Urban construction reconsidered - China's cities : issues and solutions

)-3CUSSION PAPER Report No. UDD-101 URBAN CONSTRUCTION RECONSIDERED CHINA S CITIES: ISSUES AND SOLUTIONS, by Jun Ziang June 1986 Water Supply and Urban Development Department Operations Policy Staff The World Bank The views presented herein are those of tne author(s), and they should not be -Interpreted as reflecting those of the World Earn.  Acknowledgements The author is a Ph.D. student in the Department of Urban Studies and Planning, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139. This report was written as part of his summer internship in the Urban and Water Division of the East Asia and Pacific Region's Projects Department during June-September 1985. The author wishes to express his appreciation to all the people who helped him in writing this essay. Among them, Professor Karen R. Polenske generously cevoted her time to reading through the drafts of each stage. Her critiques, comments, and editing made a great difference in formulating the final verison of the essay. Discussions with Mr. Yok-shui F. Lee and Professor John Friedmann were extremely instructive, and many of their observations have been incorporated into the essay. The author also appreciates Ms. Joanna E. Siegel's efforts in editing the early drafts. Appreciation is also expressed to Mr. Benjamin Cu Kok, who was the essay's supervisor, and to Ms. Felicia Quarcoo, who helped in editing and producing this report. The author, however, remains solely responsible for all the shortcomings, errors, and mistakes in this essay. Jun Zhang March 1986 Cambridge, Massachusetts  ABSTRACT This essay examines issues related to China's urban construc ion and financing. It argues that urban construction in China could be improved 4through better pricing and management of urban services, which would depend on how successfully China conducts its economic structural reforms. China has been carrying out a new economic development program aimed at quadrupling her per capita GNP of 1980 by the end of this century. The nonagricultural labor required for this program may total 150-200 million, which is about the same size as China's current urban population. The present urban housing, civic infrastructure and facilites, however, are already strained and will have difficulty accommodating the newcomers. China's past deliberate bias in investment, focussing on building factories and ignoring urban housing and infrastructure, has been the most obvious cause for the present strained urban services. This essay argues that a more fundamental cause has been the extremely undesirable institutional behaviors of the economic actors due to a distorted price system, which resulted from a misrepresentation of the socialist welfare theory. The solution to the current problems does not lie, however, in immediately raising overall prices. For a period of time, wages and prices would have to be gradually adjusted hand-in-hand. Better urban construction in China will greatly depend on how successful China is in conducting the present economic structural reform.  CHINA URBAN CONSTRUCTION RECONSIDERED China's Cities: Issues and Solutions Table of Contents Page No. I. INTRODUCTION .................................................. 1 Contexts of Economic Development ..............................1 Importance of Cities in the Chinese Economy .................. 2 Terminologies Used itz the Essay ...............................4 Scope and Organization of the Essay .......................... 5 II. URBAN RESIDENTIAL HOUSING .................................... 6 Chinese Institution Providing Urban Housing ................. 6 Urban Housing Conditions ..................................... 9 Causes of the Housing Shortage ............................... 10 New Trends Easing the Housing Crisis .......................... 12 III. URBAN INFRASTRUCTURE AND URBAN SERVICES ............................ 15 Inadequate Urban Infrastructure .............................. 15 Deteriorating Urban Services ................................. 17 Causes of Inadequate Infrastructure and Urban Services 19 IV. URBAN FINANCING .............................................. 23 China's Plannirng System ...................................... 23 Urban Finance Patterns before the Economic Reform. ............ 25 Current Funding Trends ........................................ 29 V. PROBLEMS RECONSIDERED ...................................... .32 Prices and Socialist Welfare Policy ........................... 32 Institutional Behavior of Service Prodticers and Consumers 33 Lessons from the Chinese Experience ........................... 36 Intricacy of the Solutions .................................... 36 VI. AFTERWORD .....................................................39  Page No. APPENDICES Appendix 1 Chinese Urban Definitions ............................... 41 Appendix 2 China's Migration Policy and Evolution*.................. ...43 Appendix 3 Two Case Studies of Urban Financing ....................... 47 BIBLIOGRAPHY ........................ . ........... 49 TABLES Table 1.1: Projections of China's Urbanization in Year 200 0 ......... 3 Table 2.1: Housing Ownership in 200 Cities (1981) ...................7 Table 2.2: Housing Ownership in Shanghai (1981) .................... 8 Table 2.3: The State Investment Pattern: 1953-80 Productive, Nonproductive Sectors, and Housing ........ 11 Table 3.1: Capital Investment in Infrastructure .................... 20 Note: The Chinese currency is the renminbi (RMB), or Yuan (Y). There are 100 fen per Yuan. As of 1986, the exchange rate between the U. S. dollar and the Yuan is approximately US$1 = Y 3.2.  