The great stagnation of Hong Kong

In Hong Kong recently I picked up a stack of the books in the new Penguin Specials series on Hong Kong–which despite being nicely featured in local bookstores are not yet readily available outside the city, or getting much promotion from the publisher. I don’t think they have to be read in any particular order, but I started with Simon Cartledge’s A System Apart (mainly because Simon is an old friend), which is an excellent short overview of Hong Kong’s recent political and economic situation.

The argument, simply put, is that Hong Kong is suffering from severe economic, social and political stagnation:

Hong Kong is stuck, with remarkably little change to show for the last two decades. Its economy is still dominated by a handful of companies, most of them run by ageing tycoons. No new business has risen up to challenge or replace them. No major new industry has been established. The city remains and finance and business center. But its intermediary role has declined in importance over the last twenty years. Across the border, China has created a host of inventive internet and technology giants; Hong Kong cannot point to a single success in these areas.

It is not a place that has failed, but it is one of lost opportunity, of diminished expectations and modest ambition. Despite living on the doorstep of the world’s most dynamic economy of the last two decades, and despite having played a crucial role in that economy’s initial opening and development, Hong Kong has gone sideways.

A further contention is that all these forms of stagnation are interrelated, and trace their origins to the arrangements put in place after Britain’s handover of Hong Kong to Chinese rule. Hong Kong’s peculiar institutions were intended above all to maintain continuity, but in fact resulted in a significant change for the worse:

When China drafted the Basic Law, one of its key aims to put in place machinery to ensure the economy continued running in the same way as before. The obvious way to do this, it seemed, was to allow businesses a big say in policy – hence the decision to make Hong Kong’s first chief executive a businessperson, and to pack the committee which would choose future chief executives with business figures. …

Under colonial rule, the administration, while undeniably pro-business, had always been separate from business itself. The governor was sent from Britain, and the top posts were filled with career civil servants – also all from the UK, until shortly before the handover. While these officials were friendly to business, they were not of business. They may have favored business interests before those of other parts of society, and they also co-opted leading local business figures into government bodies. Nevertheless, to the end, Hong Kong’s colonial rulers maintained strict control over their political power. The Basic Law changed this balance, opening the way for cronyism and corruption and preventing the kind of changes needed that would allow the city to maintain its economy dynamism. …

In the decades after the Second World War, Hong Kong successfully reinvented itself twice. For the first time in the 1950s, after American and United Nations embargoes on trade with China led to it becoming one of the world’s largest makers of light industrial goods. For the second, in the 1980s and 1990s, when it took advantage of China’s opening up to the world, in order to end its reliance on manufacturing and become a services economy centered on trade and finance. Since 1997, despite receiving its worst economic battering in more than half a century, it has undergone remarkably little change.

This economic stagnation, and the accompanying phenomena of slow growth and widening inequality, are clearly related to the increased extremism and polarization in local politics. But as Simon notes, Hong Kong is not exactly the only place in the world to have experienced these kind of political changes:

Many people seem to feel that they are not in control of their lives, and that those running Hong Kong are out of touch with their needs and interests. The senitments are broadly the same as those that to Britain’s Brexit vote and many Americans choosing Donald Trump. In Hong Kong, they manifested themselves in the one-fifth share of the vote for localist and independence candidates in the 2016 Legislative Council elections.

Hong Kong in fact seems to fit well into a common global trend (in high-income societies at any rate) of collapsing support for established political institutions and a rise in the influence of what used to be more marginal movements. So you could question whether Hong Kong’s peculiar institutions are really the cause of its deepening political divide, when places with quite different institutions are suffering from similar problems. The counter argument would be that Hong Kong had much more potential to escape stagnation because it is part of fast-growing China, and yet that potential largely has not been realized.


Zhou Tianyong says 100 million people have missed out on urbanization

Here is an interesting article from Zhou Tianyong, a well-known professor at the Central Party School in Beijing, that adds a fresh angle to the discussion over the effects of China’s hukou system. He argues that there is now a large group of people who have been prevented from urbanizing by hukou restrictions, and who realistically will never be able to urbanize in the future–thereby resulting in a permanent loss of income.

