COMMENTARY

A Road Map for Reforming China's Hukoi/' SystemThis process of gradually opening the hukou to migrants will not only add a major new driver to theeconomy, but also help China establish a fair society and move forward to becoming a modern country.

BY KAM WING C H A N **

.called for tJie realization of "Chinese dream" of re-viving the national glory. As the country enters theurban age (more than half its population now Hvesin urban areas), a critical part of the Chinese dreamis the "urban dream" — the promotion of urbaniza-tion to generate household consumption to put theeconomy on a sustainable footing.

Yet a third of the 700 million Chinese urban dwell-ers today are not truly "urbanized". They are themigrant population or "floating population", whodo not have an urban hukou., or household registra-tion. The hukou is a littie red booklet that entitiesthe bearers to truly live like urbanités in where theystay.

To accomplish real urbanization, migrant work-ers need to become full urban residents. That re-quires offering them an urban hukou with the aim ofultimately abolishing the hukou system. It's no smalltask, to be sure and can only be done gradually.

In 2012, the size of the floating population wasabout 230 íTiülion. A rough projection shows that by2030, the floating population, made up mostiy of

The surprise is that the hukou sjstem

still exists today despite

the stunning changes that have taken place

in China over the past few decades.

migrant workers from the countryside, wül reachmore than 300 miUion. I hereby propose to gradu-ally open the gate of urban hukou to all migrantswithin the next 15 years. This means that grantinghukou to about 20 million migrants per year.

How should this 20 million annual quota be al-located? In my opinion, we can learn from the ap-proach some Western countries use to take in im-migrants, plus taking cues from the policy used bysome Chinese local governments, such as Shenzhen.It could work in several steps over a period of 15years from 2015: young college graduates wouldhave first priorit}^, followed by skilled workers andstable self-employed workers. Last but the most im-portant would be low-skilled workers.

My approach is to begin with the easiest, build-ing up broad support and momentum, and proceedto the harder part. This will be more in line with thecountry's economic and fiscal reality as weU as ex-pectations of the people.Three Steps

People with college education are the importanttaxpayers in many countries. In the USA, many statesand businesses know that to develop a high-valuelocal economy requires a large pool of college gradu-ates, regardless of their origin. But in China, thehukou system still discriminates against graduates com-ing from other localities, especially in large cities. Each

• See NAME INDEX for Names in Chinese on Inside Back Cover

year, the numbers of migrant graduates gaining lo-cal huko/4 in large cides like Shanghai and Beijing arevery small, ranging from a few hundreds to maybeone or two thousands, out of hun-dreds of thousands of college-educated migrants in each ofthem.

Shenzhen last year madegreater efforts toward opetiingthe hukou system to college-graduate migrants. Through apoints system, the city admittedseveral hundred thousand people,mainly college graduates, as per-manent hukou residents. The num-ber far exceeds similar pracdcesin many other large cides and rep-resents an important step in theright direcdon.

A key part of hukou reformprogram Hes in the second stage:lowering the threshold for obtain-ing an urban household registra-don for skilled workers. For thecountry to upgrade its industryand move up the value chain willurgendy require large numbers ofbetter-educated, skilled workersand technicians, who are able tooperate high-tech and sophisti-cated equipment. Skilled workersalso get higher wages, and theycan also pay for the social wel-fare.

In my view, accepting collegegraduates and skilled workers tothe city is basically a win-win sce-nario. Giving skilled migrantworkers urban hukou will alsosend a strong message to unsldUed migrant workersand incendvize them to gain more skills. This wulraise the overall technical level of workers and en-hance the country's econotnic compeddveness.

I propose that China take the first five years toresolve the hukou issues of those two groups. Then,beginning in 2020, the country' should concentrateits efforts on resolving the hukou issues of the re-maining migrant workers. By then, after another few

A key part of hukou

reform program lies in the

second stage: lowering the

threshold for obtaining

an urban household

registration for skilled workers.

For the country to upgrade

its industry and move up

the value chain will urgently

require large numbers of

better-educated, skilled workers

and technicians, who are able

to operate high-tech and

sophisticated equipment.

years of development, China wiU be a stronger na-don and be able to devote more financial resourcesin improving social equalit)-. The government wiU

thereby be in a better position touse more resources to support tni-grant workers and provide somemore material benefits to low-in-come migrant workers.

