1. URBANCHINATOWARD EFFICIENT,INCLUSIVE, ANDSUSTAINABLE URBANIZATIONThe World BankDevelopment Research Center of the State Council,The Peoples Republic of China

2. Urban China 3. Urban ChinaToward Efficient, Inclusive, andSustainable UrbanizationThe World BankDevelopment Research Center of theState Council, the Peoples Republic of ChinaWashington, DC 4. 2014 International Bank for Reconstruction and Development /The World Bank and the Development Research Center of the State Council, P. R. China1818 H Street NW, Washington DC 20433Telephone: 202-473-1000; Internet: www.worldbank.orgSome rights reserved1 2 3 4 17 16 15 14This work is a product of the staff of The World Bank and the Development Research Center of theState Council, P.R. China. Note that neither The World Bank nor the Development Research Center ofthe State Council, P. R. China necessarily own each component of the content included in the work. TheWorld Bank and the Development Research Center of the State Council, P. R. China therefore do notwarrant that the use of the content contained in the work will not infringe on the rights of third parties.The risk of claims resulting from such infringement rests solely with you.The findings, interpretations, and conclusions expressed in this work are those of the authors and donot necessarily reflect the views of nor imply an official endorsement by The World Bank, its Board ofExecutive Directors, the governments they represent, or the Government of China. The World Bank andthe Development Research Center of the State Council of P. R. China do not guarantee the accuracy ofthe data included in this work.Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privi-legesand immunities of The World Bank and the Development Research Center of the State Council,P. R. 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ContentsForeword. . vxiiAcknowledgments. . xixExecutive Summary. . xxiiiAbbreviations . xxixOverviewIntroduction . 3Achievements and Emerging Challenges1 Chinas Urbanization Achievements . 52 Efficiency. . 73 Inclusion. . 164 Sustainability. . 25The Reform Agenda5 A Strategy for Reform. . 336 Reforming Chinas Land Management. . 387 Reforming Hukou, Social Services, and Labor Market Institutions. . 498 Reforming Urban Finance . 549 Promoting Greener Urbanization. . 63U r b a n c h i n a v 6. vi u r b a n c h i n a10 Ensuring Food Security. . 6911 Timing, Sequencing, and Risks . 71Part II Supporting Reports1 Urbanization and Economic Growth. 81Introduction. . 81Urbanization and growth at a crossroads. . 83Agglomeration, specialization, and mobility. . 90More efficient, inclusive, and sustainable urbanization and growth. . 106Chinas growth dividends from the new urbanization trajectory . 111Notes . 118References. . 1202 Planning and Connecting Cities for Greater Diversityand Livability. 123Introduction. . 123Enhancing efficiency and agglomeration economies in China. . 125Connecting people, linking businesses . 149Financing Chinas cities . 162Key actions moving forward. . 167Notes . 172References. . 1723 Inclusive Urbanization and Rural-Urban Integration. 177Inclusive urbanization: Vision, major challenges, and key reforms. . 177Ensuring equitable access to social services in urban areas. . 186Social policy reforms and rural-urban integration. . 214Strengthening institutions for an inclusive and productive labor market. . 235Notes . 252References. . 2564 Chinas Urbanization and Land: A Framework for Reform . 263Introduction . 263Land and urbanization in China. . 268International approaches and experiences. . 284Chinas land pilots: Guidance for the national reform agenda. . 297A framework for land policy reform. . 319Notes . 334References. . 3355 Chinas Urbanization and Food Security . 337Introduction . 337Chinas food demand and supply projection in international comparison . 340Resource constraints to agricultural production. . 343Supply, changing consumption, and demand. . 355Policy recommendations . 365Notes . 367References. . 368 7. C O N T E N T S vii6 Financing Urbanization. 371Introduction. . 371Urbanization in transition and its implication for financing. . 373Financing urbanization in 2013: Key issues. . 379Reform considerations for China. . 399The reform agenda and expected payoffs . 432Annex 6A A technical note on the urbanization finance model. . 436Notes . 441References. . 4437 Green Urbanization . 447Introduction. . 447The challenge of sustainable urban growth. . 450The rising cost of environmental degradation. . 451Green governance must match Chinas green ambitions. . 455Sustainable sector policies are closely aligned with green objectives. . 471Cities where a billion people want to live and work . 524Annex 7A Smart Greening . 526Annex 7B Illustrative framework and analytical tools for urban energy andemissions reduction planning. . 527Notes . 535References. . 538Annex 7B References . 547BoxesO.1 Residency rights in the European Union, the United States, the formerSoviet Union, and Japan . 19O.2 Social Housing. . 22O.3 Feeding Chinas cities. . 28O.4 Expropriations in Taiwan, China . 41O.5 Seoul becomes a global city by recalibrating regulations and market instruments. . 45O.6 The lack of connectivity and fine grain networks in Chinese urban development. . 45O.7 Comparing urban densities in two areas of Shanghai. . 46O.8 Seouls spatial strategy: Differentiation and higher densities around metro nodes. . 47O.9 European Union rules on investment incentives . 55O.10 Land value capture . 591.1 Urbanization and economic growth . 851.2 The Lewis turning point. . 891.3 Increasing social tensions. . 901.4 Microfoundations of agglomeration economies: Sharing, matching, andlearning. . 931.5 Agglomeration economies are attenuated by distance. . 941.6 Is Chinas urbanization pattern unique? A global perspective. . 1001.7 Logistic model estimates of Chinas urbanization trajectory. . 1131.8 Chinas Development Research Center computable general equilibrium model. . 1152.1 Barcelona 22@: Urban land redevelopment led by the private sector andenabled by the government . 131 8. viii u r b a n c h i n a2.2 Dual land market system . 1372.3 Regulatory restrictions on urban redevelopment and densification. . 1402.4 Comparison of connectvity in Chinese and other cities. . 1412.5 Density compared in Pudong and Puxi, Shanghai. . 1432.6 Cost analysis of street network for various size blocks. . 1462.7 Street patterns in Paris, France . 1472.8 Chinas urban villages. . 1482.9 Improvement in intercity accessibility (200010) . 1502.10 Impact of highway connection on Guangdong Special Economic Zone . 1512.11 Urban mobility plan in France. . 1572.12 Increase flexibility and variation in floor area ratio (FAR) values as in citieslike New York. . 1592.13 European Commission zero emission urban logistics . 1612.14 Split-rate property taxes in Pittsburgh. . 1662.15 Auctioning of land development rights: CEPACs in So Paulo, Brazil. . 1662.16 Planning and management to reduce risks from natural disasters. . 1703.1 Chinas experience with residence permits. . 1893.2 European Union migrants eligibility for social benefits in member states. . 1903.3 Chinas resident population information systemSetting up a comprehensivepopulation management information database. . 1963.4 Central government resources for compulsory education. . 1993.5 12th Five-Year Plan (201115): The National Basic Public Social ServicesSystem: The basic package and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2153.6 The main labor laws in China. . 2444.1 The evolution of Chinas policy framework of land, 19782013. . 2644.2 Chinas secondary urban land market: An invisible and unregulated market. . 2764.3 Chinas property taxation. . 2924.4 Land markets and institutions in the United States. . 2964.5 Chinas rural and urban land rights. . 2984.6 Documentation and registration of land. . 3224.7 Chinas collective land ownership . 3234.8 General and zone takings in Taiwan, China. . 3314.9 Mortgaging of individual rights to collectively owned land. . 3335.1 Agro-ecological zones methodology. . 3565.2 China Agricultural Policy Simulation Model (CAPSiM). . 3626.1 Reporting and budgeting of infrastructure finance. . 3926.2 Local governments debt instruments . 3946.3 Basic concept and categories of affordable housing in China . 3976.4 Formula grants . 4066.5 Options for policies and tools that capture land value. . 4086.6 U.S. securities laws applicable to municipal securities. . 4186.7 Australia: A leading model in implementing public-private partnerships . 4236.8 Performance-informed budgeting in the Minhang district, Shanghai. . 4287.1 Reducing severe air pollution in London and in Tokyo. . 4537.2 Addressing the central SOE problem. . 4577.3 The three baos of data reporting. . 4587.4 Co-opting local businesses into green growth in Xiaoyi . 4607.5 Environmental performance ratings in Jiangsu Province. . 463 9. C O N T E N T S ix7.6 China 2030: Estimated impacts of carbon pricing . 4697.7 The call for integrated, multipollutant approaches to air quality managementin the United States. . 4777.8 Promoting electric vehicles in China: Opportunities, challenges, andimplications. . 4857.9 Energy efficiency utility: Efficiency Vermont, United States . 4917.10 Tools for low-carbon development planning: The experience of ChangningDistrict in Shanghai. . 4947.11 New York PlaNYC 2030 case study: Integrated centralized planning relyingon decentralized delivery . 4957.12 Maintaining coverage of energy efficiency obligations under the currentsystem with the introduction of a new system of carbon emissions trading . 4987.13 Cleaning the air indoors: The other air pollution . 5027.14 Mnster, Germany: Low-energy building standards through sale ofcity-owned land. . 5037.15 Singapores Green Mark scheme. . 5057.16 Cities take active measures to reduce harmful burning of coal. . 5097.17 The Beijing Sunshine Schools program: Linking green policy, pedagogy,and people. . 5127.18 Phasing out coal in district heating provides significant environmental andsocial benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5157.19 Examples of cost-effective water treatment services provided to cities bynatural ecosystems. . 5197B.1 New York PlaNYC 2030 case study: Integrated centralized planning relyingon decentralized delivery . 5297B.2 Heat cascading in the Rotterdam Energy Approach and Planning. . 5307B.3 Benchmarking and energy saving tool for low-carbon cities (BEST-LowCarbon Cities). . 5327B.4 Climate-friendly air quality management planning in the San FranciscoBay Area . 534FiguresO.1 Chinas rapid urbanization from an international perspective. . 5O.2 Productive gains from reallocating labor and capital are almost exhausted . 9O.3 Guangzhou could accommodate 4.2 million more people with Seouls densityprofile . 12O.4 Gross land revenues are large, but net revenues are declining. . 12O.5 Consumption share and GDP per capita, select East Asian countries. . 13O.6 Services and urbanization in East Asia. . 