uses an amended version of the Harris Todaro model to explain the historical off-farm migration in the United States. The author uses two modifications. On the one hand, the unemployment rate is taken as exogenous. This is because unemployment is seen as an effect of ”... fiscal and monetary policy, business outlook, consumer expectations, and investment opportunities ...” (Suits, 1985, p.820), not as a result of rural-to-urban migration. He finds that the model is applicable to the industrial country. Secondly a reduced form of the model is used. Thus, rural-to-urban migration is affected by changes in technology and population size, not by prices and incomes. The results show that the role of the amount of rural surplus labour and job creation in the non-farm sector in the migration decision is reduced with development. This is because the rural sector takes up a smaller share of production and employment once a country has reached a certain level of development. However, the model is still able to give some indication of how and why off-farm migration takes place in developed countries.
3.3 The Applicability of the Model
In addition to the assumptions on rural-urban wage differentials, segmented labour markets and large rural-to-urban migration rates, the analysis above has made a case for explicitly modelling the urban informal sector and agglomeration economics. The evidence shows that there is a strong pull to the urban informal sector for rural migrants. Thus, the extensions to the Harris Todaro model incorporating an urban informal sector and agglomeration economics are of great relevance for the application of the model to less developed economies today, and the basic assumptions of the extended models could be verified.
However, the above analysis also shows that no two countries can be said to be facing the same problems in terms of rural-to-urban migration experiences. The developments can be similar at most. Different countries are faced with different starting positions and historical, political and cultural influences. Thus, although it can be concluded from the above evidence that the Harris Todaro model with its extensions is likely to be applicable to most developing countries, the goodness of fit will have to be established in individual studies. In this study the focus has been put on China. Thus, the next section will describe the historical, economic and political experiences of the Chinese economy. This way the assumptions of the Harris Todaro model and its extensions can be analysed in the context of China. The application of the policy suggestions made by the theory also has to be established individually for different countries. Even if a model represents the present shape of an economy, it may not be able to give good indications of future developments in that country. Thus, the policy considerations will be discussed separately in chapter 6 below.
Chapter 4
The Chinese Case
China has a unique combination of a huge population and an economy that is unusually open to the rest of the world, as measured by trade or foreign direct investment.
(The Economist, Oct. 2nd 2004, Sur-vey, p.4)
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Surplus labour in the agricultural sector, a wage differential between the rural and the urban sector and a segmented labour market can be observed in China.1 This suggests that the Harris Todaro formulation is applicable to model the Chinese economy. However, the experience of China has its particularities.
Decades of producing under a communist regime with central planning have left their marks. Many state owned enterprises (SOEs) are producing inefficiently, swallowing up a large proportion of government resources in subsidies and bailout costs. Nevertheless, privatisation is rapidly progressing and more foreign direct investment (FDI) and the establishment of subsidiaries of foreign enterprises have improved the situation.
At the outset, it has to be explained why China has been singled out for the more detailed analysis. It is a good case study for various reasons. It is a large country at least partly open to international trade since 1978 and a recipient of large inflows of FDI. It consists of many diverse regions. Thus, it allows the study of how various parts of the country are affected by government policies, while holding the legal requirements, other policies and the cultural background constant across all regions. This allows a neutral analysis of national government policies (Wei, 2002, p.27). China is also an interesting case study. Chinese policy makers followed a process of trial and error. Many policies were introduced in a chosen geographical area first. If the outcome proved to be successful, the policy was then implemented in other parts of the country.
Additionally, China is a special case in the developing world. Relative to other less developed countries it is far more developed and is more involved in interna-tional trade with the rest of the world. Other examples of emerging countries of similar size are Russia, India and Brazil. However, the Gross Domestic Product (GDP) of China is greater than the GDP of the the other three countries added together (The Economist, October 2nd 2004, Survey, p.11). Also, China exports six times as many goods and services as India (The Economist, October 2nd 2004, Survey, p.11). To give an example of the extend of China’s involvement in world trade: more than 50 per cent of digital cameras, every third mobile phone and every fourth washing machine are produced in China (Der Spiegel, 42/2004, p.112-3). Wages are lower than in India and Vietnam (The Economist, October 2nd 2004, Survey, p.6), two countries boasting either a large labour force or a high level of production and trade with the rest of the world. The Economist (October 2nd 2004, Survey, p.6) sums up the additional benefits in the Chinese economy as follows: ”... [China] has the advantage of good infrastructure, an educated work force, a high rate of saving available to finance investment and, most important of all, an extremely open economy.” Thus, the further integration of China into the world economy will not only affect China, but due to the sheer size of its population and its geographic and economic size it will also have a
1Wang et al (2000, p.102) find that blue-collar jobs are open to rural migrants even in the urban formal sector. However, white-collar jobs are out of reach.
huge effect on the world economy as a whole.
In this chapter the applicability of the Harris Todaro model to China will be tested by comparing the assumptions made by the authors with the conditions apparent in the Chinese economy. However, as Wang et al. (2000, p.103) put it ”... it would be counterproductive to deal with the issue of internal migration in China without having firm knowledge on the nature and workings of labour markets along the rural-urban continuum.” Thus, this chapter will look at the Chinese economy in greater detail. This allows the reader to understand the structure of the economy, also in terms of rural sector development and agglomeration economics. The resultant policy options for the future will then be looked at in chapter 6 below.
This chapter is structured as follows. First, in section 4.1 the availability of Chinese data will be discussed. Then, section 4.2 covers the historical develop-ments in China, while section 4.3 details the structure of the Chinese economy.
