Third Annual Central China Exhibition
Mayors Forum on Sustainable Development

Wuhan, China, April 2008

Mr. Chairman, ladies and gentlemen –

On behalf of McKinsey & Company, I would like to thank the State Housing and Construction Ministry and the Ministry of Commerce for the honor of joining such a distinguished group of leaders.

Today, amid your discussions of the best ways to meet China’s goal of achieving sustainable urban development, I’d like to share some insights that have emerged from a year-long research initiative that our economics research arm, the McKinsey Global Institute, has just completed on China’s urban development path.

China is at the forefront of a worldwide trend. For the first time in history, 50 percent of the world’s population now live in cities, rather than in towns or villages. In China, 100 million people moved from rural to urban areas between 1990 and 2005. The dynamic growth of China’s cities over the past generation is largely responsible for China’s rapid economic growth and rising living standards.  Cities now generate 75 percent of China’s total gross domestic product.

The success with which China has managed such an unprecedented flow of people to its cities – and over such a short period of time – is a tribute to your policies, and to the effectiveness of your urban planners and managers.

The scale and pace of China’s urbanization promises to continue at an unprecedented rate. Between now and 2030, we estimate that 350 million people will be joining the ranks of China’s urban population: this is equivalent to the entire population of today’s United States.  By 2030, one billion people, or two-thirds of China’s entire population, will reside in the cities.

The accelerating scale and pace of urbanization in China will continue to drive China’s economic engine. By 2030, over 95 percent of the nation’s GDP will be generated from urban areas.

We believe that China’s continuing urbanization is likely to ensure that you will fulfill your economic growth target set out at the 17^th Party Congress last year of quadrupling per-capita GDP by 2020.

At the same time, the expansion of China’s cities will represent a huge challenge for local and national leaders. Of the 350 million people that China will add to its urban population by 2025, more than 240 million will be migrants.

This influx could push cities to their breaking point. By our estimates, demand for energy in urban areas will likely more than double; demand for water will increase by between 70% and 100%. Providing healthcare and education to new migrants will severely strain cities’ ability to fund these critical services. Depending on the shape that urbanization takes — more concentrated, or more dispersed — arable land could be depleted by 7% to 20% nationwide.

So what should China’s cities do?

In our research, we developed several scenarios that China could pursue at the national level to shape the path of urbanization going forward.

Two of these scenarios foresee patterns of concentrated growth. If China decides to adopt a policy of concentrated urban growth, the government could encourage the emergence of 15 super-cities with average populations of 25 million people. If it so chooses, the government could also direct such policies in a way that would spur the development of 11 urban “networks” of cities, with combined populations of 60 plus million people.

Another two, quite different approaches, would involve patterns of dispersed growth.  If China decides to pursue a more distributed growth path along the lines of historical urban development, we would see a very large number of cities – with populations of 1.5 million to 5 million people – spread throughout China. Another, more extreme version of this approach would see the emergence of hundreds of smaller cities – with populations of half a million to 1.5 million people.

Through our analysis of China’s history of urban growth, in-depth econometric modeling, and a detailed comparison of city performance within China, we concluded that concentrated growth would be the optimal approach for China to achieve higher urban productivity, while mitigating the impact of urbanization on public services, energy, natural resources, and the environment.

Concentrated growth is likely to increase per capita GDP by 20 percent, improve energy productivity by 20 percent, and reduce the loss of arable land by 15 percent. Concentrated urbanization would also substantially reduce the need for investment in mass transit, and reduce carbon emissions and water pollution nation-wide.

While concentrated growth will present its own challenges, including the need to absorb hundreds of millions of migrants into a relatively few number of large cities, our analysis shows that larger cities in China have generally proven more adept at surmounting such challenges than have smaller cities.

Concentrated growth is moreover, eminently feasible. At the national level, relevant policy action can make a decisive difference in the overall shape of urbanization. Such policies would include greater enforcement of restrictions on land acquisition by cities, directing large infrastructure investments toward the larger cities, elevating the status and autonomy of larger cities, setting national standards for the provision of public services to all segments of the population, and adjusting the incentives of city officials.

Through policy direction and incentives, the central government can do much to influence how urbanization plays out in China. But while Beijing plays an important role in guiding the overall direction of urbanization at the national level, it is city leaders who make many of the key decisions that shape the path and pace of urbanization.

Regardless of which path of urbanization China decides to pursue at the national level, cities can adopt urban productivity initiatives to contain urban sprawl, cut energy demand, optimize the use of land, and improve the quality of life for its urban citizens.

By urban productivity, we mean an agenda for both the public and private sectors that would improve the quality and efficiency of urbanization, while moving away from the current focus on maximizing GDP growth of China’s cities.

A productivity-based approach to urban development would encourage the efficient use of inputs such as energy, water, and land; would focus cities on matching sufficient skilled labor to higher-value-added activities; and would improve the provision of public services. Urban productivity initiatives have the potential to reduce future funding pressures, producing outcomes that are both cost-effective and beneficial to the overall quality of urban life.