14O.7 Chinas rising inequality . 16O.8 Air pollution declined over time . . . but the costs of air pollution havebeen rising. Particulate matter pollution and estimated health damages inurban China, 200311 . 26O.9 Land requisition is outpacing urban land use . 27BO.3.1 Self-sufficiency ratios for grain in Asian countries. . 28BO.3.2 Food consumption in energy equivalents and income. . 28O.10 Impact of urban density on carbon emissions for transport and infrastructures:road, water, and wastewater network lengths. . 29O.11 Water and wastewater tariffs. . 67 10. x u r b a n c h i n a1.1 Chinas impressive economic growth has been accompanied by a massivepopulation shift into urban areas . 84B1.1.1 Urbanization is inextricably linked to economic growth. . 851.2 Growth is increasingly dependent on capital accumulation as productivityfrom reallocation of labor and capital is declining . 871.3 Small cities are less efficient users of capital, increasingly so over time,19952011. . 881.4 Changes in labor force and urban population. . 88B1.2.1 Lewis model. . 891.5 Total factor productivity has been highest in tier 1 and northeastern cities . 94B1.5.1 Distance to major ports and economic development level of cities within ametropolitan area . 941.6 Changing patterns of specialization in manufacturing and advanced services . 951.7 Despite recent trends, a large share of manufacturing remains in large andmedium-size cities. . 961.8 To become a high-income country, China will have to develop services quickly,but the marginal product of labor in services continues to decline. . 961.9 Population densities of Chinese cities have fallen over the past decade as theurbanization of land was faster than the urbanization of people. . 971.10 In places where economic densities are falling, growth is supported by capitalaccumulation rather than by productivity increases . 981.11 Structure of migrants stock by type of migration by regions in 2010. . 981.12 Migrants go to larger cities, where wages are higher. . 99B1.6.1 Percentage point changes in urban population shares between 1978 and 2012 . 100B1.6.2 Urbanization rate and year country reached Chinas current per capita income. . 1011.13 Increased mobility and connectivity will support employment growth. . 1021.14 Higher densities are associated with higher incomes and consumption. . 1021.15 Real household incomes (adjusted for cost of real estate) are lower in thelargest cities, yet they have experienced the largest increase in population. . 1031.16 The initial stages of urbanization and industrialization led to imbalances ineconomic growth. . 1041.17 Chinas middle class continues to grow, but it remains small relative to Chinasdevelopment level. . 1051.18 Why is urban consumption so low?. . 1061.19 The concentration of different factors of production differs widely in China. . 1071.20 Slow urbanization of people has slowed income convergence. . 109B1.7.1 Estimates of Chinas urbanization rates, 19742050. . 113B1.8.1 Analytical structure of the growth model. . 1151.21 Final consumption as a share of GDP, 201030. . 1171.22 The energy and CO2 intensity of Chinas economy will decline . 1182.1 Per capita GDP in 2000 and 2010. . 1252.2 Population in 2010 by city size . 1262.3 Distribution of cities by size in China and the United States. . 1272.4 Efficiency by city size and location in 2010. . 1282.5 Recent trends in land use allocation from farmland to other uses. . 1292.6 Annual construction land supplydirect vs. competitive allocation. . 1302.7 Chinas largest cities have lower densities than their peers worldwide. . 1332.8 Urban density profile comparison between Guangzhou and Seoul. . 1332.9 Spatial expansion of cities is associated with higher commute times. . 134 11. C O N T E N T S xi2.10 Station locations in Wuhan and Paris. . 1522.11 Travel mode shares in Beijing, 19862010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1532.12 Travel mode shares in Shanghai, 19952009 . 1532.13 Road transport cost per ton-kilometer . 1552.14 Economic density and stock of expressways, 2010. . 1573.1 Rural-to-urban migration trends in China, 200012. . 1793.2 Trends in urban resident population and population with nonagriculturalhukou, 19782012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1793.3 Relative wages of rural migrants and urban formal employees, 200111. . 1803.4 Central and subnational expenditure by function, 2011. . 1973.5 Per capita subnational revenues and transfers, by province/region, 2011 . 1983.6 Pension coverage for urban workers in China, 200012. . 2073.7 Urban and rural dibao beneficiaries in China, 19962012. . 2103.8 Modes of access to dwellings in urban areas, by household . 2113.9 Share of urban population with secondary and tertiary education in China,Brazil, and Korea. . 2173.10 Official promotion rates from junior high school to academic high school,urban and rural, 19902006. . 2193.11 Health spending by source and location, 19952009. . 2213.12 Proposed overall design of the pension system . 2273.13 China and G20 fiscal transparency indicators, 2012. . 2323.14 Elements of fiscal transparency indicators for China, 2008 and 2012 . 2333.15 Expansion of higher education in China, 19902012. . 2403.16 Urban minimum wage adjustments, 19952012. . 2453.17 An international comparison of the tax wedge, 2012. . 2473.18 Protection of permanent workers against individual and collective dismissals,2013. . 2503.19 Total disputes and disputes settled through arbitration, 200112. . 2514.1 Revenue and expenditure of subnational governments, 19782008 . 2694.2 Urban construction land . 2714.3 Requisition of rural land . 2714.4 Composition of construction land use increase, 200512 . 2724.5 Shares of main urban construction land use categories, 200512. . 2724.6 Urban land prices: National average, 200813 . 2734.7 Urban land price: Eastern region, 200813 . 2734.8 Industrial land price: Regional averages, 200813. . 2744.9 Annual (urban) construction land supply, 200112 . 2754.10 Construction supply: Direct versus competitive allocation, 200112 . 2764.11 Local government income from land sales, 200312. . . . . . . . . . . . . . . . . . . . . . .2774.12 Revenue from land sales and associated cost, 19992013 . 2774.13 Revenue from land sales as a share of total local government revenue,19992013. . 2784.14 Annual change in outstanding local government debt, 19972010 . 2794.15 Bank lending to urban development investment corporations as share oftotal infrastructure lending, 2009 . 2804.16 Bank exposure to loans to urban development investment corporations, 2010. . 2814.17 Illegal land use: Number of reported cases and area affected, 200111 . 2814.18 Illegal land use by violators in 2011 . 282 12. xii u r b a n c h i n a5.1 Total calorie (in kilocalories per capita per day) and protein consumption invarious countries (in grams per capita per day). . 3415.2 Population growth vs. diet change: Change in CE consumption. . 3415.3 Relationship between CE food consumption and income . 3425.4 Calorie and CE consumption trends against income in China, 19802009. . 3425.5 Production, consumption, and income in China, 19802009. . 3435.6 Grain self-sufficiency ratios for selected Asian countries, 19602013. . 3435.7 Contribution of major grains to Chinas supply-demand gap, 19602013 . 3445.8 Water use in China: Total and by sector. . 3445.9 Sectoral shares of Chinas total water consumption . 3455.10 Trends in agricultural sector water consumption and urbanization . 3455.11 Percentage of rural labor employed off the farm, 19952011. . 3485.12 Manufacturing wages, 19942008. . 3495.13 Trends in mechanical operation, 19702011. . 3505.14 Average daily cost of on-farm labor, 19972012 . 3505.15 Trends in labor input by commodity, 19972012. . 3515.16 Expenditures on mechanization by commodity, 19972012. . 3515.17 Share of mechanization expenditure to total expenditure on physical input bydifferent crops, 19972012. . 3525.18 Land conversion trends, 19882000. . 3535.19 Land conversion trends, 200008. . 3535.20 Changes in agricultural production potential, 200008 . 3575.21 Per capita consumption of various agricultural products in response toincome growth. . 3605.22 Food consumption at home and away from home for urban residentsby income . 3615.23 Projected supply shortages for various food items . 3646.1 Cost of urbanization as a share of GDP . 3776.2 Government expenditures as a share of GDP . 3786.3 Fiscal space, government expenditures, and public debt as shares of GDP. . 3796.4 Cost of urbanization in the reform scenario, as a share of GDP. . 3806.5 Government expenditures in reform scenario as a share of GDP . 3816.6 Fiscal space, government expenditures, and public debt in reform scenarioas shares of GDP. . 3816.7 Central and subnational expenditure, by function, 2012 . 3826.8 Budget transparency trends in the OECD and China, 200812. . 4277.1 Fast economic growth outpaced improvements in efficiency . 4517.2 Air pollution declined over time and has recently been stable:PM10 concentrations . 4517.3 Estimates of the value of mortality and morbidity from air pollution . 452B7.1.1 Air pollution concentrations in London and Tokyo, 19502013. . 4537.4 Global net transfers of CO2 emissions embedded in traded goods, 19912008 . 4547.5 Only a quarter of provincial EPB directors came from within the organization. . 4567.6 Border spot prices for thermal coal traded in China and other countries,201213. . 4657.7 Residential electricity prices of 10 cities in China compared with othermajor cities, 201112. . 466 13. C O N T E N T S xiii7.8 Chinas transport fuel prices are still relatively low but have increasedsignificantly. . 4677.9 Natural gas prices paid by industrial end-users in Chinese cities compared toprices in other countries, 200011 . 467B7.6.1 Effect of a carbon price on emissions and economic growth . 4697.10 Household energy expenditure shares, 2012. . 4707.11 PM10 and PM2.5 monitoring results from 74 pilot cities, including 3 regions,200913. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4737.12 Framework for comprehensive integrated air quality management. . 4767.13 Example of a nested modeling system of air quality in the Jingjinji regionin China. . 4777.14 Potential of redensification in the densest 600 km2 in Guangzhou, comparedto Seoul. . 4787.15 Water network length and urban density. . 4787.16 Road network length and urban density . 4797.17 Fuel consumption for freight (40-ton trucks) and congestion . 4797.18 Superposition of carbon emissions per capita for private transport and urbandensity in metropolitan London, New York, and Paris . 4807.19 Total length of bus and metro lines in operation . 4827.20 Vehicle emissions contributions in China . 4847.21 Expected pollution reduction from raising current emission standards toEuro VI standard . 4867.22 Primary energy supply in Beijing, Shanghai, and Chongqing municipalities,2011. . 4887.23 Per capita CO2 emissions for 11 large Chinese cities and selected citiesaround the world. . 