The piece is short and very clear, so without further ado here is my (slightly abridged) translation (Chinese original here):

A person has a natural life cycle, from birth to old age, from entering the workforce to retirement, from being able to adapt to the urban environment to being less able to adapt to the urban work and living environment in middle and old age. Thus in an individual’s life there is a fixed window of time when they can migrate to the city. If they cannot enter the city and become city people in that window, then they have missed out on urbanization. This is a phenomenon that occurs under China’s system, and needs to be carefully examined and analyzed to understand the transformation of China’s dual [urban-rural] structure.

In 2013, some economists put forward the view that urbanization will drive the rapid growth of China’s economy in the future. This is because because the level of urbanization in China was only 52.6% in 2012, while in developed countries urbanization has reached 75% or even 80%. The lag in China’s urbanization compared to developed countries is, in this view, actually a latecomer’s advantage. China’s urbanization rate can in the future increase by 1 percentage point every year, and become a strong driver of national economic growth. This is one of the arguments that some people use to argue that China’s economy can grow at more than 8% for the next 15 to 20 years. …

There is another point of view that China’s “floating population” of rural migrant workers face a lot of obstacles in urbanization. Many rural people are able to migrate to cities when they are young, but in the end they cannot bring their families with them to the city and cannot become city people. This group of people have missed out on urbanization because of the hukou system and control of migration: because cities do not provide education and other public services, or because they do not have any income from rural land while urban housing prices are too high.

How many of these people are there? The technique I use to calculate the number of people who have missed out on urbanization is based on the gap between potential urbanization (estimated based on the urbanization level in South Korea, Taiwan and other countries) and actual urbanization. I also consider that the potential urban population below the age of 50 still has the potential to urbanize. The formula is therefore the potential urban population minus the actual urban population times the share of the total population over the age of 50. The results of this calculation are shown in the chart [Y-axis unit is ten thousand persons]:



You can see that with the growth of the population, the population that has missed out on urbanization has also steadily risen, although the growth rate has slowed in recent years because of some relaxation of migration controls. In 2015 the population that has missed out on urbanization totaled 98.42 million—almost one hundred million people—or 7.16% of the population.

But urbanization does not wait for people. The high fertility rate and high population growth rate of the early period of industrialization have created a huge potential urban population, but many of them cannot enter the cities, or once they enter the cities they cannot become city people. Young people leave the village to work, and old people leave the city to return to the village. Those who cannot become city people at the right time of life end up becoming rural people who have missed out on urbanization.  …

And because of the decline in fertility and population growth at the later stages of industrialization, which is especially sharp in China because of its forced family planning policies, the proportion of people in rural areas who can still urbanize is falling. This is quietly lowering the rate at which the future rural population can urbanize.

Thus, in countries where there are obstacles to migration during the process of industrialization, the level of urbanization that can be achieved at the end of industrialization may be much lower than countries with free migration or that provide assistance for migration. With 7% of China’s population already having missed out on urbanization as of 2015, and this proportion set to gradually rise in coming years, it is impossible to reach 75% urbanization within 10 years.

The existence of a large group of people who have missed out on urbanization creates economic losses in three ways. First, an overly large labor force in agriculture results in relatively low productivity. These people could have higher productivity in the city, but in rural areas they can only do some basic agricultural work, which is a huge loss for the national economy. Second, the delay in urbanization results in a loss of consumer demand. Because rural migrant workers cannot easily urbanize, there is a big gap between their spending power and that of true urban residents. Third, people do not realize their potential to create and distribute wealth, which leads to a huge loss of national income. Much rural land is abandoned because it cannot be used for large-scale operations, houses are rundown and the woods empty because the land cannot be allocated by the market and re-purposed by investors. In fact rural land is becoming a zombie asset that cannot be re-allocated to other uses because of restrictions on private capital, resulting in a huge loss of potential output and value.

My guide to the debate raging over China’s Northeast rust belt

Over the past week or so, an impassioned debate has broken out over what should be done to help China’s struggling rust belt in the Northeast. Justin Yifu Lin, perhaps China’s most famous living economist, sparked the debate when his think tank released a long (400+ pages!) report proposing an industrial policy strategy for Jilin, one of the three Northeastern provinces. The report’s recommendations were seemingly innocuous–develop more light industry, tourism, and agriculture-related businesses–but they nonetheless attracted vociferous online criticism.

