Urbanisation – the move of the century

Definition: To make a rural area more industrialized and urban, or to increase the migration from rural areas to cities.

This concept of urbanisation is certainly nothing new to most investors and financial advisers. History has taught us that each developing economy has gone through this process over the last few centuries. The urbanisation process undertaken by Great Britain in the 1800s and the United States in the 1900s played a significant role in turning them into the world’s leading economies.

Asia, the region which contributed greatly to the global economy in the last two decades, especially post the 2008 financial crisis, is the next frontier in urbanization. However, the scale of growth this time around is unprecedented.  Between 1950 and 2010, Asia’s urban population nearly tripled from 15 percent to more than 40 percent.

Focusing specifically on China, as at January 2012, over half the population of the 1.35 billion people is now residing in urban areas. This means that over 600 million people are still in rural areas, which will be developed over the next few decades. This is something that should never be underestimated.

One major benefit that urbanization brings is the potential consumption power. Based on a forecast by the United Nations, China’s urban population will increase by 216 million from 2012 to 2025. For India and Indonesia, the combined increase in the urban population is expected to be greater than 400 million. With more migration into urban areas, there will be significant increases in the demand for properties and household products.

Furthermore, by 2020, the Asia Pacific region is forecasted to have over 50 percent of the world’s middle class population. The rising disposable incomes and wealth levels will encourage the pursuance of higher living standards. While external demand remains gloomy, the rapid urbanization in Asia is highly likely to unearth great potential in domestic consumption.

However, the greatest benefit of urbanization, as in the case of the US and Britain, is productivity. As the population moves off the land and into factories or the service sectors, the multiple gains in productivity are significant. This has already been proven by the US that the urban population is up to 50 percent more productive than the rural population.

Therefore by moving from farming to manufacturing, the multiple gains for China will increase and continuing to grow as further efficiencies evolve. This in turn will generate more economic growth and convert China’s industries from working harder to working smarter.

It has also been well documented that urbanisation can positively impact the evolution and economic growth of a country towards an industrialised economy. To create a completely industrialised economy, it requires the creation of three areas: free education, free base level healthcare and a government social security/pension safety net.

Education has been seen as one of the most important factors in economic development. Higher literacy rates can strengthen the productivity of labour forces – one of the key engines for economic growth. In most of the rural areas in Asia, a large number of people are still struggling with the issues associated with poverty and can hardly afford education. Therefore it is necessary for policy makers to support those areas with free education. Since 1998, the Chinese government has tripled its share of GDP that is devoted to education.

There is now a 9-year complimentary education provided in both rural and urban areas. On the 29th of July 2010, China’s Ministry of Education released guidelines for reforming and developing the educational system in the next 10 years. This program covers almost every level of education (from kindergarten to university), especially in rural areas. Providing education to the children of urban migrants has also been marked on the ministry’s agenda.

Secondly, a sound healthcare system can help sustain or increase productivity in order to support the supply of labour forces. It can also reduce the financial burden on households brought about by medical services. As part of its $4 trillion yuan stimulus package in 2008, China invested a large proportion of it into creating a universal healthcare system. Their aim was to have the entire population covered by the universal healthcare system by 2020. Moreover, it is also aimed at addressing the disparities between rural and urban dwellers. Those in the cities are healthier and live longer compared to those in the rural areas. 

The World Bank adds that bankruptcy caused by medical expenses is common in rural China. A free basic health care system means that those who normally cannot afford basic health services, such as rural dwellers and low income earners, can gain access to basic health care. This will at least give them something that is normally available to those in the middle income bracket and above.

Thirdly, a government social security system is also necessary in maintaining a basic standard of living, slowing the widening gap between the rich and poor and maintaining an income stream after retirement. Currently the pension system coverage rate in Asia is still underdeveloped, with the Asian Development Bank indicating that the coverage rate for the working-age population (those from the age of 15 to 64) ranges from 13.2 percent for Vietnam to 58 percent for Singapore.

In comparison, the rate for developed countries is around 90 percent. On a brighter note, the Chinese government has reformed and enhanced its social security system. The government has introduced compulsory superannuation at a level of 10 percent for urban workers and created a government base retirement pension. In addition, during the 2012 National People’s Congress, Premier Wen Jiabao announced that a full coverage of the pension system for both rural and urban populations is expected to be achieved this year – 2012.

For the rest of Asia, the situation is not too different. The way the urbanisation roadmap for Asia will be unfolding is through the government providing incentives to reduce the gap between the rich and the poor, and trying to create the largest proportion of its population as the middle class. While this complete urbanisation is still a work in progress, governments will slowly roll out similar programs to boost the standard of living. With a strong middle class population; consistent, steady, and most importantly, sustainable growth is possible.