4897.24 Industrial energy use as a share of total energy demand in cities, 2010. . 4897.25 Industrial and nonindustrial CO2emissions per capita in selected Chineseand other cities . 4897.27 Primary household cooking energy in urban and rural areas, 2006. . 4907.26 Energy use in commercial buildings in China, the United States, and Japan. . 4907.28 Energy consumption by neighborhood . 4927.29 Mapping Londons electricity demand. . 493B7.10.1 Marginal abatement cost curve for Hongqiao area of Changning District,Shanghai. . 4947.30 Energy use per unit of water treated by municipal water utilities, various years. . 496B7.13.1 Concentrations of formaldehyde and benzene concentrations in buildings. . 5027.31 Primary energy consumption in China by end use in residential andcommercial buildings, 2010. . 5037.32 Access to natural gas in Chinas 10 largest cities compared with other cities . 5087.33 Supply of piped gas to urban households needed to achieve universal accessto piped gas by 2020. . 5107.34 Estimated fuel required to supply 65 percent of district heating with naturalgas by 2030. . 510B7.18.1 Carbon emissions under different scenarios of increasing gas use for heating. . 5157.35 Water and wastewater tariffs in Chinese cities compared to other citiesaround the world. . 5177.36 Sources of main water pollutants, 2011. . 5187.37 Share of utilities with net positive margins, by province, 2009. . 520 14. xiv u r b a n c h i n a7B.1 An example of the energy and emissions planning process. . 5287B.2 Examples of energy potential mapping from the Netherlands, Rotterdamand Groningen. . 531MapsMap 2.1 Population changes from 2000 to 2010. . 127Map 2.2 Sprawl in Shanghai Metropolitan Region between 2000 and 2010. . 136Map 5.1 Major river systems in China and locations of the 10 largest river basins . 346Map 5.2 Land conversion: From cultivated land to other uses, 19882008 . 354Map 5.3 Land conversion: From cultivated land to other uses, 200008. . 354Map 5.4 Land conversion: From other uses to cultivated land, 19882000 . 355Map 5.5 Land conversion: From other uses to cultivated land, 200008. . 355TablesO.1 Returns on capital are declining over time: China compared with Japan, Korea,and Taiwan, China . 9O.2 Chinas carbon emissions and drivers of growth . 25O.3 Chinas urbanization scenarios . 35O.4 Urbanization costs and fiscal space: Baseline and reform scenarios . 371.1 Incremental capital-output ratio in China and other economies, various periods. . 871.2 Growths drivers on the new urbanization trajectory . 911.3 The 12 types of economies of scale. . 921.4 Structure of migrants stock by receiving and sending region, 2010. . 981.5 Migrant worker employment by sector, 200412. . 991.6 Percentage of population with consumption between $10$100 a day,in 2005 PPP dollars. . 1051.7 Summary of the reforms scenario. . 1141.8 Urban population projections over the medium term. . 1141.9 Sources of growth, five-year averages: Baseline and reform scenarios, 201530. . 1161.10 Composition of the demand side of GDP: Reform scenario, 201030 . 1161.11 Industrial structure of GDP and employment: Baseline and reform scenarios,201030. . 1161.12 Urbanization will bring potential gains and pose risks to enterprises,households, and governments . 1182.1 Annual change in key economic and welfare indicators between 2000and 2010. . 1322.2 Examples of key national plans. . 1382.3 Key local planning institutions . 1392.4 Factors making up an integrated urban plan. . 1392.5 Sources of fiscal revenues for financing investment in public service facilities,2011. . 1622.6 Provision of basic infrastructure services in urban areas. . 1632.7 Role of different agencies and stakeholders. . 1683.1 Educational attainment of rural workers in 2012. . 1813.2 Distribution of rural-to-urban migrant workers by city level, 200912 . 181 15. C O N T E N T S xv3.3 Enrollment of migrant children in universal compulsory education,Beijing municipality. . 2003.4 Status of migrant children enrollment in universal compulsory education inselected cities, various years. . 2003.5 Conditions for migrant childrens enroll in public schools, 2011. . 2013.6 Assistance in financing migrant childrens education. . 2013.7 Summary of characteristics of the three health insurance schemes. . 2053.8 Comparison of the three health insurance schemes. . 2053.9 Summary of characteristics of the major pension schemes in China. . 2073.10 Cost of extending urban social services to cover rural migrants. . 2133.11 Composition of funding in universal compulsory education, 1997 and 2010. . 2173.12 Examples of extended free basic education in China, various years . 2203.13 Proportion of pension contributions transferred to provincial adjustment funds. . 2283.14 Proposed financing arrangements for the pension system. . 2293.15 Dibao and medical financial assistance in urban and rural China, 2012 . 2303.16 Trends in employment and wages of college graduates, 200812. . 2413.17 Social insurance and housing fund contributions in urban China, 2013. . 2474.1 Industrial land price development by region, 200011. . 2744.2 Supply of construction land and land concession income, 200112 . 2754.3 Cost structure of land concession, 200812. . 2784.4 Expenditure patterns of land sales profits to local government, 200812. . 2794.5 Mechanisms capable of capturing betterment. . 2864.6 Transport sector investment projects and land value capture . 2874.7 Land and property tax in Germany, 2003. . 2914.8 Land and fixed property tax in Japan. . 2915.1 Total increase rate of water use in China by sector, 19492011. . 3445.2 Water supply, water demand, and water balance in Chinas 10 major riverbasins, averaged over 200610. . 3465.3 Planned expansion of irrigation areas. . 3475.4 Proportion of rural laborers working off-the-farm, by age cohort, 2011. . 3495.5 Hourly wage rate of rural migrant workers across regions in 2011. . 3495.6 Machinery subsidies in China, 2008. . 3525.7 Change in total production potential by province, 200008 . 3565.8 Impact of a 1 percentage point increase in Chinas urbanization rate onChinas domestic food production to 2020. . 3575.9 Chinas supply and demand of agricultural products in 2012, 2020, and 2030 . 3585.10 Impact of a 1 percentage point increase in Chinas urban population onChinas international trade to 2020. . 3595.11 Chinas current and projected supply and demand of livestock products in2012, 2020, and 2030 . 3636.1 Urbanization costs and fiscal space: Baseline scenario. . 3766.2 Urbanization costs and fiscal space: Reform scenario. . 3806.3 Chinas investment in public utilities, infrastructure and facilities, 2011 . 3906.4 China public debt, June 2013 . 3936.5 Proposed fiscal rule and debt limit indicators. . 4136.6 Local government bonds by issuers. . 4166.7 Local government fiscal tiers in the world. . 4306.8 Comprehensive reform program. . 433 16. xvi u r b a n c h i n a7.1 Sector priorities for green urbanization. . 4727.2 Breakdown of PM10 and PM2.5 sources nationwide and in Beijing . 4747.3 Estimated waste generation levels and main outlets in China, 2011. . 5227B.1 Green and low-carbon indicators for the transport sector in Chinese cities. .5297B.2 Illustrative examples of tools to assist city leaders in developing low-carbonplans . 533 17. ForewordU r b a n c h i n a xviiToday, more than half of the worlds popula-tionlives in cities, and by 2030 that will riseto an estimated 60 percent. Nearly all of thisgrowth is happening in developing countries,where as many as 66 million people migrateto urban areas each year. Urbanization hashistorically served as an essential enginefor economic development: No country hasreached high-income status without undergo-inga successful urbanization process.Chinas urbanization over the last threedecades has been unprecedented in scale: 260million migrants have moved to cities fromrural areas, supporting the countrys rapideconomic growth and development progress.Despite the enormity of this transition, Chinahas avoided some of the ills often associatedwith urbanization, particularly large-scaleurban poverty and unemployment. But strainshave begun to emerge in the form of risinginequality, environmental degradation, andthe quickening depletion of natural resources.Chinese leadership understands thesechallenges. Premier Li Keqiang has placedurbanization as one of the governments toppriorities. In November 2012, he asked theWorld Bank Group to partner with Chinain conducting a joint study on the countrysurbanization challenges. Earlier that year,the Bank Group and Chinas DevelopmentResearch Center of the State Council pro-duceda groundbreaking study entitled China2030: Building a Modern, Harmonious, andCreative Society, which laid out the key, long-termchallenges facing the Chinese economy.The urbanization study aimed to build onthis successful collaboration and help Chinatackle another key development challenge:forging a new model of urbanization.To this end, Chinas Ministry of Finance,the Development Research Center of theState Council, and the World Bank Groupestablished a joint work team to addressseveral overarching questions related toChinas urbanization process, such as: Howcan a new model of urbanization become anengine for higher-quality economic growth?How can more efficient urbanization supportChinas future economic transformation?How can more inclusive urbanization pro-moteintegration and cohesion? How canmore sustainable urbanization help slowenvironmental deterioration, achieve moreefficient use of resources, and advance foodsecurity objectives? How can reforms to theland, hukou, fiscal, and financial systemsreinforce Chinas new vision of urbanization?To answer these questions, the team helda series of workshops; prepared numer-ousstudies, cases, and background papers;and developed common ideas based on adeep understanding of the challenges andopportunities of urbanization in China andaround the world. This report, Urban China: 18. xviii U r b a n c h i n aToward Effi cient, Inclusive, and SustainableUrbanization, represents the results of thatwork. The report takes as its point of depar-turethe conviction that Chinas urbanizationcan become more effi cient, inclusive, and sus-tainable.However, it stresses that achievingthis vision will require strong support fromboth government and the markets for policyreforms in a number of areas.The report proposes six main areas forreform: first, amending land managementinstitutions to foster more effi cient land use,denser cities, modernized agriculture, andmore equitable wealth distribution; second,adjusting the hukou system to increase labormobility and provide urban migrant workerswith equal access to a common standard ofpublic services; third, placing urban fi nanceson a more sustainable footing, while foster-ingfi nancial discipline among local govern-ments;fourth, improving urban planning toenhance connectivity and encourage scaleand agglomeration economies; fi fth, reducingenvironmental pressures through moreefficient resource management; and