The urbanization fallacy

China Financial Market ^ | August 16, 2013 | Michael Pettis

[TigerLikesRooster]

The urbanization fallacy

Posted by Michael Pettis on August 16, 2013

in Urbanization

The latest default bull argument supporting higher levels of growth in China than I believe possible is the urbanization argument. Beijing is planning another major urbanization push, and according to this argument China can resolve the problem of wasted investment by investing in the urbanization process, that is it can engage in a massive investment program related to the need to build infrastructure for all the newly urbanized. Here is the Financial Times on China’s urbanization policy:

[TigerLikesRooster]

P!

[Vince Ferrer]

Wages in China are getting high enough that manufacturing jobs will be outsourced, including back here. This will make city jobs more scarce. Urbanization will also accelerate the demographic problem.

China's Unprecedented Demographic Problem Takes Shape

[Wuli]

same ol same ol as in the U.S.

thinking that “housing” and its infrastructure is some kind of perpetual motion machine in terms of economics - its not

it’s the cart and it follows - is pulled by the horse - job growth, not the other way around

[Zhang Fei]

I like Pettis and he makes great arguments. I think the problem with this particular argument is that he assumes that all countries are all that they can be at any point in time. I'd argue that China has suffered, from 1949 to 1979, from a serious mis-allocation of raw human capital, such that people who really should have been working with their brains, were literally working with their hands (e.g. pulling plows that, in other Third World countries, were operated by draft animals). And this mis-allocation is so severe that government action can significantly improve not only the lot of the average citizen, but also increase the economic growth rate of the entire country.

China is a huge country and cannot possibly decentralize its infrastructure to the extent that all jobs are reachable by all who might have the raw talent to fill them. And urban living being expensive, many are dissuaded by the high cost and risk of moving to the city, only the be crippled in an industrial accident and become a burden on their extended families. Thus, development relies on bright individuals currently on farms to pursue urban jobs on their own initiative, shouldering 100% of the risk of working for uncaring employers that discard shredded employees like used Kleenexes in pursuit of the almighty RMB.

Rather than being unprecedented, the current Chinese initiative resembles Singapore's government-subsidized housing push, with a slight difference, namely that China's version is also a quasi land-reform program. It reverses a sliver of the inequities of the Communist Party's confiscation of all land from their original owners in 1949, by handing out subsidized apartments to the descendants of some of the people negatively-affected by that confiscation. The high-IQ descendants of intellectuals and professionals shipped out to rural areas who settled there permanently, and were thereafter involved in low-productivity work should also benefit. A big part of the West's industrial development occurred because its brightest minds were liberated from the mind-numbing routine of farm work and set towards more productive activities. I'd argue that China could benefit from reversing decades of mis-allocation of human resources with these programs.

Since 1979, the Chinese government has been highly effective in not only freeing up the economy - it has also generated the highest growth rate of any Third World economy. As a 30-year China skeptic, I'm not exactly a fan of the regime (i.e. I think it would be poetic justice if the entire communist party and all of its extended family were deported to a penal colony in Antartica), but I think there's more than meets the eye with many of its economic policies.

[snoringbear]

“Wages in China are getting high enough that manufacturing jobs will be outsourced, including back here. This will make city jobs more scarce. Urbanization will also accelerate the demographic problem.
China’s Unprecedented Demographic Problem Takes Shape “”

China’s demographic problem is already in motion. Their problem is somewhat similar to our problem here in the U.S. poor rural Chinese from the semi-autonomous regions have and are moving into the high growth urban areas, primary along the Pacific crescent. And, even though one must have a intra-country passport to travel from region to region the regulation is not abided by. It’s kinda like our illegal immigration problem with Mexico, poor seeking a better life and willing to risk consequences to get it. So, these illegal workers are living in shanty’s in and about the high rises, office buildings,etc. being that these shanty’s and such dint have any plumbing or running water there are severe higene and sanitation problems as a result - not to mention the image problem this creates with feces and urine pools on the streets and sidewalks. So, the government is attempting to build some living quarters for them to to cean up the cities. Btw, the PRC has an interesting method of cleaning out these shanty towns. Notices are posted that the occupants have 30 days to get out. Then, the bull dozers move in and start leveling everything and preparing the land for new construction. Not very pc but its sure effective :)

[E. Pluribus Unum]

This is the kind of thinking that gave us zombie malls and entire cities.

The "urbanization" centers will become prison camps in very short order.

[Rockingham]

China's choices are constrained by structural issues, demographics, diminishing returns on investment, and the inefficiencies and follies fostered by Party control. The push for urbanization seems to reflect many of those factors and may be spurred by complementary desires to rationalize its fragmented and relatively inefficient agricultural sector and to accommodate multiple generations in an urban setting.

In effect, China seems to want its current generation of workers to retire in cities near or readily accessible to their offspring and to vacate the remote countryside where most Chinese were born and raised and would otherwise retire.

As such a wave of more intense urbanization is accomplished, China's ancient pattern of tenaciously held small farms can be more easily consolidated into large efficient, commercialized operations, as in the US. With the elderly living in cities closer to their children and grandchildren, extensive travel and other family related burdens on urban employment will be reduced and the provision of geriatric care and of schooling for the young made more efficient.

Of course, calculations by central planners and politicians often break down because costs and human preferences are hard to anticipate in full and tend to subvert official goals. And China's notorious corruption has led to massive malinvestment and lots of badly constructed buildings and infrastructure.

By following Japan's model of export led industrialization, China got a generation of rapid economic growth, but she now seems likely to at best become a bigger, messier, more polluted version of today's economically stagnant and over-leveraged Japan. Fifteen years from now, China may well be a textbook case of a country that missed its chances.

[GOPJ]

Thanks for the ping.

[St_Thomas_Aquinas]

Does this remind anyone of Japan in the ‘80s? How’d that national industrial policy work out for them. Whatever happened to analog HDTV?

[B4Ranch]

I think you guys are correct but you are overlooking the fact that China has their own version of Agenda 21 in operation. “Get the people into the cities where we can control them.”

[Rockingham]

No doubt that consideration is never out of the regime’s thinking, but it argues against urbanization in that cities readily offer the critical mass of people necessary for a riot or a revolution. This potential seems to have been addressed by the wide boulevards and many government buildings common to the new cities.

[BfloGuy]

it’s the cart and it follows - is pulled by the horse - job growth, not the other way around

Crucial point; bore repeating. Housing is a consumer good. People must produce something [i.e., WORK!] before they can buy a house. Attempting to pump up the housing industry while employment languishes will only create a temporary, investment-based housing bubble.