Hukou Essay

It is a known fact that as economies start to grow industries tend to develop in certain areas and people flock to these areas in the hope of work from their rural locale, this is the phenomena know as rural-urban migration or urbanisation. This is a natural transition of many developing economies and it is usually done on the basis of “market forces”, as people in rural areas see growth in employment, wages and opportunities in cities they then weigh up whether to leave their village to increase their living standards or more crudely to have a better life. As shown in the Harris Todaro model (Harris and Sabot, 1982) the wage differential between wages in the agricultural sector and in the manufacturing sector create an incentive for people to move from rural areas into an urbanised setting – this is a “market force”. My contention is that due to public policy choices within China, this normal market force pulling residents to urban areas is unable to occur due to limiting public policy called Hukou (Household registration). The Hukou system divides the Chinese population into regions in relation to descendants’ location at the time of Hukou inception in the 1950’s. Prior to periods of deregulation in the 1990’s and more recently in the early 2000’s residents had heavy controls on them in regards to where they can work and reside. Due to reform of Hukou, rural-Hukou holders can now move to cities as migrant workers however they are not entitled to local social initiatives such as education and other government services.
The use of the Hukou system has varying impacts upon the economy in totality, however only the impact upon the economic growth rate is in the scope of this essay. Hukou impacts economic growth via four channels; th...

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...ublic policy, being Hukou, is impacting the ability for individuals to make free market decisions. These 4 channels are generalised under the headings of Hukou’s impact upon the supply of labour, the impact upon individuals economic participation with a focus on the efficient wage hypothesis, the impact it has on the allocation of financial resources within the economy and finally the dis-incentive it provides when it comes to migrant workers investing in their human capital. Hukou’s impact is not only limited to these four channels, but I have focused on these four as there is a clear link through these upon how Hukou impacts Chinese economic growth. Hence through economic theory and historical data it has been shown that Hukou is detrimental upon economic growth in China, largely as a result of the impingements it places upon individual rational decision making.