sixth,improving governance at the local level.The report also provides recommendationson the timing and sequencing of reforms. Itstresses the need to fi rst implement reformsrelated to land, fi scal, and public service sys-tems.Doing so will facilitate Chinas transi-tionto higher-quality economic growth.The team prepared interim reports thatwere shared with Chinas top policy makersas inputs to policy discussions on urbaniza-tionduring 2013, providing an importantbasis for the formulation of Chinas newmodel of urbanization.Going forward, we hope the fi nal reportwill provide the insight to help central andlocal authorities navigate Chinas ongoingtransition to an urban-based society. Morebroadly, we hope this work will provide auseful contribution to global knowledge onurbanization, and help other countries bettermanage their urbanization challenges.Jim Yong KimPresidentThe World Bank GroupLI WeiPresidentDevelopment Research Center of the StateCouncil, P.R.C. 19. AcknowledgmentsThis research was organized jointly byChinasMinistry of Finance (MOF), theDevelopment Research Center of the StateCouncil (DRC), and the World Bank Group.President Jim Yong Kim of the World BankGroup, Minister Jiwei Lou of MOF, andMinister Wei Li of DRC provided valuableguidance and strong support throughout.Guiding this research was a Chinese inter-nalsteering committee comprising MinisterWei Li of DRC, Minister Jiwei Lou of MOF,Vice Ministers Baoan Wang and Yaobin Shiof MOF, Vice Ministers Shijin Liu and JunHan of DRC, former Minister Xuren Xie ofMOF, former assistant Minister XiaosongZheng of MOF, plus a World Bank Groupinternal steering committee comprising SriMulyani Indrawati, Jin-Yong Cai, Axel vanTrotsenburg, Kaushik Basu, Rachel Kyte,Keith Hansen, Otaviano Canuto, JanamitraDevan, Jaime Saavedra, Ana Revenga, Zou-bidaAllaoua, and Klaus Tilmes.Under the overall leadership of MinisterWei Li of DRC and Managing Director SriMulyani Indrawati of the World Bank, thereport was prepared by a joint team from thethree organizations, led by DRC Vice Minis-terShijin Liu, DRC Vice Minister Jun Han,World Bank Country Director for China,Mongolia, and the Republic of Korea, KlausRohland, and World Bank Chief Economistfor the East Asia and Pacific region, BertHofman. Within the World Bank, ChorchingGoh was the technical task team leader.The overview report was prepared by ajoint team comprising Chorching Goh, JunHan, Yupeng He, Bert Hofman, YongzhiHou, Peilin Liu, Shijin Liu, Klaus Rohland,Mara Warwick, and Xian Zhuo, with sup-portfrom Shusong Ba, Changsheng Chen,Sen Gong, Sanlin Jin, Shouying Liu, Yun-zhongLiu, Jinzhao Wang, and Yida Wang(DRC and MOF), and Uwe Deichmann,Gailius Draugelis, Elena Glinskaya, SomikLall, Mark Lundell, Paul Procee, UlrichSchmitt, Karlis Smits, and Min Zhao (WorldBank). The overview report benefited frominputs provided by Anass Afilal, RichardAuty, Roy Bahl, David Bulman, Wei Cai,Shaohua Chen, Zhao Chen, Basab Dasgupta,Yongheng Deng, Wanli Fang, Bruce Fitzger-ald,Li Gan, Ming Lu, Yanyun Joyce Man,Baoyun Qiao, Shonali Sen, James G. Wen,and Colin Lixin Xu.The joint DRC and World Bank teambenefited from commentary and review pro-videdby Arup Banerji, Benu Bidani, MilanBrahmbhatt, Fang Cai, Rugui Chen, KhooTeng Chye, Yuanzhu Ding, Chuangling Fang,Martin Feldstein, Zangchun Gan, PeiyongGao, Chaolin Gu, Jiankun He, Richard Herd,Andrew Hilton, Biliang Hu, Cunzhi Hu,Jikun Huang, Xiaohu Huang, Yukon Huang,Kang Jia, Xiangzhi Kong, Qiang Li, Mai Lu,U r b a n c h i n a xix 20. xx u r b a n c h i n aChaping Mu, Stefano Negri, Vikram Nehru,Pengfei Ni, Baoxing Qiu, Yulong Shi, MingSu, Zhonghua Sun, Woo Wing Thye, JunWang, Yiming Wang, Debbie Wetzel, GuangXia, Lin Xu, Xianping Xu, Kaizhong Yang,Yulong Ye, Xiangquan Zeng, Liu Zhi, QirenZhou, and Deci Zou. The overview teamgratefully acknowledged the helpful sugges-tionsfrom the peer reviewers Marianne Fay,Abha Joshi-Ghani, Indermit Gill, and JeskoHentschel, as well as the support and guid-ancefrom John Roome, Sudhir Shetty, TuncUyanik, and Xiaoqing Yu.The seven supporting reports were pre-paredunder the overall guidance of Jun Han,Bert Hofman, Shijin Liu, and Klaus Rohland.Supporting Report 1 Urbanizationand Economic Growth was prepared by ajoint team led by Changsheng Chen (DRC)and Karlis Smits (World Bank). The teamincluded Bingde Duan, Jianwu He, Yu Jiang,Ting Shao, Wei Xu, Zhaoyuan Xu, and XianZhuo (DRC), and David Bulman, Chorch-ingGoh, and Bingjie Hu (World Bank). Thereport benefited from inputs provided byYong Hwan Cha, Shaohua Chen, TianmingChen, Li Gan, Jingyi Jiang, Edward Leman,Binglie Luo, and Jian Zhang.Supporting Report 2 Planning and Con-nectingCities for Greater Diversity and Liv-abilitywas prepared by a joint team led byYunzhong Liu (DRC), Somik Lall, and PaulProcee (World Bank). The team includedJianwu He, Bin Huang, Shen Jia, ZongminLan, Jiabin Lin, Rufei Liu, Yong Liu, XiongNiu, Zhiyan Sun, Hui Wang, and XiaoweiXuan (DRC), and Edward Leman, JoannaMasic, Gerald Paul Ollivier, Serge Salat, andAndrew Salzberg, (World Bank). The reportbenefited from inputs provided by AnassAfilal, Zoubida Allaoua, Mats Andersson,Mesky Brhane, Wei Cai, Basab Dasgupta,Chandra Deuskar, Emiliano Duch, MarianneFay, Wanli Fang, Ellen Hamilton,VernonHenderson, Abhas Kumar Jha, Ying Jin, FanLi, Stefano Negri, Ira Peppercorn, BinyamReja, Fatima Shah, Pablo Vaggione, SamehWahba, Runze Yu, Rufei Zhang, and PengjunZhao. The team benefited from suggestionsfrom Changchun Feng, Chaolin Gu, Feng Li,Jian Lin, Bin Lv, Baoxing Qiu, and Deci Zou.In addition, data support and other inputswere provided by Sheng Luo, Tingting Shi,Tingting Xie, Chaoyi Xu, Min Zhang, andFanfan Zhao.Supporting Report 3 Inclusive Urbaniza-tionand Rural-Urban Integration was pre-paredby a joint team led by Sen Gong (DRC)and Elena Glinskaya (World Bank). The teamincluded Liejun Wang, Xiongjun Wang, andBingzi Zhang (DRC), and John Giles, GerardMartin La Forgia, Xiaoyan Liang, PhilipOKeefe, Shonali Sen, Dewen Wang, (WorldBank), and Christine Wong (University ofMelbourne). The report benefited from inputsprovided by Jehan Arulpragasam, Luis Ben-veniste,Meskerem Brhane, Xiangming Chen,Maitreyi Das, Mark Charles Dorfman, MaryGallagher, Qingyue Meng, Toomas Palu,Albert Park, Jin Song, Minna Hahn Tong,Xiaoxia Wang, Liping Xiao, Xiaoqing Yu,Chenggang Zhang, and Shuo Zhang.Supporting Report 4 Chinas Urbaniza-tionand Land: A Framework for Reformwas prepared by Shouying Liu (DRC) andUlrich Schmitt (World Bank). The reportbenefited from inputs provided by AndrewHilton, Xueping Hou, Ruixian Hu, XiaohuHuang, Lixing Li, Ping Li, Yihao Li, Shen-minLiu, Paul Munroe-Faure, Xiazhen Shao,Ran Tao, Xiaoqin Wang, Xiaohui Wu, andChongfa Yuan.Supporting Report 5 Chinas Urbaniza-tionand Food Security was prepared by ajoint team led by Sanlin Jin (DRC) and UlrichSchmitt (World Bank). The team includedKym Anderson, Emiko Fukase, Jikun Huang,Yan Liu, Willam Martin, Scott Rozelle, andJun Yang. The team benefited from com-mentsand suggestions from Jun Han, YupengHe, Shouying Liu, and Xingqing Ye (DRC),as well as other supporting report authors.It also benefited from background papersprovided by Junfei Bai, Xiangzheng Deng,Songqing Jin, Ji Ma, Huanguang Qiu, LapingWu, Jinxia Wang, and Xiaobing Wang.Supporting Report 6 Financing Urban-izationwas prepared by a joint team led byShusong Ba (DRC), Yida Wang (MOF), andMin Zhao (World Bank). The team included 21. a c k n o w l e d g m e n ts xxiMingge Lv, Hong Tang, Xianling Yang, andZilong Zheng (DRC), Shuanyou Ma, Li Xu,and Yongzhen Yu (MOF), Hongye Fan, Cati-anaGarcia-Kilroy, Lili Liu, Ira Peppercorn,Juan Pradelli, Binyam Reja, Robert Taliercio,and Luan Zhao (World Bank). The reportbenefited from inputs from Roy Bahl, DavidPainter, Baoyun Qiao, Anwar Shah, Lina Li,and Guangrong Ma. The team benefited fromsuggestions from Kang Jia, Jun Ma, Lin Xu,and Sudarshan Gooptu, Ming Su, Jun Wang,and other supporting report authors. Part ofthe proofreading of the translation work wasprovided by Jian Chen.Supporting Report 7 Green Urbaniza-tionwas prepared by a joint team led byJinzhao Wang (DRC) and Uwe Deichmannand Gailius Draugelis (World Bank). Theteam included Jianpeng Chen, Jianwu He,Tao Hong, Weiming Li, Xiong Niu, GuangShi, Zifeng Song, Haiqin Wang, Xu Wu, andXiaowei Xuan (DRC), and Garo Batmanian,Liping Jiang, Todd Johnson, Xiaokai Li, FengLiu, Jostein Nygard, Gerald Ollivier, BinyamReja, Serge Salat, Christopher Sall, Rob-ertTaylor, and Frank Van Woerden (WorldBank). The report benefited from inputs pro-videdby Dimitri De Boer, Xiangxin Guo,Genia Kostka, Zhi Li, Ximing Peng, PaulProcee, Wenjin Pu, Yu Qin, Li Qu, ShuaiRen, Yanqin Song, Xiaodong Wang, YunWu, Runze Yu, Yabei Zhang, Yu Zhang, andXi Zhao. The team benefited from commentsand suggestions from Fei Feng, Jiankun He,Xiulian Hu, Guang Xia, and other support-ingreport authors.Invaluable support for the endeavor wasprovided by MOF Vice Ministers YaobinShi, Baoan Wang, Guangyao Zhu, Directors-General Wenhan Ou, Shaolin Yang, JiayiZou, Deputy Directors-General ZhongyongHu, Yida Wang, and Yingming Yang, aswell as the Chinese Executive Director to theWorld Bank, Shixin Chen.Coordination teams led by Yongzhi Hou(DRC), Wenhan Ou and Jiayi Zou (MOF)and Mara Warwick (World Bank), and com-prisingDongwei Wang, Hai Wang, YidaWang, Yan Xie, Yingming Yang, and LichengYao (MOF), Hui Han, Yupeng He, Shen Jia,Qing Li, Peilin Liu, Hui Wang, and XianZhuo (DRC), Ying Fan, Li Li, Guangqin Luo,Yu Shang, Elaine Sun, and Hua Zhu (WorldBank) provided strong support for the suc-cessfulcompletion of the study. Tianshu Chenof the World Bank served as interpreter forthe project and organized and coordinatedthe translation work. Yueyang Bao and Yuan-jingShang of the China Development Pressand Weiling Zhang of DRC managed thecoordination and production of the Chineseedition. The World Banks Kathryn Funk,Li Li, Lasse Melgaard, and Mara Warwickmanaged the coordination and production ofthe English edition. The team is grateful toSusan Graham of the World Banks Publish-ingand Knowledge Division for managingthe editing and layout of the English version,as well as to Andres Meneses for the printingand file conversions. The International andComprehensive Departments of MOF, theGeneral Office and International Departmentof DRC, and the World Bank provided effec-tivesupport in organizing all the conferences,discussion meetings, and international fieldstudy trips throughout this research.This research also benefited enormouslyfrom comments and suggestions from Chi-neseministries and local governments,including The National Development andReform Commission, Ministry of Educa-tion,Ministry of Public Security, Ministryof Human Resources and Social Security,Ministry of Land and Resources, Ministryof Environmental Protection, Ministry ofHousing and Urban-Rural Development,and National Population and Family Plan-ningCommission. Development ResearchCenters of Shanghai, Tianjin, Chongqing,Guangdong, Zhejiang, Inner Mongolia,Henan, Shaanxi, Hubei, Hunan, Yunnan,Shenzhen, Xian, and Zhengzhou providedcase study reports, and Finance Bureausof Liaoning, Henan, Sichuan, Chongqing,Hunan, Guangdong, Hainan, and Ningboprovided assistance in local field study trips.The joint research team is grateful for alltheir support. 