Only through opening the tur-ban hukou door to all migrant willthis kind of urbanizadon expandChina's middle class and domes-dc demand. Only then will the vir-tuous cycle of "urbanizadon-eco-nomic growth" be achieved. x\fterrural migrant workers become per-manent urban residents withstable living expectations, theywill be able to transfer the userights of their contracted land inthe countr\'side and give up theiridle rural homes. This will greadyimprove the producdvit}' of ruralland, which is pardcularly impor-tant to China where land is scarce.Cost Considerations

Many legitimately fear that thecosts of allowing migrants to useurban social services wül be toooverwhelming. The main urbansocial services are public educa-don, public housing, social secu-rity, and medical care. In recentyears, there have been several es-timates using quite detailed, com-prehensive and publicly availablestadsdcal data. The results showthat the cost of "urbanizing" eachperson (i.e. the av erage cost of

social service) is approximately 20,000 yuan in asmall cVoj and 100,000 yuan in a large z\X>j. In 2010,the State Council Research Development Centerconducted a detailed survey and analysis in fourmedium-sized and large cides. The results show thataverage costs of providing urban social services toa typical migrant worker, including their children,are about 80,000 yuan (in 2010 prices) over theirlifedme.

C H I N E S E A M E R I C A N F O R U M - V o l u m e XXIX, No. 2 - O c t o b e r 2013

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Here below I use a sHghdy higher figure (25%more), 100,000 yuan, to calculate the overall costof urbanizing the entirefloating population andits fiscal impact. Totransfer the householdregistrations of all ofthe 230 miUion floatingpopulation to urbanhousehold registrationsin one year would cost23 trillion yuan, or 44% of China's GDP in2012. This is, ofcourse, an astronomi-cal figure. However, ifwe use the 15-yeartimeframe and take into consid-eration projections that the mi-grant population will reach 300miUion by 2030, the figure wiUcome down to an average of 20million per year at an annual costof 2 trillion yuan, or 3.8 % of the2012 GDP This is stiU a figuretoo high to be absorbed easily.

However, this 100,000 yuanwould be spent over the remain-ing lifetime of a migrant, not inone single year, as some observ-ers have understood. The aver-age migrant worker is between 27and 30 years old. Assuming he orshe Hves for another 40 years, this100,000 yuan would be spreadover 40 years, or 2,500 yuan eachyear. In other words, offeringhukou to 20 million people peryear would cost 50 billion yuan,or 0.1 % of China's GDP instead, a figure wellwithin the country's affordability.

A more useful approach would be to calculatethe cost of urbanizing migrant workers as a pro-portion of total government revenue. I computedthat 50 büHon yuan is 0.4 % of the governmentrevenue in 2012. Of course, this is just the cost ofthe first year, and the cost would increase each year.By the last year of the plan (the 15th year), the

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China's Population: Urban vs Rural

because hukou reform is

an important aspect of China's

overall development strategy,

any reform would require

the strong leadership and

planning of the central

government, I suggest that

China estabtish an

authoritative hukou leading

group at the central tevet to

take charge of hukou reform

and coordinate various parties.

cost would rise to the equivalent of 6 % of 2012the government revenue. Even so, I think this is still

within China'saffordability. The highest (6%) is only a fraction of theannual growth increase ofthe government revenue inthe past two years (23 %in 2011 and 13% in 2012).

Leaving the numbersaside, we can also see thatthe majority of migrantworkers are young, with theaverage being less than 30.In the early phase of theproposed program, the ex-penses of social welfare for

tnigrants wiU be very low. Indeed,they are Ukely net contributors tothe urban social welfare system inthe early phases of settHng in thecit}', paying more into the welfaresystem than taking away from thesystem. With the current urbanpopulation (especially in large cit-ies) rapidly aging, the social secu-rity contributions of young migrantworkers wiU be an important sourcein filling the fiscal gap in the urbansocial welfare system caused by theaging of urban residents.

