tianjin, soon followed the path of market reforms.

Today, cities vie ruthlessly for competitive advantage using tax breaks and other incentives that draw foreign and domestic investors. Smaller cities specialise in particular products, while larger ones flaunt their educational capacity and cultural appeal. It has led to the most rapid urban “economic miracle” in history.

But the “miracle” has had an undesirable side effect: It led to a huge gap between rich and poor, primarily between urban and rural areas. The vast rural population – 54% of China’s 1.3 billion people – is equivalent to the whole population of Europe.

More competition

And most are stuck in destitute conditions. The main reason is the hukou (household registration) system that limits migration into cities, as well as other policies that have long favoured urban over rural development.

More competition among cities is essential to eliminate the income gap. Over the past decade the central government has given leeway to different cities to experiment with alternative methods of addressing the urban-rural wealth gap.

The most widely discussed experiment is the “Chongqing model,” headed by Bo Xilai, a party secretary and rising political star.

Chongqing, an enormous municipality with a population of 33 million and a land area the size of Austria, is often called China’s biggest city. But in fact 23 million of its inhabitants are registered as farmers.

More than eight million farmers have already migrated to the municipality’s more urban areas to work, with a million per year expected to migrate there over the next decade. Chongqing has responded by embarking on a huge subsidised housing project, designed to eventually house 30% to 40% of the city’s population.

Chongqing has also improved the lot of farmers by loosening the hukou system.

Today, farmers can choose to register as “urban” and receive equal rights to education, health care and pensions after three years, on the condition that they give up the rural registration and the right to use a small plot of land.

While Chongqing’s model is the most influential, there is an alternative. Chengdu, Sichuan’s largest municipality, with a population of 14 million – half of them rural residents – is less heavy-handed.

It is the only city in China to enjoy high economic growth while also reducing the income gap between urban and rural residents over the past decade.

Chengdu has focused on improving the surrounding countryside, rather than encouraging large-scale migration to the city.

The government has shifted 30% of its resources to its rural areas and encouraged development zones that allow rural residents to earn higher salaries and to reap the educational, cultural and medical benefits of urban life.

I recently visited a development zone composed of small firms that export fiery Sichuan chili sauces. Most farmers rented their land and worked in the development zone, but those who wanted to stay on their plots were allowed to. So far, one-third of the area’s farmland has been converted into larger-scale agricultural operations that have increased efficiency.

Empowering the poor

More than 90% of the municipality’s rural residents are now covered by a medical plan, and the government has introduced a more comprehensive pension scheme.

Rural schools have been upgraded to the point that their facilities now surpass those in some of Chengdu’s urban schools, and teachers from rural areas are sent to the city for training.

Empowering rural residents by providing more job opportunities and better welfare raises their purchasing power, helping China boost domestic consumption.

And in 2012, Chengdu is likely to become the first big Chinese municipality to wipe out the legal distinction between its urban and rural residents, allowing rural people to move to the city if they choose.

Chengdu’s success has been driven by a comprehensive, long-term effort involving consultation and participation from the bottom up, as well as a clear property rights scheme.

By contrast, Chongqing has relied on state power and the dislocation of millions to achieve similar results. If Chengdu’s “gentle” model proves to be more effective at reducing the income gap, it can set a model for the rest of the country, just as Shenzhen set a model for market reforms.

There are fundamental differences, of course: Chengdu’s land is more fertile and its weather more temperate, compared with Chongqing’s harsh terrain and sweltering summers.

Life is slower in Chengdu; even the chili is milder. What succeeds in one place may fail elsewhere.

Ultimately, the central government will decide what works and what doesn’t. And that’s not a bad thing; it encourages local variation and internal competition.

European leaders ought to take note. Central authorities should have the power not just to punish “losers” as Europe has done in the case of Greece, but to reward “winners” that set a good example for the rest of the union.

The writer is a professor at Shanghai’s Jiaotong University and Beijing’s Tsinghua University, and co-author of The Spirit of Cities.