22. Executive SummaryOver the past three decades, Chinas urban-izationhas supported high growth andrapid transformation of the economy, allow-ingpeopleamong them some 260 millionmigrantsto move from agriculture to moreproductive activities. In the process, 500 mil-lionpeople were lifted out of poverty, andChina managed unprecedented growth thataveraged 10 percent a year for three consecu-tivedecades. Chinas cities, with abundantlabor, cheap land, good infrastructure, andcompetition among local governments toattract industry and investment, have cre-atedan environment that has been highlyconducive to growth. Growing cities thathave become increasingly connected witheach other and with the rest of the worldhave added to productivity growth throughagglomeration effects, and Chinas mega cit-iesnow have income levels comparable tosome member countries of the Organisationfor Economic Co-operation and Develop-ment(OECD).China has avoided some of the common illsof urbanization, notably urban poverty,unemployment, and squalor. But strains arestarting to show. Chinas growth has beenincreasingly driven by investment rather thanproductivity, and investment has become lesseffective in generating growth at the nationalas well as the city level. Urbanization hasrelied excessively on land conversion andland financing, which is causing inefficienturban sprawl and, on occasion, ghost townsand wasteful real estate development. Barri-ersto migration have kept Chinas urbaniza-tionrate too low, thus underutilizing peo-plespotential and exacerbating urban-ruralincome inequality. Unequal access to publicservices between citizens with urban house-holdregistration (hukou) and those with-out,although diminishing, remains and isa barrier to mobility. At the same time, thelarge influx of migrants puts pressures onurban services, and urban citizens perceivean erosion of service quality. Rural-urbanland conversion has been inequitable in thedistribution of its gains, has added to wealthinequalities, and has fed social unrest amongfarmers whose land has been expropriated.Despite progress in environmental stan-dardsand policies, the cost of pollution tothe nations health is rising as Chinas popu-lationis increasingly concentrated in cities.And land-intensive urbanization has reducedthe availability of farmland, is competingfor scarce water resources, and is adding topollution that affects the quality of farm pro-duceand food production capacity.Chinas leadership is well aware of thesechallenges and has called for a new modelof urbanization to match Chinas evolvingU r b a n c h i n a xxiii 23. xxiv u r b a n c h i n adevelopment goals and meet the emergingchallenges. A new model can support moreefficient growth through better allocationof land, labor, and capital; be more inclu-siveand share benefits of urbanization morewidely than in the past; and be environmen-tallysustainable and safeguard Chinas foodsecurity. Chinas urban landscape will con-tinueto change: the largest cities will likelybecome larger and boost their role as gate-waysto the world and centers of a diverseeconomy, moving increasingly into services,knowledge, and innovation. Secondary cit-ieswithin metropolitan areas are likely toattract more land-intensive manufactur-ing,benefiting from specialization and linksto markets. Chinas large inland cities cancompete with coastal cities if they are wellconnected to markets. Hinterland cities andrural towns would focus on activities withfirm-level scale economies and on providingthe public services that allow people to moveto opportunities elsewhere. Better allocationof land, labor, and capital will accelerate theshift of industry to secondary cities, and asjob opportunities open up in these areas,migration pressures in large cities are likelyto moderate. As surplus labor diminisheswith more rapid urbanization, the wage sharein gross domestic product (GDP) will riseand urban-rural disparities will narrow. Thatwould also promote consumptionincreas-inglydriven by a growing middle class,whose demand will spur a more services-basedurban economy. More inclusive growthand more equitable distribution of incomewill reinforce the shift toward consumption,because lower-income earners consume moreof their income than higher-income earners.A new model of urbanization requires adifferent role for government. Governmentshould support rather than supplant marketforces in shaping Chinas urban landscape,allowing Chinas cities to grow more organi-callyand efficiently in response to marketforces within the context of the governmentsstrategic development plan. Governmentwould need to rebalance its involvement fromexercising administrative control to regulatingthe market-based allocation of people, land,and capital across China and the provisionof public services to support these alloca-tions.At the same time, a growing numberof people will be exposed to environmen-talhazards, and government would need toincrease its effectiveness in enforcing existinglegislation while enhancing market pricing toreflect environmental externalities in markettransactions. The reform strategy underpin-ningthis new role would focus on four areas:better policies on land, including creation ofthe institutions in which more market pricingfor land can take place; removal of obstaclesto peoples mobility, including reforms of thehukou system and provision of a minimumpublic services package across China; a fis-caland financial strategy that will make thenew model of urbanization affordable; and achange in the incentives for local governmentofficials to pursue the goals of the new urban-izationmodel.The main benefit of reforms will be higher-qualitygrowth. The reforms proposed in thisreportspecifically regarding land, hukou,and fiscal system reforms, and a change inthe incentives for local governments to attractinvestmentwill make the allocation ofland, capital, and labor more market based.That in turn will change the distribution ofeconomic activities across Chinas urbanlandscape. Accelerating the shift of industrialactivities to cities where land and labor arecheaper would provide a stronger economicbasis for those cities, and therefore promotesmall and medium-size cities. At the sametime, this shift in industrial activities wouldalso reduce migration pressures for the largestcities that would increasingly specializein high-value services and innovation andattract higher-skilled labor rather than a low-skilledindustrial workforce.Land reforms would improve the efficiencyof rural and urban land use and increase thecompensation rural residents receive fromland conversion, thus improving the distribu-tionof income and wealth. Land reforms willalso likely lead to denser cities, which wouldreduce the energy intensity and car use in 24. e x e c uti v e sum m a r y xxvcities, thus improving environmental sustain-ability.And reduced land use for urbaniza-tionwould leave more land for environmen-talservices and agricultural production.Hukou reforms and supporting reformsin public services would increase the mobil-ityof workers across China and added totheir productivity and wages. It would alsoaccelerate rural-urban migration, whichcombined with land reforms, would acceler-ateagricultural modernization and increaserural incomes, thereby reducing rural-urbanincome inequalities. More equal service deliv-eryacross China would expand the equalityof opportunity for all Chinas citizens. Bet-teraccess to housing finance for migrantswould allow them to acquire urban propertyand benefit from capital gains, thus reducinggrowing wealth disparities.Fiscal reforms would generate the revenuesto finance a minimum package of servicesacross China and reduce the need for land-basedfinancing, while limiting the risk to thefinancial system resulting from unregulatedborrowing by local governments. Fiscal andfinancial reforms would also exert more dis-ciplineon local governments, thereby reduc-ingthe wasteful development of ghost townsand empty industrial parks.Six priorities for establishing a new urban-izationmodel emerge from this study.First, reforming land management andinstitutions. More efficient land use, densercities, modernization of agriculture, and bet-terincome and wealth distribution betweenrural and urban areas all require more effi-cientand equitable utilization of land. Acritical element of reforms is the currentland system, which can be improved by bet-terprotecting land rights and optimizingthe use of land resources in rural and urbanareas. Land rights could be better protectedby: (1) legalizing the central policy of longterm without change for farmland leasesand specifying the nature of the contractualrights to farmland, including the rights tooccupy, use, profit from, transfer, mortgage,and bequest land; (2) improving land titleregistration by enforcing written land leases,establishing a register for land titles and landtransactions. Over time, a unified land regis-trationsystem based on unified rules, stan-dards,and procedures applicable to all landshould be established; (3) reforming collec-tiveownership by codifying that collectiveassets belong to the collectives members,clarifying membership and qualifications forentering and terminating collective member-ship,and defining rights to collective assets,including the rights to occupy, use, profit,transfer, withdraw with compensation, mort-gage,guarantee, and bequest an inheritanceof those rights; and (4) defining public inter-estfor which the government can exerciseits eminent domain power, while unifying theprinciples and standards for rural and urbanland expropriation.Rural and urban land use could be furtheroptimized by (1) allocating rural land in amore market-driven way. In line with land-useplans and regulations, government couldclarify equal market entry of collective andstate construction land, while the collectiveconstruction land that has already enteredinto the urban market needs to be classifiedaccordingly and integrated into urban mas-terplans and managed according to the law;(2) integrating urban villages into the formalurban development process and allowingthe use of rural collective construction landin peri-urban areas for urban developmentwithin the framework of urban master plans;(3) shifting land use from industry towardservices and residential use, increasing trans-parencyin the secondary land-market trans-actions,and boosting the availability of landfor low-income housing from vacant govern-mentland and consolidated urban villageland; and (4) pricing of industrial land inline with competing uses to improve the useof this land and strengthen local governmentfinances.Second, reforming the hukou system tocreatea mobile and versatile labor forcewith equal