Chinese lessons of urbanization in Africa

Nigeria has not reaped the benefits it did in China. Then again, the lessons of Chinese urbanization differ from those in the West.

Recently, the consulting conglomerate McKinsey released its intriguing urbanization report Nigeria’s renewal: Delivering inclusive growth.

According to McKinsey, the Nigerian case differs from the expected pattern of rising productivity and per capita GDP, which developing economies typically follow during industrialization and urbanization. In Nigeria, urbanization has not moved millions out of poverty, as China has done.

But how did China achieve its success?

From industrialization to urbanization

Starting in the 1980s, China’s reform and opening up were initiated by the creation of the coastal special economic zones (SEZs), initially in the southern province of Guangdong, close to Hong Kong and Macao.

By the early 1990s, the reforms extended from urban agglomerations such as Shenzhen and Guangzhou to other primary cities, from Beijing to Shanghai – thanks to the colossal investment projects in Pudong which turned the swampland into an emerging global financial hub.

During the past decade or so, the economic success of these megacities has been spilling over into other tiers of Chinese cities. Even before the onset of the global financial crisis, second-tier cities – such as Suzhou, Tianjin, Shenyang, Chengdu, Dalian and Chongqing – had attracted significant attention with foreign investments.

At the same time, third-tier cities, from Ningbo and Fuzhou to Wuxi and Harbin, have been following in the footprints of first- and second-tier cities. Behind these three tiers of rapidly-growing urban agglomerations, there are still others such as Kunming and Hefei, seeking to take advantage of the urban growth trajectories.

Paced by strong economic growth, China’s leading megacities are evolving fast. The urbanization that took almost a century in the West is occurring in a decade or two in China.

In 1979, Shenzhen, the most celebrated example, was still a poor fishing village with some 20,000 inhabitants and subsistence income.  Today, sub-provincial Shenzhen has some 15 million inhabitants, while (nominal) income per capita exceeded $22,000 – not that different from Taiwan.

Urbanizing the rest of China

During the past three decades, migrant laborers have played a key role in China’s economic growth; in the first-tier cities. However, as living costs rise fast in Beijing, Guangdong, and the Yangtze River Delta region, employment prospects are improving in China’s inland cities and the West.

Since the early 2000s, the new “Go West” policy covered the huge municipality of Chongqing, six provinces, from Gansu to Sichuan and Yunnan, and five autonomous regions. At the time, this region accounted for almost 30 percent of China’s population, but less than 17 percent of its GDP.

Initially, the policy focused on the development of infrastructure (transport, hydropower plants, and energy and telecom establishments). But it is the new stage of development in eastern China that is now dramatically accelerating growth in its inland and the West.

Even before the global financial crisis, the Ministry of Commerce designated more than 30 “priority relocation destinations” in China’s inland, in order to increase the share in the processing industry in central and western areas, especially in labor-intensive manufacturing.

Nonetheless, there is a growing consensus that the old urban growth path is unsustainable. Led by Premier Li Keqiang, China’s leadership believes that the new urbanization should achieve lower urban density, support conservation, and attract more foreign and private investment.

Most importantly, the old urbanization experience has caused much environmental deterioration.

Moreover, the proposed “new type urbanization” also means greater recognition for some 230 million migrant workers as urban residents. The issue can no longer wait. By 2030, the overall floating population, most of whom are rural migrant workers, could exceed 300 million.

Three principles

In its urbanization report, McKinsey basically argues that Nigeria offers great untapped economic potential, which is seen as a significant growth and empowerment opportunity. To unlock these opportunities, McKinsey focuses on the government’s delivery challenge and advocates unlocking the consumer opportunity.

Many other consulting firms and investment banks in the West tend to focus on similar ideas. And certainly such lessons offer vital insights, but the question is, are they actually more typical to advanced-economy urbanization than to those in emerging economies?

In contrast, Chinese urbanization has relied on industrialization and manufacturing, not consumption.

Only recently, after more than three decades of economic reforms and opening-up policies, the Chinese growth model has begun to move from investment and net exports toward consumption.

At the risk of gross simplification, it might be said that the first lesson of Chinese urbanization is the primacy of industrialization. That, in turn, became possible when doors were opened to foreign multinationals. The latter have essentially exchanged market share for advanced technology and know-how. Even today, more than half of “Made in China” products stem from foreign multinationals operating in the mainland.

The second lesson is new job-creation. Until recently, China also enjoyed favorable demographics, which supported rapid industrialization. Right demographics is necessary, but not sufficient for success. In the postwar era, millions of migrants flocked to Latin America’s capitals only to find inadequate job opportunities. The favelas are a living reminder of those failures. In the Middle East, similar dreams of future and comparable realities of slums resulted in massive instability. So what really matters is new job-creation. When migrants arrive in the cities, they must find jobs.

The third lesson has to do with China’s political system and massive size. If industrialization had been left to the private sector alone, the mainland would now suffer from the kind of regional inequities that haunt most developing nations. Instead, the proactive public sector seeks to ensure that neither industrialization nor urbanization remains the benefit of the prosperous coastal regions. Rather, new urbanization in China seeks to unleash the economic potential of the mainland’s inland and the west.

It is these three principles – industrialization, new job-creation and proactive public sector – that are vital for success in urbanization in emerging and developing economies.

Consumption requires adequate tax revenues, which become possible with industrialization that generates new job opportunities. Today, the role of consumption is increasing in China’s first-tier megacities, which have an adequate tax base for rudimentary social services and consumption. But this process has barely begun.

With their low GDP per capita and many other challenges, emerging countries do not urbanize in the way today’s advanced economies once did. China has not thrived because it did things according to the West’s playbook, but because it has broken those rules when necessary.

Nigeria, too, can enjoy successful urbanization, but that requires far greater emphasis on industrialization, new job creation and proactive government.

Original version published by BusinessDay (Nigeria) on Sept 29, 2014