Dec 10 2008
Big trouble in little China – how slowing growth may mean major problems for the Chinese Communist Party
Published by Jason Welker at 2:45 am under
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WikipediaHow high is China’s jobless rate? | The great wall of unemployed | The Economist
China Faces Unemployment Woes
Unemployment in China is a big deal. The legitimacy of the Chinese Communist Party hinges on its ability to assure stable jobs and income growth for the 300 million “middle class” Chinese who live in the country’s cities. When the urbanites are unhappy, trouble ensues.
So a dip in economic growth rate into single digits, while we in the West may think of it as silly to fret about, is a major deal for China. Interestingly, according to the Economist newspaper, unemployment data in China is notoriously unreliable; in fact analysts have no clear idea of just how much unemployment there is:
Until the 1990s, the government more or less guaranteed full employment by providing every worker with an “iron rice bowl”—a job for life. But when soaring losses at state-owned firms forced the government to lay off about one-third of all state employees between 1996 and 2002, the official unemployment rate rose only slightly. Today it is 4% in urban areas, up from 3% in the mid-1990s.
But the official rate excludes workers laid off by state-owned firms. Thus at the start of this decade, when lay-offs peaked, it hugely understated true unemployment. Over time, as laid-off workers have found jobs or left the labour force, the distortion will have shrunk. Another flaw is that the official unemployment statistics cover only people who are registered as urban dwellers. An estimated 130m migrant workers have moved from the country to the cities, but there is no formal record that they live there, so they are ignored by the statisticians. After adjusting the official figures for these two factors, several studies earlier this decade concluded that the true unemployment rate was above 10%—and might be even as high as 20%.
The textbook definition of unemployment is the percentage of the labor force actively seeking but unable to find a job. In China, however, the “labor force” only includes the 25% of the country’s population that lives in cities, and the massive number of workers who were fired from state-owned enterprises over the last decade are mysteriously excluded from official figures. 4% unemployment, the official number, puts most developed countries to shame, as it represents extremely low levels of unemployment.
Despite the fuzziness in the figures, one thing is for sure, slower economic growth, even though it is still expected to be between 8-9% this year, means fewer new jobs in China, hence the government’s recent slashing of interest rates to re-invigorate investment and spending in the economy.
…on November 26th the People’s Bank of China slashed rates by more than a percentage point—the most in 11 years—to boost growth. The slowing economy has led factories to cut jobs, and there are mounting fears that the swelling ranks of the unemployed might one day take to the streets and disrupt China’s economic miracle.
An interesting point made in this article is that even continued economic growth in China does not guarantee continued job growth. Basic economic theory holds that when a nation’s output is increasing, employment is also increasing, since growth in output implies increase demand for labor. China, however, is experiencing a different type of growth today than that of years past:
China is creating fewer new jobs than it used to. In the 1980s, each 1% increase in GDP led to a 0.3% rise in employment. Over the past decade, 1% GDP growth has yielded, on average, only a 0.1% gain in jobs. Growth has become less job-intensive, so the economy needs to grow faster to hold down unemployment.
One reason for this is that the government has favoured capital-intensive industries, such as steel and machinery, rather than services which create more jobs… China needs to shift the mix of its growth from industry, investment and exports to services and consumption. To adjust the structure of production requires a further strengthening of the yuan, raising the price of energy, scrapping distortions in the tax system which favour manufacturing, and removing various shackles on the services sector.
More labour-intensive growth would also boost incomes and consumption and so help to reduce China’s embarrassingly large trade surplus. But most important, by allowing more workers to enjoy the rewards of rapid growth, it could help to prevent future social unrest.
Discussion Questions:
- How does China’s current account surplus result in fewer new jobs than a growth strategy based on domestic consumption would?
- Why would a stronger RMB contribute to greater domestic job creation?
- “More labour-intensive growth would boost incomes and consumption and so help to reduce China’s embarrassingly large trade surplus” Discuss this statement.
- Philosophically speaking, why is there more pressure on the Chinese Communist Party to maintain high growth and low unemployment than there might be on a democratically elected party such as the Republicans in the United States?