Why? The summaries in the English-language press (see the SCMP and Caixin) give the impression that it’s a debate over whether government policies should promote light industry, or something else. If that were the case, this would be a typical academic tempest in a teacup. In fact, a lot more is at stake: the debate over what to do about the Northeast (aka Dongbei, aka Manchuria) involves fundamental differences over how to understand Chinese economic history and the development trajectory of countries and regions really develop. The debate over how to help such struggling regions is also one where conventional Western economic wisdom has little to offer, so the field is wide open. After doing some reading on both sides, here’s my guide to the debate (warning: this is a long post).

Continue reading →

Should hukou system reform focus on rural land rights?

There is an interesting working paper out from the Hong Kong University of Science & Technology, “China’s mobility barriers and employment allocations“, that attempts to redirect the debate over China’s household registration (hukou) system.

China’s hukou system is intended to restrict and redirect urbanization, and this is exactly what it does: because people born with a rural hukou cannot claim government benefits in an urban area, fewer people migrate from rural to urban areas than would otherwise be the case. Most of the discussion over the hukou system (such as in these two excellent recent WSJ articles) emphasizes how it restricts migration through its links to various social services and social welfare policies. The authors of this paper (Rachel Ngai, Christopher Pissarides, Jin Wang) compare this aspect of hukou policy with a less-studied one: the potential for rural people to lose their land rights if they migrate to urban areas.

In our view, barriers to mobility from the hukou registration system arise mainly along two dimensions. First and foremost in the use of land, which is provided free by the state to rural families but is in principle withdrawn when the farmer gives up agricultural employment to move to a different job; and second in the provision of social services such as education and health, which are conditional on each person’s hukou registration and in particular the area that she lives. …

We show that the land policy embedded in the hukou system slows down migration from the land and calculate that this has led to overemployment in agriculture of 6.3 percentage points. The 6.3 points of overemployment in agriculture have come at the cost of 4.1 points underemployment in urban sectors and 2.2 points underemployment in rural non-agricultural sectors. The policy followed with respect to social transfers has further held back migration out of agriculture by another 0.4 percentage points. The biggest impact of the social transfer policy, however, is on urbanization (rather than industrialization). Because of it, rural businesses overexpanded at the expense of urban businesses, as agricultural workers prefer to stay in rural areas to benefit from their local hukou registration than move to the city and lose their local hukou. …

We find that land policy and the absence of property rights for farmers are the main channels through which the hukou system distorts both urbanization and industrialization. The social subsidies are too small by comparison, and although they have an impact on urbanization and the growth of rural enterprises, their impact on industrialization is much less. This is an important finding in light of the literature that highlights the role of hukou in restricting the access of migrants to the social services received by urban hukou holders. Such restrictions may have important social consequences but their distortionary effects on migration flows are not large.

This quantitative finding suggests that the economic benefits to China of liberalizing rural land rights would be much greater than the expansion of social welfare benefits. The theory is that if farmers had full property rights in their land, they would be able to transfer their land to others and could enjoy an income stream from the land even while working in the city. In that case more farmers would seek more productive non-agricultural employment, and national incomes would be higher as a result.

The quantitative estimate in the paper however assumes that no transfers of rural land are taking place in China today:

In the formal modelling that follows we deal with the complex issue of transfers by focusing on two extremes, one with no transfers and one with full property rights with transfers. We consider the former to be a much closer description of the present situation in China, whereas the latter corresponds to a policy reform that involves the privatization of land, something not yet contemplated by the People’s Republic. …

Although it is apparent that some unrecorded transfers of land are taking place, we ignore them in this derivation. They are small in number, the rental is unrecorded but believed to be below market rate and they do not make much difference to farmer’s attitudes. But given that some migrant workers do find ways to retain some income from their land, the impact that we calculate should be treated as an upper bound for the costs of the policy.

I’m not so sure that assumption is so easy to make. Transfers of land among farmers are allowed under current law, and have been officially encouraged (albeit with some limits) for several years now. Official statistics show that about one-third of the farmland managed under the household responsibility system has been transferred in one way or another, which is a lot more than zero.

I do think there are large economic effects from China’s rural property rights system, and the paper is right to focus on them. But the size of those effects is likely to be smaller than the estimates in the paper, as there has already been some gradual change in the direction it recommends.

Will centralizing power solve China’s economic problems, or worsen them?

The relationship between the central government and local authorities is perhaps one of the least understood and most important questions about how China works today.