access to a common standard ofpublic services. To achieve this, the house-holdregistration system would need to movefrom an origin-based to a residence-based 25. xxvi u r b a n c h i n asystem. The hukou system and residencysystem can operate in parallel. A residencyregistration would provide access to servicessuch as education, health care, welfare, andaffordable housing, whereas hukou could bemaintained to provide land rights. As landreforms and pension reforms progress, thisbalance could be adjusted in the future. Cen-tralgovernment needs to define the rules forestablishing residency and a framework forextending access of new residents to urbanservices. Initially, local variations in levels ofaccess and the timeframe in which new resi-dentsgain full access to services may be nec-essary,but standards for residency should begradually unified across China. The first pri-orityis to enable migrants and their familiesto better integrate into urban society and pro-videthem with the social services they needwhich would likely require a central fiscalsubsidy to those cities that host a large shareof migrants. In the medium term, reforms insocial services and the public finance systemcould allow a nationwide common servicestandard, irrespective of location. Sustain-abilityand portability of pension benefits areof particular importance and would requirecentral administration over time. Furtherdeveloping a fiscal system based on expendi-tureneeds and revenue capacity would lay thefoundation for equal access to a minimumlevel of public services across China.Third, placing urban finances on a moresustainable footing while creating financialdiscipline for local governments. Chinasfiscal system has served the country wellsince the major reforms of 1994, but furtherreforms will be required to meet the publicservice demands from new urban residentsand lower revenues from land financing asexcessive land conversion is phased out andcompensation standards improve. For localgovernments to make optimal choices whenusing scarce resources, reforms in the fiscaland financial systems should impose hardbudget constraints on them. There are fourpriorities for reforms: Improve the revenue base of local gov-ernmentsby mainstreaming a propertytax on housinggradually phased in toallow people to adjustto provide localgovernments with a stable, sustainablesource of finance linked to land prices;charging higher prices for urban servicessuch as water, energy, and transport tocover full costs and promote efficient useof resources; and increasing taxes andcharges on motor vehicles to raise revenuesand reduce congestion. China could alsoconsider reassigning some consumptiontaxes to local governmentpossibly whilemaintaining central collection. Irrespectiveof the policy choice on local revenues, atthe margin Chinas cities must be financedfrom local taxes so that local governmentdecisions will be scrutinized by those thatpay the taxes and benefit from publicservices. Improve the intergovernmental grantssystem. In 2013, China had some 200 dif-ferentearmarked grant programs, eachmeeting separate objectives. Consolidatingthese in a limited number of sectoral blockgrants could make the system more effec-tivein the short run. In the medium term,moving to a general grants system thatconsiders revenue capacity and expenditureneeds (including a measure for the numberof residents) would ensure that money fol-lowspeople and would enable local gov-ernmentsto provide a minimum level ofpublic services for all citizens. Central gov-ernmentwould also need to develop stan-dardsfor the subprovincial fiscal system,where large fiscal inequalities remain. Establish an explicit framework for localgovernment borrowing. Allowing localgovernments to borrow requires a well-definedcentral government framework,which should include rules that definewhich local governments can borrow, fromwhom they can borrow, and the conditionsunder which they can do so, and which,at least initially, puts limits on borrowingfor individual municipalities and for localgovernments as a whole. The regulatoryframework should also include a cred-ibleno-bailout commitment by the centralgovernment and clear rules of debt work-outin case a local government becomes 26. e x e c uti v e sum m a r y xxviioverindebted. Nonviable local governmentfinancing vehicles (LGFVs) should be reab-sorbedwithin the local administration,and overindebted governments and LGFVsrestructured to regain financial viability. Reform the financial sector to enhancefiscal discipline of local governments. Inother countries, market discipline alonehas regularly failed to limit local borrow-ing,so China would need to regulate thebond market, banks, and shadow banks onequal footing to ensure local governmentdiscipline and competitive access to financewithout undue risk to the financial system.For the local government bonds market tofunction well, local governments wouldhave to abide by independent creditworthi-nessassessments and rules on disclosure offinancial statements, requirements that arealready common for banks and enterprises.In the short term, bank finance will remainimportant, however, and to ensure thatlocal government borrowing does not riskbanks stability, legal and regulatory limi-tationsalready in place should be enforced.These include exposure limits, which capa banks loan exposure to a single cli-ent;concentration limits, which restrict abanks exposure to a certain type of cli-ent,such as all local governments takentogether; and insider lending limits, whichlimit lending to the owners or co-ownersof the bank. After experiencing widespreadsubnational defaults, countries such as Bra-zilbanned subnational ownership of finan-cialinstitutions.Fourth, reforming urban planning anddesign. Global experience shows that urban-izationhas led to a diversity of viable andlivable cities, different in size, location, andpopulation density, but well connected atthe national level and clustered at the localand regional levels. Rather than prescribingcity size, policies that create a level playingfield can encourage scale and agglomerationeconomies across cities to emerge. Chinawould benefit from replacing the currentstandards-driven master planning withmore dynamic approaches based on soundeconomic strategies for cities. Within cities,flexible zoning that promotes smaller plotsand greater mixed-land use would allowfor denser and more efficient development.China could make better use of existingurban land by rezoning excess industrial landinto commercial and residential land; raisingfloor area ratios (the ratio of a buildings floorarea to the land on which it sits); integratingurban villages into urban planning; and link-ingtransport infrastructure with urban cen-ters.Finally, promoting coordination amongcities in metropolitan areas and city clusterswould enhance agglomeration benefits andencourage better management of congestionand pollution.Fifth, managing environmental pressures.China already has an impressive set of envi-ronmentallaws, regulations, and standards,and many technical solutions to address pol-lutionand increase resource use efficiencyhave been piloted and some mainstreamedfor many years. Improvements will thereforecome with a strengthening of the institutions,incentives, and instruments that enable effec-tiveenforcement across sectors and at anappropriate geographic scale. An intergov-ernmentaltransfer mechanism to compen-satefor environmental compensation couldbe considered. Management of water and airquality, the latter especially in large urbanclusters, would be most effectively conductedat a regional scale. An improved data collec-tionsystem with wider information dissemi-nationwould promote monitoring and com-plianceand allow greater public participationin holding polluters to account. The legal sys-temcould be better leveraged to complementgovernment enforcement by expanding andformalizing current experiments with envi-ronmentalcourts. Furthermore, rebalancingenvironmental policy instruments towardmore market-based tools such as taxes andtrading systems for carbon, air, and waterpollution, and energy use would create agreener urban environment.Sixth, improving governance at the locallevel. The performance evaluation systemof local officials could be adjusted to givegreater weight to variables that will drive 27. xxviii u r b a n c h i n aa more efficient, inclusive, and sustainableurbanization. Local governments incentivesto attract industries would need to be mod-eratedby national rules to ensure that localactions promote national goals. Improvinglocal government financial management andtransparency could contribute to more effi-cientand sustainable urbanization throughthe introduction of a medium-term expen-ditureframework, comprehensive budgetsthat include all government fiscal funds, anddisclosure of full financial accounts includinga local government balance sheet. Establish-mentof a chief financial officer for each localgovernment would ensure clear accountabil-ityfor financial management and local bor-rowing.Finally, new governance structuresfor metropolitan areas could realize agglom-erationbenefits and manage externalities.Many administrative models exist in othercountries and could be tested in China. Theyrange from loose organization, with objec-tivesrestricted to one sector or fully inte-gratedacross all local government planningand services to more formal arrangements,such as the Kreis in Germany or the metro-politanarea councils in a variety of countries.Timing, sequencing, and monitoring. Thepolicy agenda proposed in this report is acomprehensive one, and authorities will needto set priorities. Perhaps the most urgent isthe land agenda: once cities have expanded inan inefficient way, it is hard to reverse. Whilegovernment prepares for stronger propertyrights for farmers, it may wish to tightenland conversion and make more efficientuse of existing urban land. Second, govern-mentwould need to focus on local borrow-ingof all kinds, first and foremost to assesswhether the situation requires urgent action,as has already been done through the recentlycompleted audit of local debt by the NationalAudit Office. Rules for debt resolution willhave to be issued and applied, especiallyregarding instituting a system of propertytaxation, a source of stable revenue. Formalaccess to borrowing will have to wait untila full regulatory framework is in place, andpreferably after local government revenuesources have been strengthened. A decisionon a temporary fiscal subsidy for integrat-ingmigrants would accelerate the implemen-tationof a residency system and could bemade early on. Finally, market-based con-versionfrom rural to urban land is likely torequire more experimentation before it canbe mainstreamed nationwide. Other systemicchanges in the policy areas discussed couldcome later, but presenting a comprehensiveplan for implementing the agenda and estab-lishinga monitoring mechanism for follow-upwould lend credibility to the urbanizationagenda. 