al obstacle may be the status of IKVs, the state-owned management com- panies. The authors propose to priva- tize rental housing management, but are inconclusive about the status of IKVs, which form a substantial politic- al and bureaucratic force.

In sum, a system of housing allow- ances seems attractive at first sight, and Hegedi~s, Struyk and Tosics offer an appealing elaboration of one such system. However, housing allowances cannot be divorced from the politica! and bureaucratic setting in which they operate. A better picture of market developments and supplementary

housing policy instruments is required to make a housing allowance system acceptable and effective.

Peter Nientied Urban Management Center/

Institute for Housing and Urban Development Studies

Rotterdam The Netherlands

1See, for instance, the recent study and literature mentioned in: Comparative Study on Social Housing Systems in Europe: Financial Instruments, Ministry of Housing, Spatial Planning and Environment, DGHV/ DOK Report 92/22, 1992 (in Dutch).

China's urban reforms URBAN HOUSING REFORM IN CHINA An Economic Analysis

by George S. Tolley

World Bank Discussion Paper No 123, The World Bank, Washington, DC, 1991, 95 pp

The People's Republic of China was the first socialist country to formulate and attempt to implement a radical reform of its urban housing system. Since 1980 the ideological and policy debate in China has been vigorous, but more important, the country has implemented numerous experiments and pilot projects, usually at the city level, aimed at testing these new ideas in practice. Despite this sustained effort, however, Chinese urban hous- ing reform remains ambiguous and incomplete, with decision makers and professionals still searching for reform policies that are politically and econo- mically feasible for wide-scale applica- tion. The difficulties faced by China in its struggle for reform provide impor- tant lessons - and warnings - for other countries seeking similar transforma- tion of their socialized housing sys- tems. For this reason, the present review goes beyond the scope of simp- ly examining a single publication.

This working paper by Tolley, which is part of a series of World Bank sponsored studies on similar and re-

lated subjects, seeks to apply econo- mic analysis to the Chinese reform effort as it existed in 1989-90. By using ideas and analytical approaches from the established Anglo-American tradition in urban economics, Tolley helps to clarify some of the core issues and problems of Chinese housing re- form. This is useful for the non- Chinese reader, given the complexity and opacity of much of the debate as carried on within China.

Nonetheless, by using this approach Tolley introduces the greatest short- coming of this working paper (and of many similar studies): its failure to look at Chinese housing problems in the context of Third World housing and urban economics. For all the pro- wess of its recent economic growth, and for all the surface modernity of its booming coastal regions, China as a whole is still a lower-income develop- ing country. There is a rich literature on the subject of housing issues in the Third World, but the valuable and hard-won insights available from that literature are simply not brought to bear on the Chinese situation. On the other hand, Tolley does include refer- ences to, and examples from, housing behaviour and housing analysis in the USA - a vastly different situation that is of questionable relevance to China.

Equally puzzling is the scarcity of references to the available English- language literature on Chinese hous- ing reform. Aside from the documents

Book reviews

originated from the World Bank itself (only one of which is used significantly by Tolley), this substantial body of literature includes book-length treat- ments by Western experts (such as Richard Kirkby), articles in English- language periodicals produced in Chi- na (such as Building in China or China City Planning Review), articles in both generalist and specialized Western periodicals (such as China Informa- tion, Habitat International, World De- velopment, and Cities), and a wide variety of conference and seminar papers from China and abroad.

As a result, the working paper seems curiously 'stand-alone' and in- complete. Some of its economic analy- ses are useful and perceptive, as elaborated below, but it remains, in the end, unsatisfying. Its biggest chap- ter, for example, is on housing tenure choice, including an over-long ~Policy analysis' section based on lengthy algebraic manipulations of numerous 'ifs' and 'maybes', with only a limited foundation in Chinese reality. This type of work may be obligatory in US academic circles, but adds little to our understanding of Chinese urban hous- ing issues.

Despite these shortcomings, how- ever, the working paper does have a number of interesting features that make it well worth study by those concerned with Chinese housing sys- tem reform or with similar housing reform issues in other formerly social- ist economies. Concentrated in parts of Chapter IV and Chapter V, Tolley's observations and comments cover a number of issues that highlight the shortcomings and limitations of Chi- na's present reform approach.

