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Tuesday, September 02, 2003

China's Enormous 'Reserve Army'

Here's another dimension of the China situation, and one that's likely to mean that prices stay down whatever happens to the yuan. The question is to understand the whole dynamic of what is happening. Introducing an enormous new labour supply from the rural hinterland into the new economic zones, and then systematicall folding the state owned industries on the fly creates a very special dynamic. And one that is liable to see internal wage deflation for some time yet.

China's soaring economic growth will not stop hundreds of thousands of staff at state-owned firms from losing their jobs in the next five years, the country's state media has reported. According to the China Daily, the main English-language paper, more than 2,000 state-owned enterprises (SOEs) will go to the wall. That, the paper warns, will further worsen China's already serious unemployment problem. "Further bankruptcy will make things extremely tough for redundant workers, and will probably exacerbate China's urban unemployment problems," the paper quoted an official from the State-owned Assets Supervision and Administration Commission (SASAC) as saying. Almost 8,000 SOEs have already gone bust - although another 159,000 remain in business, the paper said. China's government is keen to see the back of many more, since their inefficiency often means the goods they make are worth less than the cost of making them. Following the country's entry into the World Trade Organisation - and the resulting increase in imports - the mismatch is likely to get worse. State benefits for the unemployed are limited in China, remaining little changed from the pre-market economy days when everyone had a job in a state enterprise. That means those forced out of work may end up swelling the numbers flocking from the provinces to China's big cities and often ending up sleeping rough.
Source: BBC News

Anecdotal evidence from Peking Duck only confirms this impression:

I am no economist, but it appears to me that this is the conundrum of China's economy:

''The policy of allowing these loss makers to go bankrupt will make China's employment situation much tougher,'' the official was quoted as saying. State-sector reforms have led to the shedding of tens of millions of workers every year, many of whom cannot find new jobs. The Ministry of Labour and Social Security said that China needed an additional 24 million jobs for its unemployed urban residents.

That's 24 million jobs for urban residents alone. I don't even want to think of how many in the countryside are out of work. On top of this, the government is always borrowing more and more to support the non-productive, cash-bleeding SOEs, so the banking system is under perpetual strain.

And that's where the "maintain social stability at all costs" mentality steps in. Once you have any sort of panic, any run on the banks, the entire system is threatened. I realize the situation is more complex than that, but I was always aware when I lived there of just how fragile things really were.

A common myth, I believe, is that multinationals in China are thriving, and that the Chinese are lining up to buy foreign goods. I'll take that back -- it's half myth. There is no doubt a sliver of the vast population is indeed buying Mercedes sedans and Louis Vuitton bags. And the middle class is certainly growing, though I believe most readers would be amazed at what would constitute the "middle class" wages of, say, an accountant or marketing manager in Beijing.

I would guess that most of the Louis Vuitton, Ermenegilda Zegna and Hermes boutique shops that seem to be everywhere in Shanghai and Beijing are breaking even (maybe), thanks to that high-spending sliver at the top, as well as the expats. But I can't imagine anyone getting rich from them.

Most companies seem to feel they must establish a presence in China now and take advantage of the great marketplace of the future. ............Time will tell if this is an ingenious strategy or a doomed goldrush. I honestly can't say. Some are definitely doing very well, especially certain auto manufacturers like Volkswagen and Buick, which made shrewd deals to assemble their cars on Chinese soil. Others are operating at a painful loss.

One thing's for certain: the new pheomenon of the Chinese millionaire and of that small sliver at the top that can afford Prada bags and trips to Paris is a mixed blessing when it comes to holding the society together. Their money is certainly trickling down, but it also exacerbates the already shocking discrepancy between the nouveau riche and the dirt-poor peasant/migrant worker. The government appears to be truly concerned (justifiably, IMHO), about a possible "Let them eat cake" gulf between the rich and poor.