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". Related posts:
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China’s export-oriented growth results in fewer new jobs than a growth strategy based on domestic consumption would, because there is more pressure on the Chinese Communist Party to maintain high growth and low unemployment than there might be on a democratically elected party such as the Republicans in the United States. The Chinese government’s main concern is unemployment, which is why the governments ensures a low RNB, favouring a devaluation of it’s currency more than an appreciation (or evaluation). As a result, the Chinese RNB is in surplus while the U.S dollar is in deficit. In digression, it should be noted that the U.S congress has been trying to get the RNB (China) to float and appreciate, moving the U.S into a trade surplus. A stronger RNB would also contribute to greater domestic job creation; improving the “social situation”. As it is stated in the article, “more labour-intensive growth would also boost incomes and consumption and so help to reduce China’s embarrassingly large trade surplus. But most important, by allowing more workers to enjoy the rewards of rapid growth, it could help to prevent future social unrest”.
1.) How does China’s export-oriented growth result in fewer new jobs than a growth strategy based on domestic consumption would?
Well, this is mostly explained by the fact that, as the article states, a large part of china’s exporting industries have shifted to capital-intensive industries, such as steel. For simplicity’s sake, lets just say that China exports mainly steel: So – with its growth strategy based on these exports, (as china manipulates currencies for example, in order to increase foreign demand for its steel by devaluing (not depreciating!) its currency and making its steel expotrs appear cheaper to foreign importers)…anyway so as Chinese policies encourage its exports sector, and foreign demand for its steel increases, China will want to shift out the supply of steel. However, as this is a capital-intensive industry, what will happen, is that chinese steel firms will buy say, 5 new steel-making machines each, and increase their output by 10%…but they will only need 2 new people to operate the machines.
As this rather simplistic scenario demonstrates, under the circumstances, china’s export-oriented growth, although very capable of increasing production, will not create very many new jobs and will not help battle unemployment.
In the meantime, a growth strategy based on domestic consumption would mean that local producers will produce for local consumers – who often enjoy more labor-intensive goods, such as the textile industry. If china were to stimulate its production of and demand for such goods, it would find that this sector of its economy will grow and result in the creation of many more jobs relative to its export-growth.
why is this issue so important to china? As we discussed in class, the poor chinese farmers are getting sick of digging around the mud all day for what the virtually inexistent benefits of working for a communist government. As a result, they are migrating to cities and searching for jobs (now making them part of the labor force – willing but unable to find work) at a faster rate than new jobs are being created, because of china’s export-oriented growth, as previously explained.
This has put china in a bittle of problem, because as their unsustainable growth slows down, their unemployment goes up – potentially threatening the communist ruling party…again we also see politics forming a large portion of economic decisions.
i have my own ideas about this, but i’ve already written enough. would anyone care to discuss why china doesn’t simply switch to a more consumer-oriented growth strategy???
China is currently enjoying a capital-intensive growth strategy. The article states that a “More labour-intensive growth would boost incomes and consumption and so help to reduce China’s embarrassingly large trade surplus”. A capital intensive economy relies on the manufacture of Capital goods – such as iron or steel. The government of china is very concerned with keeping low unemployment, as an increase in unemployment among the ‘middle class’ chinese could have a destabilizing effect both socially and economically. A vicious circle is formed from the current economy strategy, as the Capital production makes some workers obsolete increasing unemployment, but it provides the bulk of jobs in China. The article offers to move to a labour-intensive growth strategy. This poses the problem of structural unemployment; to create the new labour intensive jobs, capital intensive jobs must be forgone. In the short term, many ‘middle class’ Chinese would lose their jobs as they become retrained for service and consumption jobs, which would potentially destabilize the government as unemployment would rise and the “swelling ranks of the unemployed might one day take to the streets and disrupt China’s economic miracle.”
Question 1 and 4)
As stated in the article and in the blog posted before, it is very clear that china has an export oriented growth strategy. However, this strategy only works if the rate of growth would continue to increase at this alarming rate (I means seriously, about 10% of growth each year?) and if only labor intensive good as being manufactured. The export based strategy pushes producers to produce as many goods as possible, meaning that the more they produce the more income they will earn in terms of exports. As the income of these producers rises, the more likely they are to purchase capital goods or robots to produces the goods. Machines, oppose to human labor, as cheaper in the long run, can more work more hour (max 24 hours a day), do not complain or go on strike (I don’t know if you can do that in China…). As machines replace human labor, unemployment rise, however the exports continues to rise as the same or more can be produced. Even if the demand for the good increases, only very few workers will have to employed to man the new machinery acquired.