For instance, he points out some of the con t rad ic t ions in the credit arrangements: high downpayments (difficult in a welfare system with li- mited cash incomes), short repayment periods (making for high monthly re- payments), but with subsidized in- terest rates (which distort a mortgage finance system that is only in its infan- cy). These factors militate against a successful house purchase program- me. For another example, Tolley notes the very real danger of increased bureaucratization. This comes from the government's desire to regulate

CITIES August 1993 275

Book reviews

and control every aspect of change, but is an ironic result of a reform aimed at moving toward commer- cialization and markets. However, Tolley's more important general con- clusions derive from his concern for the half-heartedness of Chinese re- form, as expressed in a warning with which most observers would agree:

A danger is that China will be permanently stuck with a cumbersome halfway house that is little or no better than the pre- reform situation, and might in some ways be worse (p 88).

It may seem harsh to criticize Chinese efforts so strongly, especially in light of China's laudable desire for housing reform. However, the situation itself is cruel (as well as increasingly familiar in Eastern Europe): half-way and in- complete reJorm is usually more pain- ]ul and more damaging (especially in the long run) than the (initially) stron- ger dose o f full-blooded reform.

China's urban housing system re- form began in 1980 and has been sustained for 12 years through strong support from the top leadership. Nonetheless, this reform has generally been cautious in practice, despite its ambitious objectives of wholesale sys- tem change. The reasons for caution are probably familiar to observers of Eastern European economic change: fear of arousing popular discontent by forcing people to pay for previously free goods and services, rearguard ac- tion by cadres and privileged groups who benefit from the present rationing system, desire to maintain centralized political control while selectively loosening economic control, the dan- ger of stimulating urban inflation, the uncertainties coming from an almost total lack of experience with real mar- kets, and fundamental conflicts within the leadership.

In output terms, China's urban housing has been transformed over the past 12 years: the country has achieved a quantum increase in urban housing production and housing stan- dards that must be acknowledged as an outstanding and unprecedented achievement. ~ Nonetheless, the in- creased rate of physical production has not been matched by changes in the financial and economic basis or operations of the urban housing sec-

tor. Basically, this vast increase in output was produced through existing channels of investment mobilization and production and allocation. The improved output performance has in fact increased the tensions inherent in housing system reform, aggravating the p rob l ems that arise from a piecemeal and incomplete approach. One result has been a truly massive increase in housing subsidies: the total housing subsidy burden increased from 9,7 billion yuan in 1981 to 58.4 billion yuan in 1988. This was not just the result of increased urban popula- tion and housing production. The housing subsidy per m 2 rose from 1.06 yuan to 3.03 yuan over the same period, and the total housing subsidy per employee per year rose from 118.24 yuan to 571.90 yuan. 2

The pressure of this rising burden of housing subsidy (and of similar sub- sidies for basic goods and services) has become unbearable. The government budget has only been able to cope, and barely so, because of the country's remarkably strong economic growth over the past 12 years. Still, even leaving ideology and principle aside, effective and widespread reform be- comes all the more urgent because of the need to control this budgetary burden.

A less commonly identified reason for escalating expenditures is also a result of a centrally administered non- market system: the adoption of high- cost hous ing s tandards that are beyond the level that can be afforded by the economy. Those concerned with housing problems in the Third World are only too familiar with this issue. Excessively high standards and regulations (for building materials, space, site lay-out, and infrastructure) has long crippled efforts to provide affordable housing in the cities of the developing world. China's cities fall into the same category. Twenty-storey tower blocks of reinforced concrete and steel, with lifts and pumps and fully-equipped (if small) units, are also 'unaffordable' at China's average in- come level. 3

Another shortcoming that is rightly emphasized by Tolley (Chapter IV) is the failure of the Chinese reform to understand the need for market-

oriented reform of the public sector rental system. In practice, the main thrust of housing reform has been "commercialization', which has basi- cally meant the selling of housing units within a highly subsidized and reg- ulated system. For example, at the October 1991 Second Working Con- ference of National Housing Reform, it Was announced that from 1992 on, the policy would be to sell new hous- ing before renting it. 4

Thus, despite the many pronounce- ments that emphasize the principle of 'more rent raising, less subsidy', 5 dis- appointingly little progress has been made in bringing rent levels into line with real costs. The average propor- tion of household income spent on rent continues to be negligible having remained in the range of 1-2% despite 12 years of reform. At these levels, rental revenues cannot even cover normal maintenance costs. Moreover, recently announced plans for rents to be raised sufficiently to cover mainte- nance, management costs, deprecia- tion, investment interest, and proper- ty tax do not intend to reach that target until the year 2000. 6

The slow pace .of reform and the almost complete lack of progress in raising the level of rents represent a 'lost opportunity'. Between 1978 and 1988, total worker income grew by an average of 18.1'7o a year. This is a dramatic growth rate that should have allowed the authorities to increase rent payments steadily while still allowing after-rent salaries to go up as well. Yet in reality, total worker cash salary income went up by only 15% a year, whereas total worker income from housing subsidy grew by 28.6°/,, a year. As a result, cash salary was 80,63% of urban worker income in 1978 and had dropped to only 62.03% of income by 1988 - exactly the oppo- site result that reform should have achieved.7