Kieran over at Crooked Timber had a piece last weekend about Nick Cristof and the China/Russia connundrum ( the latter has had a serious stab at political reform and has ended up with a deteriorating economy, while the former has had slender political reform, and a booming economy. That being said, if you talk to Chinese and to Russians about their respective societies, it is by no means clear that the difference is as large as it might appear to be. People in China certainly feel a lot freer than they did 15 years ago, and the Russians have serious problems with their political process).

I don’t think culture can be the right answer. It’s always tempting to reach for it when we’re faced with a very complex, nationally-bounded problem. But you have to be careful how you think about it. In this case, Kristof clearly thinks of national cultures as being pretty stable. But if they’re stable, how can they explain the huge changes in each country over the past decade? You might think that the shock of the Soviet collapse allowed Russian cultural tendencies to express themselves fully, but that’s not very convincing. Were they not expressing themselves fully between 1917-91? There hasn’t even been a similar shock in the Chinese case, so why all the changes?

The question Kristof asks is one of the Very Big Ones in comparative political economy, so it’s not fair to blame him for not solving it in a short column. The depth of the problem isn’t always appreciated. For instance, you might say “Yeah, the Russians were just as lazy and vodka-ridden under Communism, they expected the state to provide for everything and they still do, hence the lack of economic growth.” This vastly underestimates what’s happened to Russia since 1991. A good paper by Ted Gerber and Mike Hout lays out the early evidence of the disaster and shows how little of the “market transition” ever happened. (JSTOR subscription required.) Things have gotten even worse since then. I don’t have the numbers to hand but I think Russia’s GDP fell by about 40% over the 1990s. (I want to believe that it couldn’t be that much, surely, but the number is stuck in my head. Clarifications welcome.) Life expectancy is down by about five or six years. People in the Soviet Union might have gotten used to state provision of services, or have a cultural tendency to sit around the table and drink, but I don’t see how that explains such a gigantic drop in economic output and basic life-chances in a country the size of Russia.

If the macro, long-term “Culture is to Blame” explanation is unconvincing, the micro, short-term “Economists are to Blame” explanation doesn’t work either, and for the same reasons. The neoliberal policies demanded by the IMF and thought up by U.S. economists haven’t done any noticeable good. They’re usually diagnosed (often now by their originators) as having failed because evil crooks got hold of all the assets in the economy. But again, there’s the sheer scale of the problem. Even if this is why the policies failed, it doesn’t seem sufficient to explain the catastrophic outcomes. Especially when you remember that — as Ronald Reagan kept telling us in the 1980s — evil crooks were in charge of all the assets when Russia was still part of the Soviet Union, too.

All of which leaves a non-specialist like me a bit confused and wanting to do more reading that I don’t have time to do.

I tersely posted the comment that you might try looking at the demography. Virtually no-one took up the suggestion. It's like we're all colour blind. There is virtually no way that the 'transition countries' can have sustained growth with their demographics. I would bet anything you like that 90% of the explanation for the China-Russia difference can be understood in these terms (I would also bet that 10 years from now a lot more people will be prepared to agree with me). It may seem simplistic, but it could be just that simple (wasn't it Einstein himself who recommended keeping theories simple - just as simple as possible, no more than that). The other thing I noticed about the comments was the underlying cynicism of many in Western Europe and the US about the Chinese reality. We keep going back to the 'they rig the figures argument'. Sure that's probably partly true as we've seen with SARS. But there are other 'proxy' measures which are being used by good economists like Andy Xie (who the Crooked Timber crowd don't seem to have heard of!) to get an independent perspective. Or there is the argument that US corporations are going to China to lose money, just because it's fashionable (my guess is that people who make these comments don't understand much about accounting procedures, or about why the US is having a jobless recovery). However, it is also true, as Peking Duck observes, that the poor may be getting poorer, but this also happended in the UK in the first half of the 19th century, and in the US around the turn of the 20th century, and look what happened next. I hate to say this (especially given the ideology that they profess), but a lot of this smells awfully like 'eurocentrism' to me.

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