China’s Farm-to-Factory Migration Will Slow Considerably

Urbanisation and economic growth have been linked since the founding of the People’s Republic in 1949

Daniel Rohr, CFA 29 March, 2017 | 1:06PM
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Urbanisation and economic growth have been linked since the founding of the People’s Republic in 1949. For the first 30 years under Communist Party rule, China saw little of either. In 1960, 20% of China’s population lived in cities; two decades later, in 1980, 19% did. Then as central planning and stagnation gave way to reform and growth, China urbanised at a spectacular pace. According to official figures, the country’s urban population expanded from 191 million in 1980 to 793 million in 2016, boosting the urbanisation rate to 57%.

The narrative arc of reform-era China suggests a strong connection between urbanisation and economic growth. But the extent to which urbanisation has caused economic growth, or vice versa, is far from obvious. Correlation does not establish causation.

Rather, urbanisation and economic growth can both be thought of as by-products of labour migration from the largely rural agricultural sector to the largely urban industrial and service sectors. Moving workers from farms to factories and storefronts boosts productivity, expands economic output, and urbanises the population. Spatial, from rural to urban, and sectoral, from agriculture to industry and services, labour reallocations go hand in hand.

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Daniel Rohr, CFA  is a senior equity analyst at Morningstar.