As Tolley and others have pointed out, this low level of rent has a num- ber of damaging consequences beyond inadequate revenue and rising sub- sidies. These include, for instance: chronic undermaintenance, leading to rapid deterioration and high costs of emergency maintenance; irrational consumption patterns, with much

276 CITIES August 1993

more spent on bicycles and televisions than on housing; inequities - people in high-quality housing still pay very lit- tle; the incentive to 'over-consume' space or to hoard space no longer needed; and irrational location pat- terns - high-accessibility central loca- tions are generally as cheap as inac- cessible peripheral locations.

Inextricably tied to the rent level problem is the present housing alloca- tion system. As in any rationing sys- tem, there are inequities as well as incentives for corruption and 'entry through the back door'. The direct role of the work unit in providing housing is the key element, for the basic responsibility for housing deci- sions still remains with the work unit, not with the resident. This means that the likelihood of obtaining suitable housing depends upon the relative political and financial strength of the work unit. This type of allocation sys- tem exacerbates the problems of low rent and produces additional distor- tions of its own such as labour im- mobility, inequities, corruption, mis- allocation of investment resources, and so on.

Tolley's final suggestion is therefore one of his most important, going to heart of this situation: divorce housing from work units. 8 This is a logical step, and a necessary one if housing reform is ever to succeed on a wide scale. However, like many other logi- cally necessary steps, it is one that China is not yet ready to take.

The full complexity of housing re-

form issues in China cannot be ade- quately covered in a short review, which can focus only briefly on selected issues. Nonetheless, perhaps enough points have been raised to show that while Tolley's working pap- er has merit and highlights some im- portant aspects in an interesting way, its narrow scope and approach mean that it will have limited value to the general reader, just as its discon- nectedness to the known literature and knowledge base will make it of limited appeal to the specialist. Tolley is to be congratulated for attempting to apply economic analysis in a reasonably rigorous way; this is cer- tainly needed. Unfortunately, his lack of grounding in either the Chinese or Third World context has constrained the usefulness of his efforts.

Douglas McCallum McCallum Consultancy

The Hague The Netherlands

1in the nearly three decades from 1949 to 1978, a total of approximately 554 million m 2 of residential floor space was con- structed in China's urban areas; yet in the seven years from 1979 to 1985, a total of approximately 600 million m 2 was con- structed. See Richard Kirkby, 'Urban hous- ing policy after Mao', in Transforming Chi- na's Economy in the Eighties, Volume I1: Management, Industry and the Urban Eco- nomy, Westview Press, Boulder, CO, 1988. 2Lin Zhiqun, 'A review of housing construc- tion in China's cities', in China City Plan- ning Review, Vol 7, No 4, December 1990.

Book reviews

Also see Wang Yukun, 'The size of hous- ing subsidies in China', Review of Urban and Regional Development Studies, Vol 3, 1991. 3Although many Chinese professionals and administrators, especially those work- ing in the more economically advanced cities of the eastern seaboard, dislike being compared with Third World coun- tries, the level of China's GNP/capita (around US$400) is only somewhat above that of India (US$375), and still below that of Indonesia (US$600). Although many aspects of the Chinese economy and Chinese society are remarkably highly- developed, the national economy more closely resembles its 'Third World' neigh- bours of South-east Asia than it does very rich (and small and unique) places like Singapore (US$11 250) or Hong Kong (US$11 750). A similar attitude can often be found in Eastern Europe, with an insist- ence on using Western European coun- tries as the reference point, even though levels of economic development in coun- tries like Bulgaria, Romania, and many parts of the former USSR are greatly below those of the EC. 4'State will step up housing reform in cities and towns', China City Planning Review, Vol 8 No 1, March 1992, pp 61-63. 5As quoted from Chen Jinhua, minister of the State Commission for Restructuring the Economy and chief of the State Hous- ing Reform Leading Group, in 'State will step up housing reform in cities and towns', op cff, Ref 4. SOp cit, Ref 4. 7Wang Yukun, 'The size of housing sub- sidies in China', Review of Urban and Regional Development Studies, Vol 3, 1991. 8There are other compelling reasons to relieve the work units of the housing bur- den: the effort to improve the inefficient state sector of the economy will increase the pressure on work units to utilize their limited financial resources for productive investment and modernization.

CITIES A u g u s t 1993 2 7 7