Impacts of Internal Migration on Urban Development in China

The massive population flow from rural to urban areas in post-reform China is the result of both institutional and structural changes caused by economic growth. In the planned economy, China had implemented a household registration system (hukou system), which is not a simple registration management, but a man-made institutional design to strictly control population migration and labor mobility both between rural and urban areas and across regions. The issuing of Regulations on Household Registration of People’s Republic of China in 1958 marked the beginning of the formal establishment of hukou system. Public security bureaus controlled place-to-place migration and it was almost impossible to make any rural-urban migration without authoritative plans or official agreement. Departments of labor and personnel administration controlled sectoral transfer of labor force. There was no free labor market at all.
Sustainable urbanisation in China

The design of hukou system was totally aimed to serve the priority strategy of heavy industrial development and speed up industrialization. In order to accomplish the original accumulation of capital, this system kept rural labor forces staying at agricultural sectors and limited the number of people enjoying low priced food, guaranteed non-agricultural employment and urban social welfares, including basic social security, subsidized public services (education, health care, transportation, and so on), and subsidized housing in urban areas.

Since the market-oriented reform, the control of labor mobility has been gradually relaxed. The introduction of Household Responsibility System (HRS) in early 1980s allowed farmers to claim their revenues based on their efforts, thus solving the long-standing incentive problems associated with the egalitarian compensation rules inherent in the commune system (Meng, 2000). At the same time, the price system of agricultural products was altered, which stimulated the increase in agricultural productivity, thus releasing surplus laborers from agriculture. The higher returns to labor in non-agricultural sectors motivated farmers to migrate out of agriculture (Cook, 1999), producing an increasing pressure to reform the hukou system. As the result of labor mobility from agricultural to non-agricultural sectors and from rural to urban areas, labor markets began to develop.
The gradual abolition of institutional obstacles has been the key to increase labor mobility since 1980s. In 1983, observing the diminishing capacity for absorbing surplus labor in rural sectors, the government began allowing farmers to engage in long distance transport and marketing of their products beyond local market places, the first time that Chinese farmers obtained the legal rights of doing business outside their hometowns. In 1984, regulations were further relaxed and farmers were encouraged by the state to work in nearby small towns where emerging TVEs demanded for labor. A major policy reform took place in 1988, when the central government allowed farmers to work in enterprises and/or run their own business in cities provided that they were self-sufficient in staple foods.

In the earlier 1990s, the central and local governments have adopted various measures to encourage labor mobility between rural and urban areas and among regions, gradually relaxing the hukou system. For example, cities of various scales have issued blue-stamp hukou identities to those who migrated to the cities and paid for certain amount of money (or invested in local business or bought expensive house in the cities). Despite the reluctance to implement these new regulations in some of larger cities, the central government did legitimize the hukou system reform as part of the marketization efforts. But this reform was retrenched in the late 1990s. A few of cities like Beijing, Shanghai and Wuhan had enacted employment protection policies and set up hundreds of industries and positions for laid-off and unemployed urban workers, in which rural migrants were not allowed to be hired. However, a new-round economic growth and export expansion has created more job opportunities, and even caused a local shortage of rural migrants in coastal areas since 2003 (Wang, et al., 2005), providing a loose employment environment for cities to further deepen the hukou system reform.

