AS IT adjusts to the end of its run of sustained, double-digit rates of annual economic growth, China is staking a great deal on the idea that growth and urbanisation are linked. It has made continued urbanisation a pillar of the government’s long-term strategy for rebalancing. But policymakers who put so many of their hopeful eggs in this basket must also consider a vexing chicken-and-egg question: is it urbanisation that causes growth, or is it the other way round? In a paper released in July, two scholars argue that “the direction of causality likely runs from growth to urbanisaton, rather than vice versa.” There are caveats galore about their findings, especially as they relate to China. The scholars, Anett Hofmann of the London School of Economics and Guanghua Wan of the Asian Development Bank, seek not only to determine the impact of economic growth on urbanisation, but also that of industrialisation and education. And, while they seek and find indications that growth causes urbanisation, they do not themselves investigate the reverse sort of causality. They leave off noting instead that “attempts to identify a causal effect of urbanisation on growth have so far been unsuccessful” [emphasis theirs].

More relevant still is the fact that China is not betting the farm, as it were, on urbanisation. True, some influential figures have hinted at the belief that it might be sufficient as a spur to future growth. For instance Zhang Liqun, of the State Council’s Development Research Centre, recently said that "the growth momentum gained from the processes of industrialisation and urbanisation alone will support the country's steady growth."

But the senior leader most closely identified with the idea is the current prime minister, Li Keqiang, and he has outlined a more nuanced position. Elaborating his position in an article published in May in a theoretical journal of the Communist Party, Qiu Shi (here in Chinese), Mr Li wrote that “China is experiencing exponential urban growth which will spur investment and consumption and play a significant role in expanding domestic demand.”

His formulation involves more than a simple “urbanisation-causes-growth” assumption. Under China’s current circumstances, there is plenty of reason to believe he is onto something. Rather than counting on urbanisation to boost growth directly, through increased production or higher efficiency say, the hope is that it will raise the economy’s consumption share—a key goal of China’s overall restructuring effort.

In doing the sums for his article, Mr Li started with data showing that in 2010 China’s urban residents spent 3.6 times more per capita than did their country cousins. He concluded that every rural resident who moves to a city will increase consumption by an average of 10,000 yuan ($1,631). Multiplying by the 10m rural residents he expects might be absorbed into cities in a single year, he predicted that “this will, in turn, translate into consumption totalling more than 100 billion yuan and correspondingly create more investment opportunities.”

With or without the government’s encouragement, the process of urbanisation has been moving at great speed. At the end of 2011, China crossed an important threshold when, for the first time in history, its city-dwellers became the majority. In 1980 they accounted for only one fifth of the population.

And while policy will have an effect on the pace, robust urbanisation will almost certainly continue no matter what the government does. Even scholars who have been supportive of China’s drive for urbanisation are wary of its pace. In a paper from 2005 titled “Are Chinese cities too small?” Chun-Chung Au and J. Vernon Henderson, of Brown University in America, conclude that many of China’s cities were “significantly undersized” and that cost the economy in terms of both productivity and worker income. However they were careful to qualify that view: “the recommendation here is not to suddenly increase the sizes of all cities by enormous magnitudes overnight.” Whether it is truly the chicken or the egg that comes first, eggs must always be placed in the basket with care.

(Picture credit: AFP)

Clarification: the wording of the second paragraph of this story has been slightly modified to explain better the findings of the paper.