Hukou, market reforms needed to beef up urbanization

Imagine for one moment that the entire populations of France (65 million), the UK (63 million), Belgium (11 million), Greece (11 million), Portugal (11 million) and Iceland (300,000) got on the train to Germany and looked for work on construction sites and restaurants. The governments of these home countries believed that remittances from migrant workers were the best chance they had of raising living standards at home. For their part, Germany's cities welcomed the fruit of all this labor, but were reluctant to do anything that would help the migrants settle permanently. So, legally-binding employment contracts were rare, and foreigners had little access to Germany's generous social insurance schemes and a low-to-zero chance of being able to buy a home. During a few days in the winter, most of the 163 million people attempted to get a train home. Just imagine the queues at Starbucks!

Some 163 million of China's rural folk live in the modern lands of China's cities — and the number is growing at around 3 percent per year. Our metaphor above is a little off, of course. Germany's population of 82 million would be utterly overwhelmed by such an influx of foreign workers; China's 163 million migrants, in contrast, make up only 12 percent of the total population. And China's migrants are not quite as alien in their adopted homes as Greeks and Brits would be in the suburbs of Dusseldorf. But it is not an outlandish metaphor, given the clear differences in economic status, dialect and access to social services between residents and migrant workers. And the metaphor highlights the scale of the phenomenon discussed here.

There has been a lot of talk in recent years about resolving the inequalities of opportunity faced by migrants in China's cities and industrial zones. No detailed policies have yet to be announced, but the central government's intention is clearly to expand access to city social services for rural migrants. Here, we explore some of the issues through the eyes of eight migrant families we met who are living and working in Beijing. We discuss the difficulties they face and their hopes for the future, and explore where we think policy is heading over the next few years. But first, who are these 163 million people?

China's migrant workers who have left their farmlands, and who work mostly in the manufacturing, construction and services sectors, generally have only a middle-school education, receive relatively low pay and are not usually enrolled in social insurance schemes. Properly integrating them into the cities is key to China's urbanization in the next decade.

Beijing (with a fully resident population of 13 million) is home to some 7 million migrants. We recently visited eight migrant families living in Beijing. This is hardly a representative sample, but a good chance to hear firsthand about the challenges they face.

What reforms are needed to properly urbanize migrants?

Our small survey supports the view that many migrant workers living in the cities are not integrated. This is especially a problem for their children, since their education, health care and general welfare probably suffer the most. These costs hamper the urbanization process — as seen in China's current urbanization rate of 52 percent, which is low given its current state of development. Many senior policymakers have recognized the problem for many years; however, doing something about it has been tough. The Third Plenum of the 18th Communist Party of China Central Committee held in November 2013 announced an intention to accelerate hukou reform and properly "localize" migrants. The Plenum's decision called for the gradual enlargement of urban welfare systems to allow more migrants to enjoy residential, medical, pension and other services. "People-based urbanization" is the latest catch-phrase.

Several cities have experimented with different reforms. The basic idea has been to gradually expand access to social services for those without a local urban hukou (and in parallel reduce restrictions on full hukou conversion). A number of large cities and provinces such as Shanghai, Shenzhen, Zhejiang, Guangdong, Jiangsu, Chongqing and Chengdu have adopted a version of the "resident-permit" system. Such permits are probably the future, since they bypass the hukou question. (Hukou tend to be very binary: permits allow access to services to be graduated based on certain criteria.)

The approach differs across cities, with some offering easier access to permits but with more limited rights (Suzhou, for instance), some offering more entitlements but with stricter criteria to obtain the permit in the first place (Shanghai), and others offering different levels of access to those with temporary and permanent permits (Chengdu). However, most local pilot programs still seem to be oriented toward integrating better-skilled and richer migrants, leaving most migrants out in the cold.

The next steps in reform will need to coordinate hukou, fiscal, market and land reforms. We list below some of the things we hope to see:

1. An extension of the resident-permit system to all towns and cities. Access to social services could be graduated based on length of residency and other factors, but the central government would do well to offer fiscal incentives for setting up such schemes, introduce incentives for those authorities that push hard to extend access, and set national baseline standards for which services should be provided. The basic entitlement package might prioritize access to public schools for migrant children, vocational training or on-site skill training for workers, pension and health insurance (which will ultimately need to be transferable), allowing migrants access to local social-housing programs. To ensure that such entitlements are portable, we also need a nationwide database to integrate the currently separate sub-systems for pensions, health care and housing entitlements in both rural and urban areas.

2. Sustainable and efficient fiscal support. The mismatch between fiscal resources and spending responsibilities at the local level has led to enormous disparities in spending across the country. Moreover, at present, localities have limited incentives to spend on people who may move away in the future. Central and provincial-level governments need to play a bigger role in providing transparent support to resident-permit schemes tied to numbers enrolled and the level of services provided. Cities integrating more migrants could be allowed to retain a greater share of value-added tax revenue, for instance.

3. An increase in the number of migrants on contract. We hope to see a rationalization of the employer-employee contribution system to lower the overly high 42 percent-of-salary contribution standard, and then a push for greater enforcement of the Labor Contract Law. This law strengthened the legal requirement that firms give workers a written contract, identified the groups responsible for enforcement and created penalties for non-compliance. The law needs to be strictly enforced. Raising the proportion of migrant workers who have signed contracts — and who are thus able to pay into local insurance, alongside their employers — will also help. The Ministry of Finance might consider subsidizing contributions for low-income earners. To a large degree, access to local health services could be enhanced through such a reform. Perhaps local officials' performance assessments could have a "number of migrant workers with contracts and enrolled in social insurance schemes" component?

4. Greater encouragement of private participation in delivering social services, including for hospitals, clinics, private schools and vocational schools. A large number of charities would be interested in funding migrant schools, for instance, but they sometimes find local governments obstructive. Once a clear regulatory framework is established, we believe the government should let the market do its job.

5. Protection of farmers' rural land rights. We believe that the land-use rights of farmers should be extended to allow the sale, rent and mortgaging of their land. If they migrated into the cities on this basis, they would have a stable minimum income on which they could build. Eviction without adequate compensation is a common problem throughout China, and one that the central authorities are attempting to stop. Such eviction creates landless people who can easily become part of the urban poor, putting more pressure on urban social services.