The past is, as per usual, probably better understood than the present. There is a pretty strong consensus on the importance of local initiative in the 1980s and 1990s–see Yuen Yuen Ang’s book How China Escaped The Poverty Trap for a good recent account. Yukon Huang’s new book, Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong, is also good at giving a more top-down macro account of the importance of the decentralized model:

In China’s system, local authorities are motivated to promote growth. By encouraging competition, this has helped China to contain the worst aspects of the distorted signals and “soft budget constraints” that afflicted the other centrally planned economies in the former Soviet Union. Efficiency comes from having different jurisdictions and their affiliated enterprises compete against each other for their relative positions. They also compete to build the new institutions that China needs as it moves toward becoming a more market-oriented economy.

There is indeed a lot of evidence that this competition for growth among local authorities was an important positive feature of China’s system in the past. But the dynamics of that competition are not the same today as they were three decades ago:

When the state and the market complement each other, the results can have a dramatic impact on productivity and living standards, as has been the case during most of the post-Mao era. Since the onset of the global financial crisis in 2008, however, a confluence of events has altered these relationships. The creation of local-government financing vehicles (LGFVs) put local governments into direct competition with existing firms in property-related commercial activities and also enlarged the opportunities for corruption by local authorities. The government’s stimulus program channeled loans through the financial system to SOEs and local authorities, which made such opportunities even more attractive. Initially, these relationships helped redirect resources that were monopolized by the state, such as land, into more productive use in partnership with private agents. Over time, however, this process has become distorted, resulting in wasteful expenditures that the leadership is currently trying to address.

While local competition may have previously made socialist “soft budget constraints” harder than they otherwise would be, the post-2008 changes in the financial system seem to have led to an epidemic of soft budget constraints. These concerns are related to the argument in “The Long Shadow of China’s Fiscal Expansion,” by Chong-En Bai, Chang-Tai Hsieh, and Zeng Song (previously discussed here). Here’s a longer excerpt from that paper:

[Prior to 2010] local governments were actively providing special deals to favored businesses, but could not borrow from or influence the lending decisions of state-owned banks. The effect was that the assistance provided by local governments to favored firms largely consisted of exemptions from the country’s thicket of rules and regulations, but local governments could not provide the private firms they were trying to assist with preferential access to capital. These two institutional features—high-powered incentives to provide special deals, along with restrictions on access to capital—explain how China was able to grow rapidly despite seemingly low-quality institutions.

We show that the off-balance-sheet financial institutions created to fund the fiscal stimulus program changed the nature of the special-deals regime. Specifically, we show that the off-balance-sheet financial institutions continued to grow even after the stimulus program was over, because local governments now had a powerful new tool, the LGFVs, to provide support for favored firms. …

This might have had positive effects on welfare and growth if local governments had used these resources for projects that would have high social returns but had been starved of resources. However, we provide evidence that in addition to funding infrastructure projects, the relaxation of financial constraints also made it possible for local governments to channel financial resources to commercial projects favoring certain firms.

Other observers also see significant changes in the decentralized growth model in recent years. A recent piece by Barry Naughton suggests that the central government is moving away from encouraging local competition for growth and toward more top-down direction of the economy:

Since about 2010, China’s “miracle growth” era has come to an end, due to rapid changes in labor force conditions, incomes, and external markets. In the wake of this change, the complementarity between bureaucratic incentives and the plan appears to be declining.

The Xi Jinping administration has since 2012 reduced the focus put on economic growth in official success indicators, squeezing in new indicators such as managing local government debt, reducing poverty, and improving the environment. At the same time, the most recent 13th Five-Year Plan (2016–2020) GDP target of “more than 6.5%” growth is close to, or perhaps even above, growth potential. The 13th Five-Year Plan seems to have become an instrument to maintain high-speed growth, even as the bureaucratic incentive system becomes less single-minded.

It is a paradox of contemporary China that administrative interventions are increasing in size and multiplying in form just as growth potential is slowing and the benefits to a less-interventionist stance would seem to be increasingly evident.

Given that local governments get the blame, fairly or not, for the rapid accumulation of debt and wasteful investment projects in recent years, it’s understandable that the central government would try to change things. But it’s not really clear yet what model is replacing the old regional growth competition dynamic, and what the effects of this attempted shift might be.

