Achieving Comprehensive Hukou Reform in China

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as costs for city management and social housing.

Some media reports state that if the entire existing urban floating population of 230 million were assigned urban hukou, the total cost would be 23 trillion yuan ($4 trillion),

an astronomical figure that China obviously could not afford.

But that arithmetic is flawed because it simply multiplies 100,000 yuan by 230 million. The 100,000 yuan in services for granting an urban hukou to one member of the floating population would not be spent in a year, but rather over a lifetime (approximately 40 years). That is, the 100,000 yuan will be distributed over 40 years, which, based on a linear distribution, amounts to an average of 2,500 yuan ($400) annually (in 2010 constant prices).9

So if, on average, 20 million people are given urban hukou each year, the total cost would be 50 billion yuan (in 2010 constant prices) per year, or 0.1 percent of China’s current GDP. This ratio would increase incrementally each year—by the fifteenth year, the cost would amount to 1.5 percent of GDP—but these are costs that China should be able to bear.

However, these costs represent only the public expenditures, and thus do not account for the public revenue that would be generated by the

Achieving Comprehensive Hukou Reform in China 4

Photo: World Bank

floating population through taxes and other channels of contribution. A healthy, well-designed public services system would be one financed by taxes of the users. In the long run, expenditures and revenue should offset one another.

The majority of the floating population is relatively young, thus the urban welfare required by them in the short term would not be much, and would mainly consist of some migrants requiring social housing, especially after marriage. In the medium term, the main service required by these migrants who have converted to holding urban hukou would be public education for their children. The largest expenditure, social security, including pensions and healthcare, would primarily be a cost over the longer term after 2030. So in the initial phase, urbanized members of the floating population would be net contributors, via taxes and other contributions, to public finance rather than net beneficiaries. Put differently, if only the first 15 years of the hukou reform plan are considered, expenditures for urbanization will not be as high as some predict. Urbanized members of the floating population will be net contributors—that is, the revenue they generate would exceed expenditures.10

At present, the urban hukou population, especially in very large cities, is aging rapidly, and under China’s current pay-as

you-go system for pensions and healthcare, the younger floating population’s contributions to welfare could help to plug the urban public finance gap created by the aging of an urban hukou population. Under this proposed reform plan, in the initial stage, because mainly highly educated and higher-income groups are given hukou, their contributions to urban public finances should be even greater. In short, the public burden from more comprehensive hukou reform in the near term will not be as heavy as many predict.

But there is more to the case for hukou reform than just the issue of public spending burdens. Although the “costs” of urbanization should, of course, be considered, the enormous economic dividends of hukou reform are equally significant.

When a migrant worker works in the city, the value of his or her output generated will be far more than the costs of public services. And the output will be far in excess of the costs of urbanization and workers’ wages. In general, if China’s floating population had local urban hukou, they would have the right to fully participate in urban public affairs, and to enjoy what other urban residents do with regard to choice of work, opportunity to play to their own strengths, and greater security and fewer worries. These would greatly improve productivity and boost domestic consumption

Paulson Policy Memorandum

Achieving Comprehensive Hukou Reform in China 5

In short, the public burden from more comprehensive hukou reform in the near term will not be as heavy as many predict.

and demand, setting into motion a virtuous “urbanization-economic growth” cycle.

Meanwhile, a recent quantitative study by the Institute of Population and Labor Economics11 notes that hukou reform will result in freer movement of labor, an expansion of the size of the labor market, more specialization of labor, and a substantial increase in the total factor productivity of the urban economy. This study estimates that if 17 million people are granted an urban hukou each year, the resulting economic net gains would be considerable. Between 2015 and 2020, the annual net economic gains would amount to approximately 1.6 to 2 percent of GDP, equivalent to several times and up to dozens of times the costs of urbanization over the same period.

There are also other indirect, hardto-quantify benefits. For instance, receiving an urban hukou will stabilize the expectations of residency of a migrant. This will enable him or her to gradually transfer the unused residential land and arable land in rural areas, in turn, greatly improving the utilization efficiency of such land for production and residence. This is especially important for China, where land is scarce.

This is also the logic behind why proper urbanization will produce a net profit and promote economic

and social development. This is different from certain urbanization in some Latin American countries, where migrant workers enter the city but cannot find a job, resulting in urban blight and other challenges. Looking at a longer time horizon, human beings have progressed on the path of urbanization for more than 200 years. Of course there are problems, but overall, urbanization—the transformation of the rural population into an urban population—has resulted in greater productivity, higher quality-of-life, and a more promising future for mankind.12

But over the past 60 years, China has been travelling down a somewhat different road, pursuing an “incomplete” urbanization and focusing too heavily on the shortterm benefits of industrialization and stressing the “costs” of urbanization, while ignoring the interests of rural citizens as well as the long-term interests of China’s people as a whole.13

Presently, a major source of resistance to hukou reform is local governments.