Wage rates and rural-to-urban migration will be looked at in sections 4.4 and 4.5 respectively. In section 4.6 the developments in the Chinese rural sector are analysed. Agglomeration economics and urbanisation are the subjects of sections 4.7 and 4.8 respectively. Section 4.9 concerns itself with the internation-alisation of the Chinese economy, while section 4.10 sums up the analysis to give a conclusion on the applicability of the Harris Todaro model and its extensions to the Chinese economy.
4.1 Chinese Data
Holz (2004) has written an excellent article on the problems of data collection in China. Some of his ideas will be stated here, but the interested reader may refer to the source for a more detailed analysis. As stated above, the Chinese economy is a special case when studying economic developments, because of its conversion from a centrally planned to a market economy over the last two and a half decades. Many variables had to be redefined or given a new definition altogether over the past sixty years. This has made data collection more difficult, as will become apparent in the analysis below.
Collecting adequate data in China has not been facilitated by economic reforms.
Before the reforms were introduced in the late 1970s, agricultural production was divided into communes. For these small production units, it was easy to collect the necessary data. The data was then passed through the ranks of the communist regime and collected at the highest level statistical bureau. Here
4.1. CHINESE DATA 93
it could be evaluated and the next plan could be calculated. However, with decollectivisation the rural economy was divided into much smaller segments.
Additionally, the amount of private enterprises and the number of self-employed workers increased. Services also entered the production structure. Thus, collecting adequate data became much more complex in the 1980s. China’s National Bureau of Statistics (NBS) had to adjust to these changes, but only managed to do so gradually. For example, it did not have consistent data for village-level firms until after 1985 (Holz, 2004, p.384).
With economic reform, not only the amount of data increased, but also the variables that needed to be collected. For a centrally planned economy, knowing the amount of capital and labour, machinery and other inputs required for production is essential to develop the next five-year plan. However, for a market economy, the overall well-being of an economy, that is the birds-eye view, is much more important. Data on variables, such as the gross domestic product, prices and employment, that had previously been set by the government now have to be collected, as well. Variables were redefined. New staff had to be trained.
This could not happen overnight, especially not in a cash strapped developing country. Thus, accounts were falsified and a large proportion of production was not recorded at all. The body of data altogether was too great for China’s NBS to deal with.
The Chinese government was aware of many of these problems. Therefore, it amended the reporting system in the Statistics Law of 1996. To reduce the inflow of data, only firms with a sales revenue of more than 5 million yuan per annum, that is around USD 600,000, directly reported to the statistical bureau. Censuses and surveys were introduced as an additional source of data collection. They also act as checking devises for the statistics provided by enterprise accounts.
This has made data collection more manageable for the government.
The reforms appear to have been successful. Since opening the economy to the rest of the world in 1978, a lot of progress has been made in collecting data. The quality of Chinese data has been improved significantly. Data falsification has been reduced, variables are more consistently defined and data is evaluated by a greater number of better trained personnel.
However, some measurement problems persist as they would in any other econ-omy in the world, whether it is industrialised or less developed. Bhattarcharya and Parker (1999), for example, find difficulties when measuring the labour surplus in Chinese agriculture. The authors define the variable of labour surplus as ”... the difference between the estimated requirement function and the observed agricultural labour force ...” (Bhattarcharya and Parker, 1999, p.72). However, they also find that the measurement is inaccurate, because rural-to-urban migration is affected by many other factors that are not included in the variable.
Migrants from the surplus labour force, for example, may have liked to migrate before, but were not able to due to government restrictions. Thus, a meaningful definition of variables is not always easy.
When considering agglomeration economics in section 4.7, problems will again arise with data definition. Yixing and Ma (2003) found that China’s State Sta-tistical Bureau (SSB) does not define or consistently collect data on urbanisation levels. The term ”city” is also not adequately defined. Sometimes it can even include rural areas under the jurisdiction of the city authorities. Even in the five national censuses, the definition of urban population has not been consistent.
City and town population can wrongly include many rural residents, which will result in an overstated urbanisation rate in China.2
The size of the rural urban wage differential is also prone to miscalculations.
This is due to the benefits in kind available to urban residents. These include health care and housing and will be discussed in greater details below. Thus, disregarding these benefits will understate the income differential between the rural and urban labour force. However, it is also difficult to include a measure of benefits in kind that vary according to the geographical areas and the employment sector.
The number of migrants is also likely to be understated and variable. Many rural workers migrate illegally to urban areas and are not registered there.
Additionally, the definition of migrants is often changed. Some temporary migrants are included while others are not. This finding is supported by Yang (1993, p.814) who states that the rural-to-urban migration rate in China has been understated. However, Goodkind and West (2002) find that the definition of the floating population has been improved. This is partly, because the government has realised that a large floating population is necessary to keep up production and growth levels. Thus, after the 1990s the amount of time that a worker had to be away form his place of registration to be considered a migrant was shortened from one year to six months (Goodkind and West, 2002, p.2248).
Additionally, the date for the official national consensus was changed from October to November in 2000. This is helpful, because many migrants return to their rural homes in October for the lunar new year and the October holidays, so that they used to be excluded from the statistics as a migrant (Goodkind and West, 2002, p.2248). These changes made to data collection have helped to make the data on Chinese migrants more accurate.
The above analysis shows that data and the resulting econometrical studies have to be interpreted with care. Variables may be over- or understated and their
2However, note that the urbanisation rate in China is low for a country at this level of economic development. For example, it is far less urbanised than India. This will be shown in section 4.8 below.