The gradual reform of the hukou system can be characterized as a bottom-up process since the beginning of the 21th century - that is, relaxation of hukou control started from small towns and gradually extended to medium-sized and big cities. The hukou reform in over 20 thousand small towns is characterized as “minimum conditions and complete opening-up”. After years of experiments in some regions, in 2001, the Ministry of Public Security initiated actions to reform hukou system in small towns. In most small towns the minimum requirement for obtaining local hukou is that the applicants have a stable source of income and a fixed place of residence in the locality. This is considered as a great and significant step in the hukou reform ever since the system was put into place in 1958. The hukou relaxation in some medium (even some large and provincial capital) sized cities is characterized as “abolishing quota and conditional entry”. Criteria for settling in those cities with hukou status have been substantially lowered. The easiest requirement in Shijiazhuang, the capital city of Hebei province, is to have a work contract with a term of more than two years. Cities implementing the reform include both those in coastal and inland regions. This approach to reforming hukou system meets the needs of maturing labour markets and conforms to the strategy of gradualism.
The hukou relaxation in mega cities like Beijing and Shanghai is characterized as “ raising the bar and opening the gate”. Those cities have turned on green lights for intellectuals and professionals, whereas imposing stricter conditions for ordinary migrant workers to come. In short, raising the bar means narrowing the door by imposing stricter standards. Comparatively, the hukou reform in those cities has not made much progress.
From the above three patterns of the hukou system reform, it is evident that cities and towns forcibly promote the reform because of the following two reasons: one is that urban hukou identity now is of little value. Governments promise neither job opportunities nor welfare that can be obtained by hukou. Consequently, the increase in urban population will not aggravate the financial burden on the governments. The other is that local economies have experienced or longed for benefits of reallocating resources by labor force inflow. But as to metropolises that haven’t achieved substantial progress in reform, that is not the case. Their hukou status is still valuable. Governments are obliged to ensure the residents benefits of re-employment services, all-around medical care provision, nice urban environment, and even lower grade for entrance to universities, and so on. Though being aware of the advantage of resource allocation by labor force inflow, they give priority to low unemployment rate and maintaining social stability. Therefore they are not motivated enough to push ahead with the reform.
As indicated by Figure 1, the desire and efforts are affected by the expected net marginal benefit (marginal revenue minus marginal cost, abbreviated as MR and MC) obtained by governments from reforming their hukou system. The comparison of marginal cost and revenue determines what kind of measures to be launched and how much effort to be made to carry them out. Usually with the further enforcement of reform measures and the strengthening of efforts, the marginal cost of reform tends to rise (e.g., increasing opposition from the vested interests), while the marginal revenue tends to go down (people benefited from the reform withdraw their support as their benefit decreases). Finally, efforts stop at the point where the marginal cost and revenue curves intersect (Point E0, Figure 1). In view of the time sequence of the reform and the comparison of different areas, the more developed the market is, the more is the marginal revenue, and the less is the marginal cost. As Figure 1 shows, with the marginal revenue line going up and the marginal cost line going down, the equilibrium points of efforts to reform vary among different backgrounds of market development. The more developed market needs and is able to endure further reform, as indicated by Point E1.
The primary motivation for urban development should be the cost reduction from the economy of scale. But the planned and market economies engender two distinct development models. Cities with the market economic system develop by self-financing. They can reduce the transaction costs by agglomeration, and their expansion lies in efficient investment. On the contrary, those inclined to the planned economy tend to develop by redistribution. Therefore, it is observable that cities at different stages of market development have different motivations and intentions, and different means of reform, and hence different results. Naturally, those with redistribution privileges tend to resist the reform and restrict migration, while cities that increasingly rely on self-financing as the market grows prefer labor force flow.
Spatial Pattern of Migration
Since 1990, income disparities and development gaps between eastern, central and western regions have widened. As a result, in 2004, Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian and Guangdong accounted for 82.7 percent of total exports value of China and 45.2 percent of total jobs in manufacturing. At the same time, factors markets became more important forces in allocating capital and labor. The booming coastal regions have created more job opportunities and attracted massive flows of labor. Benefiting from early openness of their economies, the coastal provinces have taken the lead in the development of factors markets, which eliminates the institutional obstacles preventing factors of production from moving across regions, and have become major destinations of labor flows. Labor inflows in turn provide an important source of economic growth in these regions and improve their efficiency of labor allocation (Cai et al., 2002). By summarizing data from the 1987 and 1995 population sample surveys, and the 1990 and 2000 national censuses, Table 2 shows the changes in spatial patterns of migration. The share of intra-provincial migration has been higher than that of inter-provincial migration. When we consider the inter-provincial migration, it is more obvious that the eastern region is the prime destination for migrants.
