Analysis: Urbanization holds key to Asia's economic fortunes

BEIJING (Reuters) - Urbanization is the path to prosperity. But it can also be just a fancy word for penury.

Ask Mumbai's slum dwellers or the "ant tribes" of young office workers crammed into tiny rooms and shacks on the outskirts of Beijing.

The trajectory of growth across Asia, especially in populous India and China, will hinge on how governments tackle the complexities of urban development, from providing public works to endowing hundreds of millions of peasants leaving the land with the education and skills to thrive in the city.

Strategies will need to fit divergent demographic profiles. China's working-age population will peak around 2015, putting a premium on sustaining productivity growth to ease deteriorating dependency ratios.

India, by contrast, will be younger for longer. Its working-age population will swell by perhaps 270 million people by 2030. Job creation on a heroic scale, especially in mass manufacturing, will be imperative.

"The relative merits and opportunities of the demographic difference between the two countries are often overlooked," said Richard Dobbs, a director of McKinsey Global Institute, which has published in-depth studies on the issue.

MGI, the research arm of consultants McKinsey & Co, proposes a set of recommendations to transform urban India that it says could add as much as 1 to 1.5 percentage point to annual GDP growth.

Releasing the potential of India's cities holds the key to capitalizing on its young population, MGI says. It reckons urban India will create 70 percent of all new jobs in the next 20 years.

POTENTIAL VS REALITY

A study by Tushar Poddar, Goldman Sachs's economist in Mumbai, also digs into the powerful demographic forces at work.

Poddar reckons that Urbanization could contribute 1.8 percentage point to India's annual GDP by 2050 because labor is 3.5 times more productive in industry and five times more productive in services than in agriculture.

Urbanization, along with growth in the labor force, advances in education, more women in the workforce and a favorable age structure may generate at least 4 percentage points of GDP growth annually between now and 2030, Goldman estimates.

A golden age beckons -- if India can create about 40 million industrial jobs over the next decade, some 40 percent of all new jobs.

"For potential to meet reality, however, would require a massive overhaul of India's archaic labor laws and heavy investment in education and skills training," Poddar writes.

Ordinary Chinese might not bet on India getting its act together. Visitors typically return from India shocked by the seeming chaos of daily life and the all-too-visible poverty.

Yet it is worth remembering that China has paid a price for its meteoric ascent: its shiny cities have been built by a floating population of migrant workers who are treated as second-class citizens.

The migrants, whose ranks reached a record 211 million in 2009, are largely denied access to education, health care and housing in the distant cities where they toil long hours on building sites and in factories.

As a means of social control, the system has its uses. Beijing was relieved when 20 million migrants who lost their jobs during the global crisis quietly went back to the villages where they are officially registered.

The returnees were absorbed like a sponge sucks up water.

Yet political and economic pressure for reform of the registration system, "hukou" in Chinese, is growing.

Shanghai and other cities have begun to extend more rights to migrants, and the government says it will make it easier for rural folk to settle in smaller cities -- the sort of places to which coastal manufacturers are relocating because costs are lower.

"There is a huge debate raging about Urbanization and land reform, but it looks as if the party is moving in favor of small-town Urbanization," said Stephen Green, head of China research at Standard Chartered Bank in Shanghai.

DAUNTING CHALLENGES

Shifting people permanently off the land will be a stern test of Chinese policy planning, which is not faultless.

For example, China vastly expanded college enrolment in the late 1990s to ease job pressures but failed to cater for the consequences: there are now 6 million graduates a year, six times more than before, but over 30 percent of them are unemployed.

Hence the army of young would-be professionals, China's ant tribe, who eke out a living on the fringes of cities like Beijing trying to get a foot on the job ladder.

Many factories, by contrast, say they cannot hire enough production workers.

"China's current tight labor supply reflects a structural imbalance, with white-collar workers still unable to enjoy accelerated wage increases," investment bank China International Capital Corp said in a recent report.

India's skill mismatches are even more glaring. Only 11 percent of the 15-59 age group have received any vocational training, according to a report by manpower consultancy TeamLease and the Indian Institute of Job-Training.

Such statistics dramatize what MGI calls the unprecedented policy tests posed by the speed of urban development -- a seismic shift for a nation that takes pride in its rural identity.

"Indeed, India is still debating whether Urbanization is positive or negative and whether the future lies in its villages or cities," the MGI report said.

The research group's answer is clear: villages and cities are interdependent; addressing life in urban India is not an elitist endeavor but rather a central pillar of inclusive growth.

So, can India rise to the occasion?

"There'll be ups and downs, but there's a growing realization of the challenges if they don't. Failing to change could convert a demographic dividend into a demographic debt," said MGI's Dobbs.

(Editing by Mathew Veedon)