Has regional competition now become a malign force that must be disciplined? Or will the weakening of regional competition sap China’s economic dynamism? Or both?

Here is Huang once more:

President Xi’s consolidation of power has been interpreted by the more optimistic observers as a precursor for bolder economic reforms in the coming years. For them, China will eventually allow the private sector to play a “decisive” role in guiding the economy as stated in the Third Plenum policy statement. But the many pessimists see in recent actions only hesitancy in addressing much needed productivity enhancing measures. Consolidation of authority means more centralized control over economic activities, continued protection of major SOEs and less competitive pressures in the market space. Thus China’s move from its former collective leadership to relying on a single powerful leader might lead to a less dynamic economy and eventually political instability. Only time will tell if either of these two scenarios becomes the reality.


Is the Manchurian Recession over?

China’s provinces are reporting economic data for the first half of 2017, and the long-suffering northeastern provinces, where the recent economic downturn was most severe, are putting up some better numbers. The main exception is Liaoning, but this is because an anti-corruption investigation found that the province had inflated some statistics and forced them to be marked down–however the historical figures haven’t been revised so growth rates don’t make any sense right now. While Liaoning’s numbers look worse than the others, in reality it’s probably doing the same or better.


The downturn in the northeast prompted a national-level effort to boost growth in the region, so the pickup is getting a lot of attention. At least one article declaring the “worst is over” for the northeast has appeared in print, and this cautiously optimistic tone is common in official channels. Here is how, Sun Donghai, the director of the Anhui provincial Development Research Center, summarized the situation:

In the technology-intensive regions, represented by Guangdong, Jiangsu, Zhejiang, Shanghai, economic growth is stable, and there is a lot of momentum for both upgrading traditional industry and developing new industries. … Regions heavily dependent on natural resources, such as the three northeastern provinces, Shanxi, and Hebei, are facing great pressure to transition, but developing new growth drivers will require a long time. At the same time, we can see some positive changes, some resource-dependent provinces have reversed the declining trend since 2013, and economic growth has bottomed out and recovered. Jilin’s GDP grew 5.9% [in the first quarter] for a stable start to the year: economic growth has returned to an appropriate range, and has started to move on a normal track.

A more in-depth view of official thinking comes from Fan Hengshan, a deputy secretary-general of the National Development and Reform Commission who has traveled frequently to the northeast. In May he gave a lengthy interview on the northeast to the China Economic Times. He starts out in the conventional way, attributing the improving indicators to the government’s supportive policies for the region, but also noting the recovery of commodity prices (more significant in my view):

The government’s implementation of the new round of the northeast revitalization strategy is now taking effect, objectively speaking it has provided an effective policy environment and systemic support for the stabilization of the northeastern economy. At the same time, the rollout of supply-side structural reform has had a clear impact on the internal dynamism of economic growth. Following the implementation of supply-side structural reform and the stabilization of international commodity prices, industries that are significant for the northeast, like oil, coal, and steel, gradually returned to stability. For resource-dependent and single-industry cities this alleviated the severe mismatch between fiscal revenues and expenditures.

While maintaining the requisite note of optimism, Fan’s discussion of the problems in the northeast’s economy focuses on deep-rooted structural issues that seem quite difficult to solve. Here are some excerpts (my translation):

The problems faced by the northeast are, on the surface, caused by a lack of external demand and weakness in investment. In fact, they are the manifestation of the institutional, systemic and structural problems of an old industrial base.

From the institutional perspective, the northeast region’s level of marketization is still insufficient compared with the developed eastern region. The decisive role of market mechanisms has not been fully developed, and efforts at economic development still have a pronounced administrative tone. The historical burdens of state-owned enterprises are heavy, their vitality is insufficient, and a modern system of enterprise operation and governance has not been completely established. The old problems of incentives and restraints for state-owned enterprises have not been completely eliminated. Development of the private sector is insufficient, and the spirit of entrepreneurship in society is weak. The northeast has a strong foundation in education and science, but these scientific resources cannot be effectively transformed into real activity.

