Where Big Is Best

As China continues to boom in the coming decades, it would be well advised to think big. Big cities, that is. So far the migration from rural areas that has driven China's growth has fed the rise of many cities, and this scattered pattern is magnifying the key problems of urbanization: pollution, environmental destruction and the dislocation of farmers from land around cities, which is producing a growing number of agrarian protests. The development of megacities—which, granted, have produced chaos in other countries—would in fact produce a cleaner, more socially stable and faster-growing economy in China. Bigger is better for China due to its unique development pattern. Some foreign observers assume that China has urbanized successfully, so far, because it has a strong central government that can impose conformity even in the smallest village. And that was true in the past. However, after China began to embrace economic reform and openness after 1978, it relaxed the internal passport system called hukou to ensure a plentiful supply of labor in economic hot spots. To this day, China's economic liberalism has gone hand in hand with a policy of unleashing local dynamism, and explicitly encouraging entrepreneurial city leaders.

No single factor has been more powerful in driving urban expansion than the freedom cities have had to buy and sell land. That feature helps to explain why China has largely so far escaped the slums that have disfigured rapidly expanding cities elsewhere in the world. In other countries, from Brazil to India, an influx of migrants to cities has come first; local governments have then relied on the tax system to play catch-up in building the urban infrastructure.

In contrast, Chinese cities have been able to finance a "build it and they will come" approach, partly because of central-government transfers from China's prodigious savings and partly because of local land transactions. Until recently, China's city leaders have had carte blanche to acquire surrounding countryside cheaply and then sell this land, still at steep discounts, to incoming businesses and real-estate developers, using the proceeds to boost competitiveness and job creation and to build the urban infrastructure. The McKinsey Global Institute (MGI) estimates that over the past decade land sales have accounted for up to 60 percent of annual revenues in some cities. The jobs created by incoming businesses have then acted as a magnet to migrants. Since 1990, China's urban population has doubled, but its urban land area has grown by 150 percent.

The golden goose of land acquisition and sale may now have its wings clipped. Concerned by social unrest among displaced farmers, China's central government has instituted new controls on this practice. Local mayors may no longer rely on this source of revenue and will thus find it far harder in future years to finance urban construction. Yet the demands on the public purse will be growing inexorably. China's cities need to find the money to extend social coverage to its huge migrant populations (which, in many cities, will account for more than 40 percent of their populations by 2025) at a cost MGI estimates will reach an additional 1.5 trillion renminbi by 2025 (about $215 billion at today's exchange rate), or almost 2.5 percent of urban GDP. At the same time, cities need to fund the continuing buildup of infrastructure and mounting bills for tackling the dark side of urbanization: pollution and congestion.

Over the past 17 years, more than 100 million people have moved from the countryside to rapidly expanding urban centers. So far urbanization has followed a dispersed pattern, with many cities scattered across inland to coastal China and from north to south, all growing in parallel. In 2005, according to MGI's assessment, China had 858 cities and, following current trends, this will reach 939 by 2025. All are jostling for resources and historically have focused largely on a rush for GDP growth.

By 2025 we will have seen China's city populations swell by 350 million people—more than the population of the United States today—of which more than 240 million will have moved from rural areas. Urban China's demand for energy and water will double over the next 20 years compared with today. Under all circumstances, pollution will be severe. Today almost 60 percent of China's river water is already below international potable standards, and it is quite possible that urban water pollution could quintuple by 2025. Air pollution, in particular nitrous oxide, could reach critical levels in larger cities. Congestion is already compromising the smooth running of cities—Shanghai could outstrip its road capacity by a factor of three. Dispersed urbanization scenarios would result in a loss of up to 20 percent of China's available arable land.

The question now is whether the current approach will prove sustainable. MGI's research concludes that China would benefit substantially by shifting to a more concentrated urbanization pattern. One model of concentration could see China favoring the growth of 15 supercities in 2025 with average populations of 25 million people. The second could spur the further development of 11 urban "networks" of cities, linked by strong economic ties, with combined populations of 60 million-plus each on average. We have seen both models play out in some form internationally. There are supercities such as New York, London and Tokyo. And dynamic city networks have emerged including the system centered on Seoul.

MGI is not arguing that bigger cities are always the most successful. However, big may well be best for China, given both its unique history and the sheer magnitude of its population and the share of that population moving into cities. China's cities already account for 75 percent of China's gross domestic product; by 2025, that figure will have risen to more than 90 percent. But they will be richer cities if they are big. Both of the concentrated scenarios would deliver yield per capita GDP in 2025 of about 75,000 renminbi, or about $10,700 at today's exchange rate, or 20 percent higher per capita GDP than more dispersed urbanization scenarios, largely due to the productivity and efficiency advantages that have been true of larger cities in China.

China's larger cities have clearly packed a more powerful economic punch than smaller urban centers. MGI estimates that in 2007 only 14 cities had populations of more than 5 million and yet they accounted for 33 percent of China's GDP. Large cities have also disproportionately attracted investment and skilled workers. One quarter of Shanghai's work force has college degrees.

Public spending overall would be somewhat lower as a share of GDP in concentrated urbanization than in dispersed growth. Energy usage would be 20 percent more efficient. The loss of arable land would be limited to some 7 to 8 percent compared with more than 20 percent in dispersed urbanization, where cities tend to expand "horizontally." Carbon emissions would be substantially lower as denser cities mitigate carbon output—and while pollution in individual cities might be higher, dealing with it is more practical on a large scale than if the problem is dispersed nationwide.

Beijing has many policy options if it were to decide to move in this direction. It could enforce even tighter restrictions on land acquisition by cities, slowing the growth of less-developed urban centers and favoring dense urban development in large cities; it could promote infrastructure projects including roads, refineries and ports centered on super-cities and city clusters, and it could grant more autonomy to larger cities, allowing them greater flexibility to set their own policies.

Outside observers may be skeptical about the prospect of many huge, densely packed Chinese cities. Will China spawn a new generation of cities tarnished by slums and social deprivation that we see elsewhere? Or can China manage its demographic phenomenon effectively and create a new generation of world-class modern cities to rival, say, New York or Tokyo?

The difference between the two will be effective management. Mayors will need to think more strategically and put urban productivity at the core of their thinking—focusing on the quality of urbanization rather than supporting GDP growth at any cost. Even if urbanization proceeds on its current course, China should meet its ambitious new target of quadrupling per capita GDP by 2020. But by putting urban productivity at the core of their thinking, China's urban developers will deliver much greater improvements in the quality of life of its citizens.

Some cities such as Wuhan, Qingdao and Hangzhou are already showing the way, pioneering innovative approaches to boosting the efficiency of public-service delivery, developing talent sometimes in conjunction with the private sector and experimenting with new antipollution and anticongestion measures. China needs to replicate their successes across the nation and do so urgently because the pressures of urbanization will hit the most vulnerable—migrants and small cities—the hardest.

How China manages its transformation will not only shape the nation but exert a powerful influence around the globe. As the world watches China's progress, there is little doubt that the sheer scale of change is impressive. But the ingenuity of city managers, their efficient use of resources and a strategic approach centered on concentrated growth and urban productivity will be the yardsticks of long-term success.

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