Taking a wider perspective ofviewing costs and benefits, one cansee that the annual aggregate pro-ductivity of each migrant workeris certainly far larger, several times— possibly even several dozentimes - the sum of the 2,500 ).aianaverage cost of urban social ser-

vices and his or her wages. Once migrant workerssetde in cities and have long-term expectations ofHfe in the city, they will make more investments intheir own human capital, such as learning skills, aswell making "investments" in the urban communityin which they Hve. They also consume more. Throughthese, the dividends they produce for the city willbe even higher. This is very different from urbaniza-tion based on real estate speculation, or urbaniza-

• See NAME INDEX for Names in Chinese on Inside Back Cover

don in some Latin American countries where mi-grants coming to the city cannot find jobs.The Role of the Central Government

In hukou reform, the central government mustplay a leading role in guidance and implementation.Currently, authority' over the hukou reform has basi-cally been decentralized to local governments. Thus,hukou reform measures so far are limited to a verynarrow local scope. In many locales, measures lib-eralizing the urban hukou apply to only the localpopulation, and exclude the main group that shouldbe the target: the outside migrant workers. This israther misplaced and has achieved litde in pressingforward real hukou reform. Because hukou reform isan important aspect of China's overall developmentstrategy, any reform would require the strong lead-ership and planning of the central government, Isuggest that China establish an authoritative hukouleading group at the central level to take charge ofhukou reform and coordinate various parfies.

In recent years, the State Council, the cabinet,has proposed implemenfing a policy encouragingmigrant workers to settle down in small and me-dium cities, but not in the largest 40 cifies. Somecommentators have high hopes for this policy,claiming that it is an urbanizafion path with "Chi-nese characterisfics," which can help the countryavoid the "big city disease" by channeling migrantsto small and medium cifies. I think it is a gross mis-understanding.

That policy basically follows the old poHcy of1980s of "controlling the population growth of largecifies." The reaUty, however, is that China's invest-ment is stul tilted toward major cifies, and large cit-ies develop more quickly. Migrant workers have forthe most part not followed poHcy to small cifies andbut have moved to the large cifies because of jobs.With the current local government revenue systemdominated by land sales revenues, local governmentsof small cifies do not have means to develop thecifies either because the land there cannot be soldat a good price.

Instead of encouraging migrants to the smallercifies, I would argue that at this stage of develop-ment in China, agglomerafion economies stiU playlarge. Big cifies have the wherewithal and talents tobe the most efficient and most producfive in many

respects. China needs to harness this advantage byletting the market decide and achieve these econo-mies.

The main players of the market are businessesand workers, not the govemment. Because govem-ment officials do not and cannot have the preciseinformafion to know which businesses will do bestin which type of cifies. The government cannot knowwhere tnigrants will be able to find work in big orsmall cifies. The decision of which size of cifies togo to should be let to businesses, workers, and themarket, not decided by some central policies.

Therefore, I would argue that hukou reform mustbe roUed out in all cifies, large, medium and smalland should not be Hmited to the last two. Hukoureform should include Beijing, Shanghai, Shenzhen,and other large cifies, because that's where jobs arefound.

In conclusion, my goal in this arficle is to pro-pose a gradual but substanfive reform program tophase out the hukou system. The main target is togradually reverse the negafive trend of the widen-ing gap between the de facto urban populafion andthe VLÚÍ2XÍ-hukou populafion. Following this plan,within 15 years, we can eliminate the gap betweenthe two and return both to the same point in 2030.

I hope by then there wül be no difference in hukoustatus among cifizens of China; just like in manyother modern countries, cifizens will be able to movefreely within the country and settle in wherever theythink best to them. This process of gradually open-ing the hukou to migrants wiU not only add a majornew driver to the economy, but also help China es-tablish a fair societ}- and move forward to becom-ing a modern country. The process is also an indis-pensable part of the path to reaching the Chinesedream.

# # #The author is Professor of Geography at University of

Washington, and a former consultant of urbanit^ation

and urban migration prof ects for the United Nations and

the World Hank. An early version was published in

Cai.xin online on fune 13, 2013.

C H I N E S E A M E R I C A N F 0 R U M - Volume XXIX, No. 2 - October 2013

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