Survey of the World Economy, October 2nd 2004, p.15). Capital could also be used more efficiently. Allowing it to move into the rural areas would curb migration. However, while this is the case, migration should not be restricted (Au and Henderson, 2002). This would help to reduce the rural labour surplus and to realise economies of scale in urban areas. Thus, in the light of inefficient capital and labour allocation, migration should not be restricted, but ought to be encouraged. Yang and Zhou (1999, p.116) suggest that rural-to-urban migration ought to be encouraged to close the productivity gap between the urban and the rural sector.
In the context of the world economy, the economic development of developing countries is essential for the preservation of the environment. Higher incomes and greater awareness will ensure the implementation of environmental laws and regulations in developing countries in the long run. Until then, environmental standards must not be unified across the world, because all countries value the economy differently (Mao, 2001, p.411). However, developing countries should be encouraged to take environmental costs into account, especially since the num-bers suggest that it is already in their economic interest to reduce pollution levels.
6.7 What lies ahead
The Chinese reform process has had many successes so far. Microeconomic reforms have established an incentive scheme for producers while keeping the number of losers low. Focusing on piecemeal reforms has established a reform process of gradualism and experimentation. However, as the analysis above has shown, more reforms are still necessary.
The government has to find the right level of control to exert on rural-to-urban migration. Migration restrictions result in an inefficient labour allocation in the Chinese economy.15 Constraining employers to employ workers with a rural not an urban hukou has a negative effect on production (OCED, 2002b, p.568-9). For the labour market to clear in rural and urban areas, employment and wage rate adjustments must become more flexible to respond to changes in labour demand and supply. Segmentation between the rural and urban sectors and within the urban sector has to be eliminated (Meng, 2000, p.207). Those rural workers who migrate legally have to be given the same rights to housing and health care as urban residents, and they must not have arbitrary fees and charges imposed on them (Wang and Zuo, 1999, p.278). One way to achieve greater flexibility is to
15Further, the restrictions on the mobility of goods and capital also have to be dealt with.
reform the state-owned enterprises further and to abolish their iron rice bowl policy16. However, this requires that an adequate welfare system is put into place to look after the unemployed and laid-off workers from the former state enterprises. Further, corruption has to be rooted out and a transparent legal system must be introduced (The Economist, A Survey of the World Economy, October 2nd 2004, p.6). In order to absorb some of the excess labour force, 12 to 15 million employment opportunities must be created annually over the next three decades (Johnson, 2002). Training and education for people and adequate infrastructure to allow workers to migrate are necessary (Ravallion and Jalan, 1999, p.304). Conditions have improved due to the increase in newspaper availability. In the 1980s, there were only 382 newspapers in China, while this number had risen to 2119 in 2003 (The Economist, December 18th 2004, p.82).
For those rural residents, who are left behind, poverty reducing policies must be implemented (Ravallion and Jalan, 1999, p.304).
Further, capital and credit must be allowed to be allocated efficiently to avoid the danger of bad debts (The Economist, A Survey of the World Economy, October 2nd 2004, p.6). Interest rates are too low and, therefore, the demand for credit is too high. The economy could overheat. Thus, interest rates have to become more flexible to deal with excess demand and supply. There are even rumours that the People’s Bank of China, the Chinese central bank, is considering a rise in interest rates to reduce lending and investment, as inflation already sits at 3 per cent (The Economist, May 15th 2004, p.67). Some investments also have to be curbed, because in many industries there is excessive investment in infrastructure that may not be sustainable any more once growth slows. Additionally, credit has to be allocated more efficiently. SOEs still receive the majority of available loans, but they do not use the funds most efficiently. Other sectors are disad-vantaged, because credit allocation is still largely controlled by the government and party membership. Again, this will be improved with further integration into the world economy, because Chinese people will be able to invest in foreign assets (The Economist, October 2nd 2004, A Survey of the World Economy, p.16).
One problem in carrying out most of these reforms is the lack of government revenue. Lately tax revenue in China has been increasing as a percentage of GDP (OECD, 2002b, p.41). However, it is still insufficient to cover all the necessary investments in education, health, social security and other reforms.
As income levels increase, the amount of income tax collected will also increase.
Also, with higher consumption value added tax (VAT) revenues will also be on the rise. As foreign firms become more integrated in the economy and lose some of their privileges that were used to attract them to China in the first place, they will also become taxable entities. This will give government revenue a big
16The expression stems from the time, when the SOEs fulfilled the role of social security provider for their workers, thus in addition to wages they also provided them with ”rice”, standing for all foods and other necessities.
6.7. WHAT LIES AHEAD 183
boost. Informal sector workers and other workers that may fall through the tax system, must also be included in the tax base. Government revenue as a whole must be used more efficiently and budget planning, the collection of revenue and monitoring must be improved.
Lin, Cai and Li (1996) suggest that now there are two routes of reform for the Chinese government. It can either choose to introduce macroeconomic reforms to finish off the reform process. Without these macroeconomic reforms Chinese growth would be reduced. There will be a disequilibrium in supply and demand, where the latter exceeds the former. Therefore, exchange rates and interest rates have to be fully liberalised. At present the Chinese exchange rate is tied to the dollar. This is useful, because it results in stability of the exchange rate.
However, in the long run flexibility is necessary in order to maintain the external balance and to avoid speculative pressures (OECD, 2002b, p.740). This has the drawback of potential social unrest and losses to specific vested interests, especially in the state enterprises, but promises many benefits as well.