In terms of economic and industrial structure, out of the three growth drivers of investment, exports and consumption, the northeast’s economy is excessively reliant on investment. The investment rate is too high and the efficiency of investment is relatively low, and this kind of growth model is not sustainable. The industrial structure is not adapted to market demand: the leading industries are mainly the investment-facing sectors of energy, raw materials and heavy equipment manufacturing, while new emerging industries are small and undeveloped. Many cities have undiversified industrial structures with only a single pillar industry or two interrelated industries. From the perspective of industrial organization, there are many gigantic enterprises but few small and medium-sized enterprises. A development model based on industrial clusters and the integration of large, medium and small enterprises has not yet formed.

It’s interesting that Fan talks about the northeast in the same way that many foreigners talk about China: the problem is obvious, their economy is too dependent on investment and state-owned enterprises are stifling the vitality of the private sector. It’s all relative I guess.

But the northeast has an additional burden: people are leaving in droves, and companies can’t get them to stay (see my previous post on the emerging demographic crisis in the northeast). Here is more from Fan:

Many enterprises and research institutions in the northeast have told me that in recent years it has gotten more difficult to attract and retain personnel. Some graduates of top universities choose to go elsewhere for jobs, and some local technical and management personnel also leave the northeast to seek better job opportunities.

The northeast still has a “big government, small market” environment, where local governments are still directly allocating resources and micromanaging. This kind of system is a constraint on the development of enterprises and people. Particularly in recent years companies in many traditionally strong industries and sectors have encountered difficulties, so the salary, benefits and career development opportunities they can offer are pretty limited compared to companies in the east. Objectively speaking, their ability to attract mid- to high-level staff has declined.

In addition to salary considerations, people are also increasingly looking at a city’s level of modernization, the convenience of its transport, and social, cultural, ecological and other “soft” environmental factors. It is worth noting that some local governments and businesspeople report that, because the northeast’s winter is cold and long, the low temperatures are increasingly becoming a reason for some people to choose not to stay in the northeast and work. This creates many challenges for high-tech enterprises in the northeast to attract talent, and some companies have no choice but to set up branch offices in the south in order to attract high-level staff.

This all rings true: the northeast  has a brutal climate and a closed economy where it is difficult to get ahead if you don’t have government connections or an SOE job. This is, in my experience, more or less what Chinese people from the northeast say about their home–it is no mystery why they leave.

So I would lean toward viewing the current recovery in the northeast as reflecting the recovery in commodity prices more than anything else–although if China’s government can succeed in keeping prices stable with its many interventions into commodity demand and supply (policies that go by the somewhat deceptive moniker of “supply-side reform”) that unquestionably will help these provinces.

More broadly, I think the current regional problems in the northeast are another reason to see China’s SOE reforms of the late 1990s and early 2000s as incomplete and only partially successful (see a previous post on this topic). The northeast felt the brunt of the layoffs of that era, but once the commodity boom evaporated so did many of the apparent improvements. Here is a nice piece of oral history that gives a worker’s-eye view of the trajectory of a major SOE in Heilongjiang:

It was with honor that a sprightly 19-year-old Wang Dianyu heeded the central government’s call and joined the ranks of China’s heavy industry workers. Almost 60 years later, his eyes still glow with the pride of having worked for one of his country’s largest state-owned factory groups: China First Heavy Industries (CFHI).

Founded soon after the establishment of the People’s Republic of China in 1949, CFHI was a beacon of the country’s industrial ambition, churning out gigantic pieces of machinery both civilian and military from its base in Fularji, a district in Heilongjiang’s second-biggest city, Qiqihar. “We had a lot of catching up to do,” Wang tells Sixth Tone of China’s then-inferiority compared to the might of international rivals. “Heavy industry is the backbone of a country.”

Today, that backbone is buckling. Economic growth in the industrial northeast, once fondly known as “the Republic’s eldest son,” is slowing, and an era of overproduction for the region’s heavy industries has given way to rampant borrowing. For the 2016 fiscal year, CFHI reported losses of 5.73 billion yuan (around $850 million), compared with 2015’s loss of 1.8 billion yuan and 2014’s loss of 25.7 million yuan; it is now scrambling to pay back debt by selling off shares to its parent company, China First Heavy Industries Group Co. Ltd.

CFHI’s troubles were compounded in 2015 when its chairman, Wu Shengfu, died suddenly just weeks after the state’s anti-corruption watchdog launched an investigation into CFHI’s parent company. Some news outlets at the time quoted sources stating that he was found hanging in his office, a detail that was downplayed in later state media reports. The anti-graft investigation discovered a number of infractions, including mismanagement of state funding, violations of recruitment procedure, and “indifference toward Party principles.”