One such urban productivity initiative would be to build denser, more productive cities. Denser cities tend to produce lower demand for energy – up to 20 percent lower in the case of energy for transport.

In order to create this type of dense development, cities will need to focus on maximizing the effectiveness of their transportation infrastructure, on holistic congestion-fighting strategies, and on urban planning that uses land strategically. For instance, urban planners in China would focus on growing its cities up, not out. Using zoning laws to encourage the more efficient clustering of taller buildings, along with a transportation infrastructure which could be planned around where people live and work – what we call “transport oriented development” – would create more livable city environments while containing land and resource pressures.

By following an urban productivity agenda, policy-makers would also devote more attention to managing the demand for resources, rather than simply building supply infrastructure as needed. By introducing peak-hour electricity price premiums, deregulating gas prices, and mandating the use of more energy efficient technologies such as compact fluorescent lighting and light-emitting diodes in the construction of all new buildings, urban China could reduce its energy demand growth and potentially cut oil demand by more than four million barrels per day.

Urban productivity measures would also ensure that the “right talent is available in the right location”. Shortages of skilled labor, especially of university graduates, are likely to be more pronounced in smaller urban centers. Some cities already work with companies to offer special salary and benefits packages to attract the talent they need. City governments and local businesses could tailor these packages so that they offer clear career opportunities and social benefits to make their cities even more appealing to employers – Taizhou, and other cities we visited, have begun to do this.

To develop the right talent, cities will need to shift from the current system of measuring performance by emphasizing quantity of inputs (e.g., enrollment numbers), to one that measures attainment (e.g., the employment rate of graduates in those professions that a city may need the most).

Cities should complement such a shift with systems to measure and improve the labor productivity of their workers. Industrial organizations such as the Hong Kong Productivity Association or Singapore’s National Productivity Board (NPB) could provide one model for how to do this. The NPB used a total productivity approach that emphasized measurement, product quality, and a flexible wage system indexed to productivity, supported by a mass media campaign to communicate the need for productivity to be a pillar of Singaporean society. These, and other models for enhancing productivity could be viable options for China with appropriate adjustments suitable for local market conditions.

Finally, urban productivity initiatives will also deliver real financial benefits, particularly to small- and medium-sized cities which are finding the funding of urbanization itself more challenging. Sourcing sufficient funds to provide for adequate infrastructure and to improve public services for increasing migrant populations without raising taxes is a challenge that all urban planners already face.

One step will be improving the productivity of the public services that cities deliver. For example, deploying capital investment in transit infrastructure more efficiently through better rail network planning and increasing non-fare revenue, or better managing the capital spent annually by local governments on fixed asset expenditures.

Despite the expense and challenges, the benefits of a holistic urban productivity strategy could be considerable. Our research suggests that such policies could help reduce government spending in 2025 by more than 1.5 trillion yuan ($215 billion at today’s exchange rate) per year, the equivalent of 2.5% of overall China’s projected GDP that year.

A comprehensive “urban productivity” model is already working — in China, no less. Since 2006, Wuhan – our kind hosts for this gathering today – has launched a progressive, transparent performance-management system designed to promote sustainable economic development and raise public-sector productivity. Wuhan has implemented a broader set of performance measures for government entities that reward the reduction of energy consumption, or the design of more environmentally friendly economic development policies. Since these measures have been put into place, Wuhan has reduced energy consumption per unit of GDP by 4.5%, compared with the nationwide average of around 3%, and cut administrative red tape in half. At the same time, GDP growth has increased to 15.5%, from the average 13% growth of previous years. As Wuhan has demonstrated – achieving GDP growth and urban productivity can go hand in hand.

To combat pollution, the northeastern city of Dalian publishes a daily air-quality report in the press and online; monitors major emitters and enforces anti-pollution measures; conducts an annual motor vehicle emissions inspection program; and has pioneered the use of new technologies, including the latest power-generation equipment and low-emission industrial boilers.

Through our several visits to cities around China, we’ve seen first-hand the many innovative solutions that many other city governments are pursuing to achieve more productive urbanization. We applaud these efforts.

For the long-term sustainability of China’s new urban economy, it is vital that the broad swathe of China’s cities — rather than a far-sighted few — adopt an urban productivity agenda.  We see a significant, untapped opportunity to replicate these efforts across China’s cities – for instance, through sharing best practices and technologies to boost energy productivity, or recycle water.

Indeed, we think China could share its innovative approaches with other rapidly developing markets around the world, becoming a model for best practice urbanization that other countries would seek to emulate.

China is in a truly enviable position: With its growing wealth, it can invest in far-sighted urbanization policies that will, over time, strengthen its economy still further. At the same time, by making wise policy decisions about sustainability, it can serve as an inspiration to other nations that are struggling to cope with urban dilemmas.

It’s been a pleasure to join you today – to recognize China’s past urban successes, and to foresee an ever-stronger future as you prepare to welcome China’s urban billion.

Thank you very much.