CHINA URBAN CONSTRUCTION RECONSIDERED China's Cities: Issues and Solutions I. INTRODUCTION Contexts of Economic Development 1.01 The Fifth People's Congress of the People's Republic of China held in 1980 approved the nation's economic development program for the remaining years of this century. According to this program, the country should strive for quadrupling the gross value of industry and agricultural output (GVIAO), while achieving comprehensive progress in all social and economic aspects including income, employment, education, science and technology, and social welfare.-L As a major component of this program, the country launched a nationwide economic structural reform. This reform has two dimensions of emphasis: internally, market principles in general were, for the first time in the People's Republic's history, separated from ideological debate, and have been progressively introduced to the planned economic sys-m. Externally, the country has begun to take a positive view toward participating in foreign trade and academic and technological exchanges, in receiving foreign loans, and in inviting foreign investm ent. These latter have been summarized as China's new "Open-Door" policy.2 1.02 More than five years have passed since 1980, and the results from the economic reforms and implementation of the economic development program have turned out to be much better than expected: the GVIAO has grown at an average 10.6% annually, higher than the required average rate of 7.6% to achieve thl,quadrupling target and the planned 4-5% of the4girst decade (1981-90).-/ About 51 million new jobs have been created.-/ The averge income of the state employees has increased by 25% in constant prices.- The nation's economic capacity and political stability in general have been significantly enhanced. Although the costs of the achievement do not seem to be low (such as the problems of corruption and depletions in reserves in 1/ Documents of the Fifth National People's Congress of the People's Republic of China. 1981. Beijing: Foreign Language Press. 2/ See, for example, Cannon, 1984, pp. 717-732; Interview with Cu Mu, 1984, pp. 16-18; Kawai, 1984, pp. 7-10. 3/ People's Daily (Overseas Edition), 10/21/85, p.l. 4/ Zhao, Ziyang, 1985, p. 4. 5/ People's Daily (Overseas Edition), 9/4/85, p.l.  -2- 198561), the recent Chinese economic achievements have been very impressive. If realized, the fulfillment of the Chinese modernization program by the end of this century would represent a significant improvement of living standards of more than a third of the total third world residents. Importance of Cities in the Chinese Economy 1.03 The cities in China are playing an important role in helping China realize its ec nomic development program. In 1980, the nation's 220 desig- nated cities 7 generated 75.4,` of the gross value of industrial output, and 68.2% 2f the total state employment, and 82.6% of the nation's profits and taxes.- The popula;ion in these cities, however, was only about the 10% of the national total.2e9 1.04 The importance of the cities, however, extends far beyond these figures. The cities have been and would continue to be the economic and social centers of regions and of the nation. They are expected to be, as in the past, the most important generators of capital. Most of the national manufacturing industries are urban-based, and the technology and equipment required for the modernization program are expected to be principally provided by the cities. Some key cities, such as Shanghai, Beijing, Guangzhou, and Wuhan, actually represent the level of modernization of the surrounding regions and the country. 1.05 It has been estimated that the economic development program will require another 120 million of nonagricultural labor input.10/ The majority of the employment will likely be created in the cities. Corresponding to the labor requirement, the urbanization rate Ll/ in China may be raised from 20% in 1980 to 30 to 35% in year 2000. Therefore, there may be a net increase of 150-200 million in urban population. These estimates are summarized in Table 1.1. To grasp the magnitude of these figures, it may be useful to 6/ See, for example, Delfs, 1985, pp. 68-69. 7/ See Appendix 1. 8/ Chen, 1984, p. 43. 9/ The State Statistical Bureau, 1985, p. 97. 10/ The World Bank, 1985a, pp. 36-40. 11/ See para. 1.10.  -3- consider that the combined populations of BrItain France and Federal Republic of Germany in 1982 were just about 170 million. 27 Table 1.1: PROJECTIONS OF CHINA'S URBANIZATION IN YEAR 2000 1961 ----------------2000----------------- Quadruple Moderate Balance Percentage (%) Agriculture 70 59 61 52 Non-agriculture 30 41 39 48 Of which: Service 10 14 13 25 Total 100 100 100 100 Labor Force (millions) Agriculture 316 372 385 328 Non-agriculture 136 259 246 303 Of which: Service 45 88 82 158 Total 452 631 631 631 Ponulation (millions) 990 1,196 1,196 1,196 Dependent rate 2.19 1.90 1.90 1.90 Total urban population 208 343 327 402 Urbanization rate (%) 21 29 27 34 Note: Assume 70% of non-agricultural population will live in cities. Source: Derived from the World Bank, 1985, China: Long-Term Issues and Options -- Main Report, Washington, D.C.: The World Bank, p.37. 1.06 That China's cities are expected to experience rapid population growth raises a serious (luestion: would China be able to prevent a sharp decline of the urban environment due to a rapid increases in urban popula- tion? In turn, this question leads t- another question that is even more serious: is there a hope that China can realize her modernization program without rapid urbanization and some of the unpleasant side effects? 1.07 Urban growth is a highly complex issue. When this issue is considered in the Chinese context (large population, vast expanses of land, and a planned economy), the task becomes even atore difficult. Before the 12/ The World Bank, 1985b.  -4- discussion is carried further, some terminolbgies that would be frequently used later in this report need to be defined. N Terminologies Used in the Essay 1.08 Urban Physical Forms. Cities are combinations of different physical elements: residential and nonresidential housing, transportation, traffic and communication lines, power and water supply