How the Soviet Union tried to control the growth of large cities

Returning to my theme of socialist urbanization, here is a good overview of the Soviet system for controlling the expansion of large cities. The parallels with China are, at least to my eye, immediately obvious and striking. The passage is from Planning in the Soviet Union by Judith Pallot and Denis J.B. Shaw; it was published in 1981 which is why the USSR is referred to in the present tense:

Many Soviet writers claim that a socialist society’s ability to control the process of urbanization is a demonstration of its superiority to capitalism. Thus [geographer Boris Sergeevich] Khorev writes that the spontaneous and uncontrolled growth of cities in the West has produced such unfavorable consequences that “they militate in effect against the very system of large-scale capitalism.” By contrast, he believes, “only socialism has the possibility of using the best achievements of the modern urban form of settlement for the great masses of workers.”

Early efforts to control the rapid growth of the largest cities date from the 1930s, when rural-urban migration was threatening to produce total chaos for housing and services. Since then, with an increasing concern about regional development questions and the standard of living in cities, the policy has become more clearly defined and now embraces many more cities. The 25th Congress of the Communist Party of the Soviet Union in 1976 once again stressed the need to restrain the growth of large cities as part of a policy of industrial decentralization.

Soviet controls over the expansion of cities have three major aspects. The first is the propiska system, controlling migration into cities. The internal passport system was introduced in 1932 and at the same time a policy was implemented to control the inflow of permanent migrants into Moscow and Leningrad [St. Petersburg]. These efforts were reinforced by the plans for the two cities, promulgated in 1935, which allowed for only modest population expansion. Since that time many large cities have been declared “closed” to voluntary residence. In order to take up permanent residence in one of these cities, therefore, a special permit or propiska is required. For those who residence is temporary, such as university students, there are temporary propiska. Except for those born in a closed city, the propiska is not easy to acquire.

China: hukou system. Check.

The second control to city expansion lies in the ownership and direction of industry and of other forms of economic activity by the Soviet state. In 1931 the government decreed that all new industrial expansion was to take place outside Moscow and Leningrad. These provisions were reinforced by the 1935 plans for the cities and by subsequent government action on decentralization, especially after 1938. In 1939 five more cities–Khar’kov, Kiev, Rostov, Gor’kiy and Sverdlovsk–were added to the restricted list, and by 1956 there were 48 cities in which there was to be no further new industrial construction or expansion by already-existing plant. …In the 1960s and 1970s a whole new generation of development plans was drawn up for major cities, affirming the restrictions on, or prohibition of new industrial developments. Many plans also specify that activities not basic to a city’s economy, and polluting industries, should be relocated to satellites.

China: forced relocation of industry. Check.

The third arm in city control is that over land use. Soviet legislation on land has a special category of “land under populated settlements” and the granting of the right to use urban land is vested in the executive committee of the city soviet subject tot eh guidance of higher authority. In principle, the, industrial ministries and enterprises are unable to acquire new land without the expressed consent of local and higher authority.  …

China: monopoly state ownership of urban land. Check.

The USSR’s three largest cities in 1959 subsequently grow more slowly than other cities with populations over 100,000…the 24 largest cities of 1959 (population 500,000+) had over 25 percent of the total urban population in 1959, but less than 23 percent in 1976. In spite of these favorable trends, Khorev and others believe that the largest Soviet cities are still growing much too quickly and such tendencies are exacerbating urban problems. It is certainly the case that many cities have exceeded the growth rates expected by the planners. In the case of Moscow, for example, the 1970 city plan stressed the necessity of containing the capital’s population within the 7 million mark. At that time, however, the city’s population already stood at 6.9 million, and had reached 7.8 million by 1978. Leningrad’s city plan, approved in 1966, envisaged a population of 3.4-3.5 million people by the latter half of the 1980s, or 4 million including the suburban settlements. This level had already been reached by 1970.

Historically, China’s policies to control the growth of the largest cities only succeeded in slowing population growth rather than halting it–and even that limited success has imposed great human and economic costs. But the most recent and most draconian iteration of these policies may actually be succeeding in capping population growth. Soviet urban planning policies often failed because they were internally contradictory and poorly administered. Is the Chinese administrative state now powerful enough to actually implement the sterile visions of socialist urbanization?