China is facing many formidable tasks as it modernizes. Urbanization, especially the growth of large-and medium-sized cities, is a major concern.

"China's urbanization process in the coming years will produce much consumption demand and greatly drive up the nation's economy," said Liu Yong, a researcher with the Development and Research Centre under the State Council.

Wang Xiaolu, a senior researcher with the National Economic Research Institute of the China Reform Foundation, said an examination of the world economy reveals that urbanization has a positive correlation with a country's economic growth.

China's population of 1.2 billion remains predominantly rural with 70 per cent living in the countryside. But rural resources are insufficient to support such a large population. Expanding urban areas can provide the jobs for rural labourers who cannot find work in their home provinces.

However, China's urbanization rate, the ratio of the urban population to the entire population, is rather low.

Currently, it is only 30.9 per cent, 12 to 21 percentage points lower than that of countries with a similar per capita gross domestic product. With a comparable urbanization rate, 150 million to 250 million additional wokers could have been moved from the countryside to urban areas, says a report by Wang.

Currently around 100 million rural people have left land to seek their fortune in urban areas.

Liu said from 1949 to the late 1970s, the urbanization rate grew slowly from 10.6 per cent to 17.9 per cent. The average yearly increase was merely 0.28 of a percentage point. Far below the world average for the same period, which stood at 0.40 of a percentage point, Liu added.

To spur urbanization, Wang said large- and medium-size cities should be favoured over small towns in the allocation of resources.

"More resources should be put in for the construction and expansion of large- and medium-size cities because they have a much stronger capacity to accommodate resources and deliver more economic returns to the overall economy," he said.

Xu Xiaoqing, of the Development and Research Centre under the State Council, agreed.

"Big cities have a solid economic foundation. Therefore, it may be less risky to develop them," Xu said.

Even with the emphasis that should be placed on large- and medium-size cities, small towns still have a role.

Small towns can be a buffer zone between rural areas and big cities, Wang said.

"It is very hard for many rural enterprises to enter big cities. But they can converge on small towns, which can offer them better conditions than the countryside for their growth," he said.

One reason the State develops small towns is because they need less attention, he added. However, given their small scale, meager population and "low efficiency," they can only deliver limited economic returns, Wang added.

Market forces are another reason for allocating more resources to expand large cities. For a long time, farmers and people from small towns have struggled to find work in cities, especially big cities. But various policies and regulations have been roadblocks to their employment.

China's urban development strategy since the 1980s sought to limit the growth of large cities and instead promote small cities and towns, Wang said in his report.

To ensure ample agricultural production and limit the pressure on urban infrastructures, Chinese authorities since 1949 have limited the entry of farmers into cities.

But whether such a policy is reasonable is debatable.

"Farmers swarming into cities and increasing the population creates urban management problems, the so-called negative externalities of urbanization," Wang said.

"A rational way to assess the issue should be to compare the 'positive externalities' with the 'negative externalities' to see which one is greater," he said.

If the positives outnumber the negatives, it will be unreasonable to argue for limiting the growth of big cities, he added.

An analysis of data from 666 cities from the late 1980s to 1996 shows that cities with a population of more than 500,000 have more positives than negatives and cities with a population of 1 million to 2 million have the maximum net positive externalities, Wang's report said.

"We should not dismiss the idea of expanding cities merely because there are some negative effects," Wang said.

The negatives could be reduced by improving urban management.

"When making urban policies, possible problems that may occur as the city expands should be anticipated and precluded to reduce the costs of city expansion," he said.

Urban policies should be adjusted to meet the requirement of the market, which will facilitate urbanization. Since more farmers and rural enterprises are flowing into cities, the governments should ease restrictions and aid the labour flow instead of restricting it.

The exodus of farmers will benefit the nation's economy. It can raise the efficiency of agricultural production. It can also fill the labour vacuum in cities.