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The real reason China retains its old pass lawsTom Holland03 March 2010On Monday, 13 mainland newspapers called for the abolition of China’s hukou household registration laws, slamming them as inequitable and corrupt.“China’s people have been suffering from the hukou system for a long time,” the papers thundered in a joint editorial, which blamed the scheme for China’s widening urban-rural wealth divide. No doubt the hukou system is just as iniquitous as the papers say, but getting rid of it is likely to prove a lot more troublesome than their editors seem to believe.Widely compared to apartheid-era South Africa’s hated Pass Laws, the hukou system pigeonholes China’s citizens as residents of the place they were born. Introduced in 1958 to ensure farmers remained on the land, where they had no choice but to sell their produce to the state at controlled prices, the hukou system has long been condemned as an outdated relic of a vanished age.Today the original prohibitions on citizens’ freedom of movement are seldom enforced, and hundreds of millions of mainlanders born in poor rural areas now live and work in booming cities.But the hukou’s enduring restrictions mean that those migrants are treated as second-class citizens in their new homes. Because their hukou documents classify them as residents of another district, they cannot get public housing, their children are refused entry to local schools, and often they are ineligible for medical insurance schemes.The obvious effects of this inequitable treatment have been widely discussed and roundly condemned. The lack of welfare provision for migrants has tended to discourage the movement of workers to China’s cities. The disincentive has kept many in the countryside where their productivity is low, and has created labour shortages in the industrialised coastal cities.That is not only inefficient, it has exacerbated the wealth gap between China’s cities and its countryside. Yesterday, the government announced that average urban incomes last year were 3.33 times incomes in rural areas; a record divergence (see first chart).What’s more, the system is often blamed for having created a floating urban underclass of migrants, with attendant problems of deprivation and crime. As a result, the rich-poor divide in China is greater than in most other large economies, and much wider than in East Asian paragons of economic equality like Korea and Japan (see second chart).And even when country-dwellers do settle in urban areas, their second-class welfare status means they must save more to fund future health care and education costs. As a result they typically spend less of their incomes, which suppresses consumer demand and contributes to China’s domestic economic imbalances.Getting rid of the hukou system, its critics argue, would not only advance social justice and equality in China. It would also allow greater labour mobility, raising workers’ productivity, boosting domestic consumer demand and helping to rebalance the economy.But there is a problem. Although the hukou system is usually dismissed as a hangover from the distant past, it has also served a powerful economic function in recent years.Freedom of movement is no longer directly restricted, which means China’s urban factories have been able to get the migrant workers they need. But because the restrictions of the hukou system means those migrants are not entitled to public housing, education for their children or local pension and health care benefits, they have come as a deeply cut-price workforce.According to research by Huang Yiping at Peking University’s China Centre for Economic Research, if urban employers were obliged to make welfare contributions on behalf of their migrant workers, then factory payroll costs would shoot up overnight by between 35 and 40 per cent.
In other words, the inequities of the hukou system have effectively provided the factories and construction gangs of China’s coastal cities with a 30 per cent subsidy on their wage bills.That’s a big advantage, especially for export-sector manufacturing industries operating on margins of 5 per cent or less.As a result, although the social and economic gains from scrapping China’s hukou system would be considerable, there are powerful vested interests among China’s urban corporations and governments who won’t be prepared to give it up without a fight.
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