28. AbbreviationsACFTU All-China Federation ofTrade UnionsAEZ Agro-Ecological ZoneAQM air quality managementAOTU Autorit Organizatrice deTransport Urban (France)BAAQMD Bay Area Air QualityManagement District(California)BRICS Brazil, Russian Federation,India, China, and SouthAfricaBEEC building energy efficiencycodeBEEL Building Energy EfficiencyLabelingBEST Benchmarking and EnergySaving ToolCAPEX capital expenditureCAPSiM China Agricultural PolicySimulation ModelCASBEE Comprehensive AssessmentSystem for BuildingEnvironmental Efficiency(Japan)CASS Chinese Academy of SocialSciencesCBD central business districtCCAP Center for ChineseAgricultural PolicyCDB China Development BankCE cereal equivalentCEPAC certificate of additionaldevelopment potentialCET compulsory educationtransferCFO chief financial officerCHC community health centerCHIP Chinese Household IncomeProjectCNAAQS Chinas National Ambient AirQuality StandardsCO2 carbon dioxideCOD chemical oxygen demandCPC Communist Party of ChinaCULS China Urban Labor SurveyCWSM China Water SimulationModelDRC Development Research Center(China)ECDE early childhood developmentand educationEIA environmental impactassessmentELITE Eco and Low-CarbonIndicator Tool for Evaluating(Citie)EMMA Electronic Municipal MarketAccess (system)U r b a n c h i n a xxix 29. xxx u r b a n c h i n aENGO environmentalnongovernmentalorganizationEnMS energy management systemsEPB environmental protectionbureauERI Energy Research InstituteESCO energy service companyESMAP Energy Services ManagementAssistance ProgramET evapotranspirationETS emission trading systemEU European UnionEV electrical vehicleFAO Food and AgricultureOrganization of the UnitedNationsFAR floor area ratioFDI foreign direct investmentFIRE finance, insurance, and realestateFIT feed-in tariffFOB free-on-boardFSI Floor Space IndexG-20 Group of 20GB general obligation bondGBES Green Building EvaluationStandardGCTF Green Codes Task ForceGDP gross domestic productGGBP Green, Greater Buildings PlanGNI gross national incomeGONGO government organizednongovernmentalorganizationGVIO gross value of industrialoutputHB hybrid bondHPF housing provident fundHR human resourceHSR high-speed railwayIB-NET International BenchmarkingNetwork for Water andSanitation UtilitiesICCT International Council ofClean TransportationICOR incremental capital-outputratioID identificationILO International LabourOrganizationISIC International StandardIndustrial Classification(system)IT information technologyLCL Labor Contract Law (2008)LEAP Long-range EnergyAlternative Planning (System)LEED-ND Leadership in Energy andEnvironment Design forNeighborhood DevelopmentLGFV local government financingvehicleLPG liquefied propane gasMAC marginal carbon dioxideabatement costMACTool Marginal Abatement CostToolMEP Ministry of the EnvironmentMIT Massachusetts Institute ofTechnologyMOE Ministry of Education(China)MOHRSS Ministry of HumanResources and Social Security(China)MOHURD Ministry of Housing andUrban-Rural Development(China)MSRB Municipal SecuritiesRulemaking Board (UnitedStates)Mtce million tons of coal equivalentMTEF medium-term expenditureframeworkMTR Mass Transit Railway (HongKong SAR, China)NCD noncommunicable diseaseNCRMS New Cooperative RuralMedical Scheme (China) 30. a b b r e v i a t i o n s xxxiNDC notional defined contributionNDRC National Development andReform CommissionNGO nongovernmentalorganizationNH3 ammoniaNOx mono-nitrogen oxidesNQF national qualificationsframeworkO3 ozoneOECD Organisation for EconomicCo-operation andDevelopmentOEI Open EnvironmentalInformationOM operation and maintenanceOMEX operation and maintenanceexpenditureOOP out-of-pocket (expenditure)PES payments for ecological orenvironmental servicesPFM public financial managementPM particulate matterPPP public-private partnershipPPP purchasing power parityPRPD performance rating andpublic disclosurePSU public service unitPV photovoltaicR&D research and developmentRAM Rapid Adjustment ModelRB revenue bondREAP Rotterdam Energy Approachand PlanningRESCO renewable energy servicecompanyRMB renminbiRPS Resident Pension Schemes(China)RSL rural surplus laborRSP resident social pensionSAR special administrative regionSEC Securities and ExchangeCommission (United States)SENCE Servicio Nacional deCapitacin y Empleo (Chile)SEZ special economic zoneSO2 sulfur dioxideSOx sulfur oxidesSOE state-owned enterpriseSPM suspended particulate matterSPV special purpose vehicleSUEEP Sustainable Energy andEmissions PlanningTC280 National PetroleumProducts and LubricantsStandardization Committee(China)TEOS Two Exemptions and OneSubsidy (program)TFP total factor productivityTM/ETM Thematic Mapper/EnhancedThematic MapperTOD transit-oriented developmentTRACE Tool for Rapid Asssessmentof City EnergyTVEs town and village enterprisesTVET technical and vocationaleducation and trainingTWh terawatt hourUDIC urban developmentinvestment corporationUEBMI Urban Employee BasicMedical Insurance (China)UMCT urban maintenance andconstruction taxURBMI Urban Resident Basic MedicalInsurance (China)UWP Urban Worker Pension(China)UWS urban workers schemeVAT value added taxVOC volatile organic compoundWAT wage adjustment transferWHO World Health OrganizationWTO World Trade Organization 31. Part IOverview 32. u r b a n C h i n a 3Over the past three decades, China has expe-riencedrecord growth that has lifted 500million people out of poverty. Growth wastriggered by reforms and opening up, whichcaused a rapid transformation of the economythat allowed people to move out of agricul-tureto more productive activities. Rapid eco-nomicdevelopment was facilitated by urban-izationthat created a supportive environmentfor growth with abundant labor, cheap land,and good infrastructure. Local officials keento attract industry and investment and tocreate employment played an important rolein this transformation. Despite the speed ofurbanization, China avoided some of thecommon ills of urbanization, notably urbanunemployment, urban poverty, and squa-lor.In 1978, less than 20 percent of Chinaspopulation lived in cities; now the share ismore than half. On the basis of the countrysper capita income, Chinas urbanization isprojected to reach about 70 percentsome1 billion peopleby 2030. How China willmanage the next wave of urbanization willbe an important determinant of the countryssuccess in meeting its evolving developmentobjectives.China is now an upper-middle-incomecountry, well positioned to become a high-incomecountry. Chinas leadership has rec-ognizedthat achieving this goal requires anew growth model that is more balanced, isbased on productivity increases and innova-tions,is more equitable in the distribution ofthe benefits of growth, and produces moresustainable environmental outcomes. Theseobjectives are well reflected in the 12th Five-Year Plan. Urbanization has an importantrole to play: urban areas, if well managed,provide efficient factor markets that supportcontinued transformation and productiv-ityincreases through agglomeration effects,allow innovation and new ideas to emerge,spur domestic demand from a rising middleclass, give the services sector space to grow,and save energy, land, and natural resources.Such efficient, inclusive, and sustainableurbanization would contribute to Chinasdevelopment goals.Ef f icient urbanizat ion makes thebest possible use of Chinas productiveresourcesits people, land, and capital.Higher efficiencyor productivitywouldincrease the welfare of Chinas people; moregrowth would be achieved with the samework effort, land use, and capital accumu-lation.Reforms could increase efficiency byremoving barriers that prevent optimal useof Chinas productive resources.Inclusive urbanization provides all peo-pleaccess to equal opportunity to benefitfrom urbanizationto use their labor wherethey are most productive, to accumulateassets and savings, and to use public servicesof similar quality across China. Reformscould promote inclusion by integrating ruralmigrants in cities, providing them and theirfamilities with social services comparable tothose of urban hokou holders, while ensur-ingthat rural areas are not left behind interms of public service access and quality.Sustainable urbanization means urban-izationthat can be supported by Chinasenvironment (land, air, water) and naturalresources, while providing an urban qual-ityof life commensurate with the desiresof Chinas people. Reforms that improvethe urban environment, balance conflictingdemand on land and water, and minimizethe use of natural resources would contrib-uteto sustainable urbanization.This overview report analyzes how Chinacan make its urbanization more efficient,inclusive, and sustainable. In the first sec-tion,Achievements and Emerging Chal-lenges,chapters 1 through 4, analyzeChinas achievements in urbanization andthe challenges it faces in achieving effi-cient,inclusive, and sustainable urbaniza-tion.In the second section, The ReformIntroduction 33. 4 U r b a n C h i n aAgenda, a comprehensive reform agenda isproposed. Chapter 5 lays out the vision forurban China in 2030 and the reform pack-agethat will be needed to achieve it. It alsodescribes the urban landscape in 2030 underthe reform scenario. Chapters 6 through 10provide a detailed set of recommendationsin the key areas of reform. Finally, chap-ter11 proposes the sequencing and timingof reforms. This report is complemented byseven supporting reportsUrbanization andEconomic Growth; Planning and Connect-ingCities for Greater Diversity and Livabil-ity;Inclusive Urbanization and Rural-UrbanIntegration; Chinas Urbanization and Land:A Framework for Reform; Chinas Urbaniza-tionand Food Security; Financing Urbaniza-tion;and Green Urbanizationthat furtherdeepen the analysis and expand on the policyrecommendations. 