The other choice for the government is to recentralise the economy to overcome the transitional problems. Once the economy is in good shape, power could be decentralised again. However, recentralisation may reduce the credibility of the government and the Chinese population and foreign investors will believe that all reforms are so easily reversed. This could have negative effects for the economy.
Against centralisation is also a call to break up the Chinese provinces into smaller segments in order to make the diverse regions more governable. Instead of the 28 provinces, four municipalities and two special administrative regions, China should be divided into at least 50 or 60 provinces (China Economic Review, 2004: 14(1), p.5). Thus, introducing further reforms to complete the transition from a planned to a market economy appear to be the better choice in the long run. Especially dealing with rural-to-urban migration according to the Harris Todaro model will bring many benefits to the economy.
Chapter 7
Conclusions and Lessons Learned
While...reality does not exactly match the assumptions of the HT [Harris To-daro] approach, the HT model remains an attractive framework for analysing urban labour markets in Third World Countries.
(Brueckner and Zenou, 1999, p.338)
CONCLUSIONS 187
There is no universal recipe for success. The above analysis could show once again how difficult it is to develop a theory that is able to reflect reality without requiring excessively complex mathematical modelling. In this context, the basic Harris Todaro model has proven to be a very good starting point for the analysis of rural-to-urban migration in developing countries. Further, some extensions were found that were able to increase the explanatory power of the model without complicating the formulation too much.
Chapter 3 and 4 have shown that the basic assumptions made in the Harris Todaro model reflect the experiences of many developing economies and of the Chinese economy in particular. These can be summarised as follows: labour markets are highly segmented and large wage differentials exist between the rural and urban sectors; the economy suffers high urban unemployment and labour surpluses can be observed in urban and rural areas; and rural residents migrate to the urban areas to find employment despite of these developments.
The extensions made to the model were explained next. They ranged from the introduction of international trade, an urban informal sector and agglomeration economics into the formulation. This allowed the Harris Todaro model to give a more realistic reflection of developments in developing countries. Chapter 4 then related these considerations to the historical events that have taken place in China. It could be shown that the three extensions are of great relevance for the Chinese economy. As the country is turning into a market economy, the non-state sector is growing; China has joined the World Trade Organisation; and the economy is slowly becoming more and more urbanised.
Chapter 4 also gave an in depth view on migration patterns in China. On the one hand, it could be seen that there is high urban unemployment, but that the flow of rural migrants has not yet diminished. On the other hand, there are labour shortages and high labour demand in urban areas that make an increasing number of migrants necessary. Thus, policymakers have to make the choice between keeping migration restrictions in place via the hukou system and allowing workers to move freely within the economy.
The opinions on migration restrictions are divided in the theory. Harris and To-daro assume that due to income differentials migration is excessive. Thus, labour movements must be restricted to increase welfare. However, the formulations with an urban informal sector have shown that such restrictions are not always desirable. The private sector in China is growing rapidly, and the evidence shows that it relies heavily on rural migrants for production and growth. Further, a larger labour force in the urban sector will have a negative effect on wage rates.
Therefore, migration can act as an equilibrating force in the labour market, because it decreases the income differential between the sectors. According to the theory this will also lower migration flows, because migrants consider
expected wage rates. Additionally, the state-owned enterprises and the labour market have to be reformed further to reduce open and disguised unemployment.
This is likely to result in a short term rise in unemployment, but the surplus labour would be absorbed by the informal sector in the long run.
Allowing migration does not mean that it should go unchecked. Simply the way of channelling population movements is in doubt. The theory offers other policy choices. Wage subsidies to the urban and rural sectors are one option.
However, the first best policy found is a wage subsidy to the entire labour force, which cannot be implemented in the real world. Models assuming agglomeration economics require a higher subsidy to urban labour. Wage subsidies to the rural sector to induce industrialisation appear to be fruitless, because wages are already lower in the agricultural areas. Thus, the disincentive for investors to locate there must take a different form.
Incentive policies may be a more effective choice. They have proven to be successful in the special economic zones (SEZs). Foreign investors are attracted to these areas by tax incentives and other policies, thus bringing employment opportunities into the country. The theory pointed out that SEZs would be better placed in the rural sector, because they would help to reduce poverty and labour surplus there. However, this is only the case, if the necessary infrastructure is in place. As this is generally not the case in the inland provinces in China, the policy followed by the Chinese government appears to be better suited for the economy. The theory also states that the privileges granted in the special economic zones ought to be extended to other areas in the economy.
In that way more regions could benefit from foreign investments. However, government revenue must be large enough to cover these extra costs. This is one criticism that can be raised: Few of the models consider a government budget constraint. Thus, they cannot give an indication on how such policies ought to be funded.
The thesis has also shown that rural industrialisation is essential for economic development. The urban sector suffering from high urban unemployment will benefit, because the policy will help to curb migration. This was also shown by the empirical study carried out in chapter 5. The effects on agriculture on the other hand are uncertain. The most able workers may choose to take up employ-ment in rural industry, because it offers better pay. Due to the large amount of surplus labour in China, though, it is unlikely that agricultural production will suffer greatly. Any negative effects can be counteracted by giving greater autonomy to farmers. It is preferable, if they work in the rural sector instead of migrating to the cities, because they can still offer their expertise to those left to run the farms. Policymakers could consider granting some production subsidies to the rural sector, so that it has a better starting position for development.
However, it was also suggested that subisidisation of the state-owned enterprises