From Table 2, we can see that in 2000, 64.4 percent of the inter-provincial migration in the eastern region happened within this region, while 84.3 percent of inter-provincial migrants from the central region and 68.3 percent from the western region moved to the eastern region. In terms of the time trend, the share of inter-provincial migration within the eastern region increased by nearly 15 percent, and the share of migration from central and western to eastern regions increased by nearly 24 percent.
Migration as a Driving Force of Urbanization
Population migration is an important contributing factor in the structural transformation and urbanization in the process of economic development. Prior to the reform and opening-up, however, the pace of urbanization in China was stagnant and even dropped during the 10-year Cultural Revolution (Figure 4). The relative decline of urban share in the total population can be attributed to the following two factors: one is that the enforcement of hukou system placed tight restrictions on rural-urban migration. The other is that the natural growth rate of rural population was much higher than that of urban population. Since the reform and opening up, China has dramatically picked its pace of urbanization.
From 1978 to 2004, the urban share in total population increased from 17.9 percent to 41.8 percent, with an average annual growth rate of 0.92 percentage points. During the same time period, the average growth rate of urban population stood at 4.4 percent, significantly higher than the natural growth rate of population in China, which dropped from 1.2 to 0.59 percent.
Generally speaking, urban population growth comes from three channels: natural growth of urban residents, rural-urban migration and spatial jurisdiction change. According to an empirical study conducted by Todaro (1984) on 29 developing countries, migration and spatial jurisdiction change account for 41.4 percent of urban population growth from 1960 to 1979. Assuming the growth of urban population comes from the growth of urban residents and rural-urban net migration, we can calculate the contribution of migration to urban growth in China. We use the number of urban population in 1977 as the baseline and decompose the annual increase of urban population into growth of urban residents and net migration based on the information of natural growth rates of urban population from 1978 to 1999, natural growth rates of total population from 2000 to 20041 and annual number of urban population. Figure 5 shows that rural-urban net migration accounted for nearly 70 percent of urban growth in 1980s and went up to more than 80 percent of urban growth since 1990s, indicating that migration is becoming the most important force of Chinese urbanization.
The acceleration of China’s urbanization since reform is virtually a remedy for the long time lagged development and structural deviation. Under the planned economy, the formation of cities in China emerged with a different path than those in market economy. Cities were designed as economic zones to serve the specific purpose of satisfying the priority strategy of heavy industrial development. Although economic reform dismantled the traditional planning system, dual economy and urban-biased policies persists, which hinders the simultaneous development of urbanization through industrialization. The man-made institutional segregation between rural and urban areas deprives rural migration of the choice of permanently settling down in urban areas, and leads to the unique characteristics of under-urbanization development in China. Au and Henderson (2002) adopted a production function method to model and estimate urban agglomeration economies and the optimal city size for 206 cities in China. They found that the constraints of hukou system on labor mobility have also resulted in sub-optimal size and under-agglomeration in Chinese cities, leading to significant economic welfare losses. The that incre sing a city at 50 percent below optimal size to its efficient size will raise output per worker by a simi majority of Chinese cities are potentially undersized-below the lower bound on the 95 percent confidence interval of the size where their output per workers peaks. Estimates show about 40 percent, indicating that the net benefits of clustering and agglomeration are considerable (World Bank, 2005). The findings from the structuralist approach proposed by Chenery and Syrquin (1975) reached the similar conclusion. Based on the 2002 World Bank data of 71 countries with a population of over 50 million, Figure 6 illustrates the deviation of China’s urbanization level from the predictive trends by two methods. The Chenery-Syrquin structuralist method (1975) regresses the share of urban population on the value of logarithm per capita GDP (PPP) and its squares and produces a linear trend of prediction. The non-parametric mean adjusted smooth method shows a S-shaped curve relationship between urbanization and the changes in income level. Both methods illustrate a similar dramatic change in the spatial distribution of population with the growth of per capita income. According to the prediction, urbanization in China is way off the general trend and is at the stage of acceleration.
Apart from raising urbanization level, migration also affects the structure of urban population. On one hand, migration brings about demographical structural changes in age, gender and education level and so on. On the other hand, migration reduces urban population dependency ratio. Those impacts produce accumulative effects and agglomeration for the development of urban economy.
Migration is selective. A number of studies show that rural migrant workers are primarily youths, with an average education level higher than those who choose not to migrate. Because of the restrictions of hukou system, few migrants move along with their families. Such selectivity of migration strongly affects urban population age structure. As shown in Figure 7, in late 1980s when small amount of rural migrants began to flow into urban areas, they had little impacts on the age structure of urban population in 1990. With the fast growing amount of rural-urban migration in 1990s, however, the impacts of migration on urban population age structure become very significant. In Figure 7, the age structure pyramid illustrates the age distributions of urban local residents on the left and migrants on the right, respectively. In 2000, migrants reduce urban dependency ratio by 2.5 percentage points and aging population ratio by 0.8 percentage points through filling up the gap of age groups between 13 and 33.

by Shashikant Nishant Sharma