How urbanization can help the poor

Over the past three decades and a half, China's urban population has risen from less than one-fifth of the total to more than half, which means about 500 million people have been added to the urban population. By 2030, up to 70 percent of China's population is likely to live in cities - that is, one in every six urbanites in the world will live in China.

How China urbanizes, therefore, is important not only to China, but also the rest of the world. It is also critical for China's poor. The overwhelming majority of China's 100 million officially poor and the 275 million Chinese that spend less than $2 a day live in rural areas. But the key to getting them out of poverty lies in China's cities.

China's urbanization has supported the country's impressive growth and rapid economic transformation. Chinese cities provided cheap land, abundant labor and local governments eager to attract investment and create jobs. As a result, hundreds of millions left farm work to seek more higher paying jobs in cities - and 500 million people were lifted out of poverty in the process. Poverty in China is overwhelmingly a rural phenomenon - less than 3 percent of the urban population lives in poverty.

But now China's investment- and export-driven growth model is showing signs of running out of steam. Its land-hungry urbanization has led to urban sprawls and congestion; it also is a growing source of unrest among farmers who feel under-compensated for the loss of their land. Land also played a big role as collateral to local government debt, which has risen rapidly in the past decade and now adds up to some 30 percent of GDP, 10 percentage points higher than the US.

China's income and wealth inequality has been on the rise as well, with growing urban-rural income inequality being a major factor driving inequality. Within cities, inequality between people with urban household registration (hukou) and migrants with rural hukou is stark, too. Although migrants' wages have increased recently, their inability to fully access public services creates a divide, risks the future of their children and is becoming a deterrent for migration.

Environmental pressures in cities are rising too. Urbanization has exposed many more people to pollution, and thus the costs in human lives and economic loss are on the rise.

The Chinese authorities are well aware of these issues and have announced plans for a new model of urbanization, "people-oriented" urbanization. The World Bank and the Development Research Center of China's State Council (the country's cabinet) have just issued a joint report on how such a new model - more efficient, inclusive and environmentally sustainable urbanization - can become reality. If implemented, China's next phase of urbanization can make a big difference to its urban and rural poor.

Central to the agenda is better land policies. Land has a special status in China. According to the Constitution, urban land is owned by the State and rural land by collectives. Reforms over the past three decades have already created land-use rights for individuals and enterprises, but rural land rights reforms have lagged behind that of urban rights. Stronger property rights on land for farmers and stricter limits on local governments to requisition land for urban growth would lead to more compact, efficient cities that require less energy to run. Better-defined property rights on farmland will help in consolidating that land and facilitate better farming techniques.

Land reforms can also improve the distribution of income and wealth, because rural land prices are likely to rise with stronger property rights. One estimate is that the total compensation that farmers received on their land in the past 20 years was about 2 trillion yuan ($321.34 billion) below market value, or 4 percent of China's GDP in 2013. If this money had made a return equal to China's growth rate, it would now add up to 5 trillion yuan, or almost 10 percent of GDP.