The Chinese Communist Party has to maintain high growth rate, as this does created jobs and decrease unemployment. The growth rate must increase as the more and more framers migrate to cities to find work/jobs to support their families. As more and more people migrate more and more jobs must be created, meaning the rate of growth must increase. High unemployment, there are more and more unsatisfied people (one must take into account that 4% of unemployment in china is a huge number of people) which can lead to social unrest, which is not what the Chinese party wants. Politics, here again, trumps good economic solutions and growth strategies.
The better strategy of the long run, I believe, would be a domestic consumption based one, as it would ensure more labor intensive good (increase employment) and allow the Chinese people to receive higher wages, thus allow them to enjoy consumer goods and trade and not be stuck in poverty. More jobs will be created, causing the demand and thus wages of works to increase. This effect this may take while to be seen as there are a lot of people unemployed in China at the moment.
Why would a stronger RMB contribute to greater domestic job creation?
This statement is very controversial in the sense that there are always two sides to a story.
For one a stronger RMB would not allow a greater domestic job creation, since as the chinese currency appreciates there would be less consumers demanding chinese exports. This means that companies would have to lay off workers and contribute to unemployment, since they can no longer afford to employ as many people as they did before. This is due to the declining revenue the chinese companies are having to deal with. Yes the elasticity of the produced goods and services affect whether or not the demand for chinese will decrease or increase as the currency appreciates in value. However since china’s growth and economic prosperity is due to its labour intensive goods it produces, it is very easy vor China to loose this competative advantage to other nations such as Bangladesh, Burma, and Vietnam who also have a large labour force.
An argument that could be used to support the claim that as the RMB would increase there would be more emplyment in China is: A stronger RMB means that domestic firms can purchase natural resources more cheaply, thus lowering the cost of production. This could help China as they are one of the nations who are consuming the most natural resources on our planet. This lowering in the production costs could mean that chinese companies may want to increase the production of their goods and may therefore employ more workers. Greater production = more employment.
As Calvin stated, the effect of the Chinese currency is a double-sided blade with regards to total number of jobs in China.
On one hand, the more expensive currency will render Chinese exports more expensive and Western societies will be less inclined to import them. This will cause firms to lay off employees in order to cover their costs and as such will increase unemployment in China.
On the other hand, a more valuable currency will allow producers to import more prime and capital goods such as machinary or timber. An increase in the import of these primary resources will require extra labor in order to operate the machinery and work in these new businesses, which will again decrease the unemployment level in China and thus lead to the creation of more jobs domestically.
Philosophically speaking, why is there more pressure on the Chinese Communist Party to maintain high growth and low unemployment than there might be on a democratically elected party such as the Republicans in the United States?
Nowadays I believe that both the Chinese Communist Party and the political parties have the same amount of pressure to have high growth and low unemployment. In China, if the population is unemployed, they will undergo severe poverty and thus eventually revolt against the communist state. In the USA, a democratic state high unemployment would result in angry voters and thus more votes for the opposition. Clearly, both parties must keep unemployment low and high growth to please the population.
If a country economy grows to fast and faster than others it will experience a dramatic fall. This is especially the case when a countries growth is based on exports as by China. So Chinas exports will eventually create a surplus of goods as their output is greater than the demand. Any countries greed for greater profit drives an economy to its ppc, but the ppc does not match the demand of goods. With this miss allocation of resources the unemployment in China will fall until equilibrium is reached again and unemployment will rise. Since the firms want to have the least production cost for their goods. They will replace labour by machines as they are cheaper in the long run. So in the end Chinas unemployment will rise unless their is growth. But if the economy grows to fast it will self correct itself.
Question 1
Export has been so far the engine of China’s growth. However, exports have been generally driven by plants of foreign producers located in China rather than by domestic industry. This helped to accumulate huge trade surplus in last decade and foreign currency reserves, mainly in USD.
Without a strong domestic industry, though, based on labout intensive productions, employment will not grow in next years as needed. With more labour intensive industries real incomes may rise and so consumtpion of both domestic and foreign goods.GDP growth will be driven also by consumption and domestic investments rather than by foreign investments and export industries. Proceedings from tariffs may be replaced by higher taxes on profits. China’s economy would become more open to the rest of the world and increase of trade may lead to higher competition among firms with more benfits for the consumers. To balance all this may take time and strong leadership by the chinese government.
