> topics > Economics

Not time to put brakes on urban growth just yet

By Sun Jiuwen, Zhang Chaolei, Yan Haosheng | 2016-03-24 | Hits:
(Chinese Social Sciences Today)

Megalopolises, such as Beijing, pictured above, are expanding at a dazzling pace, which can be seen in the development of an extensive, ever-growing transportation network.

Judging from the general trend in economies around the world, one can see that when national income is on the rise, labor tends to flow out of the agricultural sector, which has a low employment rate and output, and into urban manufacturing, where employment rates and output are higher.

During three decades of rapid economic growth, China’s labor market has undergone structural transformation. The surplus of labor in rural areas leads many to seek employment in cities, accelerating the process of urbanization. In 2000, the rate of urbanization in China was a little more than 36 percent. By 2010, that figure had surged to nearly 50 percent, according to the sixth census. Using the S-shaped urbanization curve proposed by Ray Northam in his influential 1975 book Urban Geography, China has definitively reached the crucial middle stage of urbanization, which is marked by explosive growth.


Government policies
Cities develop according to different patterns, which explains the formation of a hierarchical structure differentiated by size. In the past few years, citizens of the larger cities in the eastern provinces have experienced the negative effects of urbanization, which have hindered further growth.


Government policies on urbanization were implemented in three stages. In the early 1980s, the government restricted the scale of large cities, judiciously guided the growth of mid-sized cities and enthusiastically promoted the development of small ones. The Urban Planning Act issued in 1990 placed rigid constraints on the scale of large cities while encouraging the upgrading of small and medium-sized ones.

In 2013, the Third Plenary Session of the 18th Communist Party of China Central Committee proposed the concept of human-centered urbanization and comprehensively defined the process. They put forth guidelines for orchestrating the coordinated development of cities and towns as well as building and perfecting a trans-regional mechanism to boost urban growth. The central government also adjusted household registration policies to keep populations of large cities in check. All constraints regarding household registration in towns and small cities were removed while a plan was put into place to incrementally remove these restrictions in medium-size cities.


Divergent views
Academia has been divided concerning shifts in urban development policies. To a certain extent, cities evolved by agglomerating. The scale of a city is determined by the tradeoff between the pros and cons of agglomeration. Bearing this in mind, it is crucial to ask: Are Chines cities oversized or undersized? Scholars who claim there is excessive urbanization argue that large cities have absorbed an outsized share of factor endowment—social capital in particular—thus undermining the agglomerating potential of small and medium-sized cities nearby and even precipitating their decline.

However, by applying the rank-size distribution model to assess the sizes of Chinese cities, many scholars have found that a handful of megalopolises and first-tier cities are underdeveloped, while there are too many small and medium-sized cities. They contend that governments should continue to fuel the growth of large cities because limited urbanization has increasingly compromised China’s economic prospects.


City size
Urban scale is a crucial subject in urban economics. Scholars in the field of urban geography tend to focus on three questions. The first is how to determine the optimum scale of a city. In 1964, Argentinian-American economist and planner William Alonso (1933-99) proposed a growth model for monocentric cities that explained how urban spatial structure would influence population size. In 1971, he came up with a cost effectiveness theory suggesting that the optimum scale of a city is determined by the intersection of marginal cost and marginal revenue curves.The theory has been extensively applied.
However, debate persists about how to properly gauge the costs and benefits of urban development. Scholars have experimented with incorporating quadratic terms into the econometric model to resolve the problem.

The second question is how to figure out the size distribution of cities. The most important discovery was the rank-size rule postulated by the German physicist Felix Auerbach (1856-1933). In 2005, Gordon Anderson and Ge Ying found that Chinese cities follow a lognormal distribution rather than a Pareto distribution. In 2009, Zhang Yingwu, however, proposed that the size distribution of Chinese cities generally complies with the Pareto law but does not adhere to the ideal state of the rank-size rule. The relationships between city size and other factors have also attracted a great deal of scholarly attention. Anderson and Ge confirmed that the “Reform and Opening-up” and the birth-control policies have transformed the size distribution of Chinese cities.

Prior to the implementation of reform, population growth in Chinese cities was stagnant. Afterward, a pattern of convergent growth unfolded. Using Chinese data, Au Chun-chung and Vernon Henderson detected a U-shaped correlation pattern between city size and per capita output in 2006. They conclude that, if fixed industry composition were assumed, human migration from small cities to large cities would improve productivity gains. The implication was that restrictions on domestic migration would result in huge economic losses. In 2012, Xi Qiangmin identified a positive correlation between the size of a city and its overall efficiency, suggesting an inverted U-shaped correlation between the size of a city and its scale.

In other words, megalopolises generally have low scale efficiency, while medium-to-large-sized cities fare better in this regard. Using actual wage rates as a measure, Chen Xu and Tao Xiaoma constructed a model to figure out the optimum scale of cities in 2013. Their findings confirmed the inverted U-shaped correlation pattern between the size of a city and its scale.


The problem with the extant studies is that they generally assume the homogeneity of the urban population and are shortsighted  when it comes to evaluating the significance of demographic transition.
Some scholars are focused on exploring heterogeneity in the urban context. In 2010, Edward Glaeser and Matt Resseger discovered that smart cities are powerful agglomerators and tend to be large in size. For one thing, talented individuals in cities are more capable of learning from each other. Also,technology transformation occurs at a dazzling speed. Furthermore, scholars explored the making of smart cities. In 2012, Pierre-Philipp Combes found that in France, workers dwelling in areas characterized by high employment rates are more skilled than those living in areas of low employment rates. The competency disparity among regions is mainly due to the differences of occupational groups living there. Cross-regional migration is only partially relevant. It means that talented individuals play a crucial role in determining city size.

In 2010, Kristian Behrens and Gilles Duranton constructed an equilibrium framework to clarify the role of heterogeneity in shaping spatial classification within the hierarchical structure of cities. Their model lends itself to further studies on the interrelations between the possibility and ramifications of urban expansion and sorting, choice, and agglomeration economies of heterogeneous individuals and groups.


Chinese reality
In Chinese cities, the average cost elasticity exceeds convergent revenue elasticity. It means that cities are not supposed to stride toward infinite expansion. Judging from the variance of city sizes, the balance scale exceeds the optimum scale by a narrow margin, which, however, translates into massive economic losses suffered by urban citizens.


As for regional disparities, the eastern provinces are characterized by the higher cost elasticity and convergent revenue elasticity, relative to the western provinces. Speaking of differences of scales, the balance scale of cities in the western provinces far surpasses their optimal scale. Yet, it does not lead to local economic demise. The converse is true for eastern regions.

Theoretically, Chinese cities are supposed to downsize to an optimal scalethat guarantees the highest economic efficiency. Yet, this is unlikely to happen in reality. Considering that agglomeration economies may bring in marginal social benefit, Chinese cities are expected to continue growing. At the current stage, urban growth can be expected to bring economic dividends, not losses. In this light, governments should promote coordinated growth among large, medium-sized and small cities.


Sun Jiuwen is an economics professor at the School of Economics at the Renmin University of China. Zhang Chaolei and Yan Haosheng are postgraduate students at the Renmin University of China.