34. Achievements andEmerging Challenges5 10 15 20 25 30 35 40 45 50u r b a n C h i n a 5Chapter 1 Chinas Urbanization AchievementsChinas urbanization over the past threedecades has been rapid. Chinas urban popula-tionrose from less than 20 percent of the totalin 1978 to 52 percent in 2012, an increaseof more than 500 million people. AlthoughChinas urbanization is without precedent inabsolute numbers, the increase in its urbaniza-tionrate has not been exceptional when com-paredto other countries (figure O.1). In fact,Chinas change in urbanization rate has beenlower than that of countries such as Japanand the Republic of Korea at comparablestages of development, but higher than thatof the United States and the United Kingdomin the past. Moreover, despite rapid urban-ization,the share of the population that isurban remains below that expected at Chinascurrent per capita income. Most important,Chinasurbanization remains incomplete:some 260 million residents of urban areas,known as migrants, lack urban hukou, theurban registration that regulates access tourban public services and social security.Over the past decade, Chinas cities havegained an additional 100 million urbanresidents, and the annual growth rate ofthe urban population reached almost 4percent, five times that of the total popu-lation.Some 40 percent of the new urbanresidents became urban because a nearbycity expanded to encompass the rural areain which they were living, while a similarshare moved to the cities to seek work.1 Pop-ulationgrowth in the largest cities has beenespecially rapid, despite government policiesintended to encourage migration to smalland medium cities.Rapid urbanization has facilitated anunprecedented economic transformation inthe past 30 years, which catalyzed Chinasbrisk GDP growth and pulled more than500 million people out of poverty, many ofwhom participated in Chinas massive rural-urbanmigration, moving from the country-sideto the cities and from agriculture intojobs in industry and services. Chinas averageFIGURE O.1 Chinas rapid urbanization from an internationalperspectivea0Korea, Rep. (196090)Saudi Arabia (196090)Japan (195080)AngolaHaitiMalaysiaChinaAlgeriaIndonesiaBrazil (196090)TurkeyCanada (18801910)BoliviaMexico (196090)NigeriaGhanaEcuadorGermany (18801910)Russian Federation (196090)Iran, Islamic Rep.Spain (196090)NetherlandsMozambiquePortugalUnited States (18801910)United Kingdom (185080)Average for developing countries% increase in urban share of the populationSource: World Bank staff calculations based on World Development Indicators and Bairoch andGoertz (1986).Note: It should be noted that the urbanization rates on which this figure is based are notfully comparable, as definitions of urban areas differ from country to country.a. The time period for all countries is 19782012, unless otherwise noted. 35. 6 U r b a n C h i n aGDP growth rate over the past three decadesreached nearly 10 percent, and urban areasthat provided cheap land, abundant laborfrom migrants, and expanding infrastructurecatalyzed this rapid growth. Demand from agrowing world economy, into which Chinaincreasingly integrated, outpaced domesticdemand, while investment in manufacturingand infrastructure transformed Chinas eco-nomicgeography.A key driver of Chinas success was thedecentralization of decision making to localgovernments, which started in 1980. Thisdecentralization encouraged local experimen-tationand competition for resources betweencities and motivated local initiatives througha performance system that rewarded localleaders success against national developmentgoals. In the transformation process, employ-mentin manufacturing and services grewduring the same period from less than 30 per-centof the labor force to more than 60 per-cent.Reallocation of labor to manufacturingand servicessectors that rapidly increasedtheir productivityaccounted for almost afifth of Chinas GDP growth. Reallocation ofcapital and labor to the more efficient non-statesectors further boosted the productivityof Chinas economy.Chinas cities have largely avoided thesocial ills of rapid urbanization such as wide-spreadurban unemployment and poverty.Many countries have urbanized in the courseof development, but some have seen their cit-iesexpand without much growth, and in suchcases, urbanization has been accompanied byrising unemployment, slums, congestion, andsqualor. China has avoided these problems,in part by regulating the flow of people to itscities, but more so by creating the conditionsfor rapid growth in income and employment.Mobile migrant labor that was temporar-ilyemployed either moved back to the ruralareas or on to the next job, thus containingopen urban unemployment.China is embarking on a new model ofurbanization with conditions that are vastlydifferent from three decades ago. China isreaching a stage in its development in whichefficient use of resources is becoming moreimportant for growth than simply mobiliz-ingresources. In the future, the services sec-torrather than industryis going to play alarger role in growth, and domestic demandis likely to grow faster than external demand.Chinas cities today are much larger and farbetter connected to the rest of the worldand to one another because of the massiveinvestment in infrastructure. This is a strongbasis for continued growth, because it allowsagglomeration effects and specialization tobe the drivers of future growth. It is also amotivator for improved policies that build onthese conditions. 36. o v e r v i e w 7Chapter 2 EfficiencyRapid urbanization has facilitated an unprec-edentedeconomic transformation in Chinaover the past 30 years. However, Chinasexisting growth model is running out ofsteam because of its inefficient use of capital,labor, and land. These inefficiencies resultfrom administrative obstacles to labor mobil-ityand from incentives that have caused localgovernments to become overly reliant on cap-italaccumulation and land conversion. ForChinas urbanization to be more efficient, itsfactors of production need to be used moreproductively, and city agglomeration andspecialization need to be exploited. Theseactions will accelerate urbanization, makeit more conducive to growth, and indirectlycontribute to higher consumption.Urbanization and agglomerationUrbanization is generally associated withhigher income and productivity levels. Inter-nationalexperience suggests that, done well,urbanization can be an important driver ofproductivity increases and growth becauseurban areas offer positive agglomerationeffects, including larger, more efficient labormarkets, lower transaction costs, and easierknowledge spillovers. Agglomeration effectscan also occur in smaller cities with suffi-cientspecialization and transport linkages tolarger urban areas. In the absence of soundpublic policy, however, those agglomerationeffects may be easily outweighed by conges-tioncostspollution, traffic congestion, andhigher costs of living.In member countries of the Organisationfor Economic Co-operation and Develop-ment(OECD), regions with a higher shareof urban population are generally linked toa per capita GDP higher than the nationalaverage; a 3.58 percent increase in totalfactor productivity can be expected forevery doubling of the size of a city-region. Arecent survey concludes that such phenom-enaare not limited to OECD countries,2and indeed agglomeration economies applyequally strongly in developing countries.Estimates for China suggest a 10 percentincrease in productivity for every doublingof city size.Market forces are already starting toright-size Chinas cities for economic effi-ciencyas Chinas rapid growth and migra-tionhave made urban economic systemsmore efficient through higher concentrationof production. Furthermore, experience fromJapan, Korea, and the United States, suggeststhat Chinas large cities will move from theircurrent concentration of industry toward ahigher concentration of services and that inthe future the innovation and service econ-omywill be even more concentrated than theindustrial one has been. Indeed, concentra-tionof services is already taking place acrossChinas large cities. For example, between2000 and 2010, finance, insurance, and realestate services grew almost 2 percentagepoints more in metropolitan than in nonmet-ropolitancities. But these tradable servicesare still much less concentrated than globalnorms would suggest.A key feature of Chinas urbanization hasbeen the rapid growth and concentration ofeconomic activity in large cities with highaccess to international markets. Cities witha population of 2.5 million or more gener-ate95 percent of Chinas urban exports. Thecombined economies of Beijing, Guangzhou,Shanghai, Shenzhen, and Tianjin amountedto $1 trillion in 2010comparable in size toKoreas economy. Incomes in these cities haveclimbed swiftly as well: between 2000 and2010, per capita GDP rose from RMB 35,000to RMB 82,000 in Shenzhen and from RMB32,000 to RMB 66,000 in Shanghai. Risingprosperity in large cities has attracted mil-lionsof people from the countryside. Between2000 and 2005, migration from other prov-incesboosted population numbers by 6.6percent annually in Beijing and by 9.1 percentin Shanghai. Economic concentration is stillsubstantially lower than in the United States,where the largest 10 metropolitan areasaccount for about 38 percent of GDP, com-paredwith only half as much in China.On the policy implications of agglom-erationeffects, the international literature 37. 8 U r b a n C h i n ais careful to emphasize that policy shouldnot favor any city. In fact, policies that arespatially neutral seem preferable.3 Gov-ernmentsshould create a level playing fieldamong cities to encourage firms and individu-alsto locate where they are most productive.The existence of agglomeration economies ontheir own does not imply favoring big cities,4and because density has downsides, the ben-efitsmust be weighed against the costs.Agglomeration effects will become moreimportant for China as the economy shiftsincreasingly to services. In Chinas richer cit-ies,services will become more important asa share of GDP. Agglomeration effects playan even more important role in services thanin industry. In the United Kingdom, finan-cialand insurance services are 35 times moreconcentrated than manufacturing is (andinformation and communications 7 timesmore concentrated).5 Close proximity alsostimulates the growth of other specializedservices such as legal, software, data process-ing,advertising, and management consultingfirms. Urban density allows frequent face-to-face contact among employees, entrepre-neurs,and financierscontact that in turnpromotes innovation and productivity.6As services become concentrated in cit-ies,industry will spread outfrom a fewbig cities to a larger number of small ones.For example, as service employment grew inU.S. metropolitan areas during 19722000,industry moved to the suburbs 2070 kilo-metersaway.7 Aiding this decentralizationwere transport infrastructure investments,which made trade cheaper. Similarly, afterKorea made massive investments in trans-portand communications infrastructure inthe early 1980s, industry decentralized fromthe three largest cities to smaller cities and thehinterlands.8Inefficient capital useChinas growth has become increasingly reli-anton capital accumulation in recent years,especially after the global financial crisis towhich China responded with an investment-driveneconomic stimulus. Chinas invest-mentrate is now more than 45 percent ofGDP, constitutes almost half of demand, andover the past decade accounted for 80 percentof growth. At the same time, the growth divi-dendsfrom reallocating factors of produc-tionacross sectorsand across ownershipformshave declined considerably. Further,the share of growth that can be attributed toproductivity growth not associated with fac-torreallocation declined from 2.5 percentof GDP in 19912000 to just 0.3 percent in200110 (figure O.2).Other Asian economies that grew rapidlyin the pastJapan, Korea, Singapore, andTaiwan, Chinaall relied on high invest-mentover an extended period of time toreach high income, and Chinas capital stockper capita still remains significantly lowerthan in advanced economies, so much capi-talstill needs to be accumu