1.It is clear that in the current economic crisis the export oriented china suffers great losses as less and less products are ported to foreign contries. The rising unemployment is the result of this, since firms have to cut down jobs, if they do not want to fall out of profit. When firms realize in deflation, that their year to year output is sinking, they will cut off on workers to prevent great losses.
2.A stronger currency would make products more expensive. On one side this would be very benefitial since firms will earn more profit and will therefor employ more people, which could lead to a decreasing unemployment.
On the other side, of course as products are getting more expensive less will be exportet which could reverse this aspect.
3.Of course more labour intensive growth would boost incomes and consumption since people who work earn more and can therefor spend more. This would be very benefitial to the market.
4.To keep utility up it is important to keep a low level of unemployment and a stable economy.
A party in a democratic system will be overvoted in the next elections if people are unhappy with their behaviour. But in this case people’s only chance would be to start revolting and crush the whole economic system.
An example is the fall of the Berlin wall, where the bad economic situation was a reason for the unsettlement of the people.
As a large percentage of China’s GDP is the export China is very reliant on foreign countries to inject money into it’s economy. But now due to the recession, foreign countries are reluctant to buy from oversea producers. This is detrimental for China. Therefore, China needs to keep its GDP by other means that can increase consumption and income. China’s method of doing so is increasing labor.
I suppose a communist party would be more pressured because of its communist ideals. As many say, Communism in theory, and in an ideal situation may be favorable. It is a system in which ALL PEOPLE ARE EQUAL. Therefore, if some people are unemployed and some people are unable to enjoy the levels of income and consumption that others enjoy, equality is diminished. Furthermore, communists want to be equal, but probably not all equally poor. If recession hits communism, equality is hard to establish, and if it is established, all people are equally poorer. This could perfectly lead to unrest, thus the authorities are pressured
China exports a large amount of goods it produces. But because of the economic problems, the countries are more likely to buy goods from their own country to stabilize the economy. So less goods are exported from China, leading to a decrease in employment, because less workers are needed.
If the income of the Chinese would increase, consumption of goods would increase as well, because there is a higher standard of living and therefore more goods and services are consumed. More of the goods produced in China would be consumed by the Chinese and so export could decrease to a degree where it is most beneficial for China.
As you all know a large proportion of China’s economy centers on its exports, and although it might guarantee growth, it does not ensure an increase in employment. Their reliance on the capital dependent industries eliminates new possibilities for job openings. In fact, China’s service sector GDP makes up only 40.2% of the three sectors (industry, agriculture and services) and services is where new jobs can be created in a time of crisis. It is in the country’s best interest to work on structuring and strengthening the service and consumer sector to keep the money flowing to the households who in turn continue to spend. This doesn’t mean to keep the capital intensive industries from growing, it simply means to focus largely on the service and consumption sector for the sake of the Chinese and the country as a whole. The service sector GDP can be boosted up higher than just 40.2% and make up a larger portion of the three sectors like many of the countries today with lower unemployment rates.
Exports from China have rapidly decreased during the economic crisis. This poses a big
problem to China which heavily relies on its exports, in the past the main factor for China’s increasing economic growth. China has to compensate for the decrease in exports in order to keep GDP up. Increasing labour would be one possibility, since more people had money to spend which would boost consumption. The Chinese government cannot afford any failures, since the economic miracle created by the Chinese could be damaged and more importantly social unrests could follow which would make economic growth at an increasing rate even more difficult.
China is a dilemma, their one child policy forced many families to pick a gender, and in most cases this was male. What whilst the population rate is now under control, to a certain extent, there are still hundreds of millions of men, and a defecit of women. Also in a non democratically elected government in which the people feel they have no say, they will be less tollerant to a government which is not helping them in their lives. The preassure is huge to keep the economy running smoothly because if the masses suddenly turn on the government, they have a civil war on their hands.
Their new idea of a domestic growth strategy rather than export strategy is one of much greater stability. If their own people cannot afford to buy their goods then they are bound to the fate of their customers world wide. That well has dried up partially now, and they realize that they have hardly any domestic buyers. Also they would not always have to buy so many dollars. As long as the other countries in the world are in a recession, they have no one to sell to. Therefore to create self sustainability they should internalize some of their consumption. If they created a service sector large enough, and changed their economic and social strategy a little, they could not only make the people happier and richer, but they would be able to rely a little less on exports. Given, there would be a period of structural unemployment, and some public desturbances to deal with, but seeing as they can obstruct human rights in their country, stopping the rioting should be a doddle.