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Rapid urbanization in China and its impact on the world economy

As the most populous economy in the world, China has experienced an unprecedented pace of urbanization since the start of its economic reforms in the late 1970s. The rapid urbanization was accompanied by large flows of rural to urban migration and a growing demand for a clearer specification of the rural land ownership. Since the 2000s, when the conventional restrictions on rural to urban migration were partially removed, rural to urban migration made dominant contributions to China’s urban population growth. An accelerate urbanization will require for a clearer specification of rural land ownership and free mobility of rural labor force across different sectors and regions, which in turn will have a significant impact on production, employment and international trade patterns in both China and the rest of the world, particularly in agricultural and capital intensive industries. This will result in a large-scale restructuring of the world economy in line with regional specialization and comparative advantage. Specifically, the natural resource based and capital intensive industries benefit and labor intensive industries suffer from China’s labor market liberalization, but these impacts will be offset somewhat by the land market reforms. This paper examines the impact of reforms in both China’s rural land and labor markets on the aggregate economic welfare in China and the rest of the world. Propositions derived from a theoretical model include that while the labor market liberalization generates unambiguous gains, the land reform may have some impact on income distribution. When the labor intensive industries gain, the capital intensive industries suffer in China. The impact on the rest of the world varies across different regions. The hypotheses are tested by running simulations on an applied general equilibrium model (the GTAP Model). Several different modeling scenarios including 1) an accelerated urbanization as a result of free mobility of the rural labor; 2) a de facto privatization of the rural land ownership and 3) a combination of both privatization of the rural land and free mobility of labor are specified for the purpose of separating out the effects of each simulation as well as capturing different market environments. Policy implications are developed based on the simulation results. Paper prepared for the 16th Annual Conference on Global Economic Analysis "New Challenges for Global Trade in a Rapidly Changing World", Shanghai Institute of Foreign Trade, June 12-14, 2013. Shanghai, China.