jobless growth in china

8/6/2019 Jobless Growth in China

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The Japan Research Institute, LimitedHong Kong Representative Office

Junhua W u

Chief Economist

(wu .jun hu [email protected])

CHINA TRENDVol. 1,No. 2, August 2004

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Jobless Growth

As anticipated in my last column, the tendency of overheat in the Chinese

economy has been successfully alleviated by now. Thus, the worries that China

would fall into the loop of economy-overheat to macro-restriction tohard-landing from the short term point of view could be largely eliminated. As a

result, I would like to discuss in the next few columns the issues and problems that

the Chinese economy faces from the mid- and long term point of view in terms of

its social and economic structures. Jobless growth will be my first try.

As the worlds most populated country, one of the most important items in the

Chinese government agenda has always been increasing jobs. Nevertheless,

unemployment eventually became a serious threat to the social stability in the

mid- and late 1990s at the time China emerged as a world workshop. Forinstance, the statistics of the Chinese government showed that the urban

unemployment rate increased from 1.8% in 1985 to 2.3% in 1992 and further up to

4.3% in 2003. If we add redundant laborers in rural regions and laid-offs from

state enterprises, the actual unemployment rate would probably reach over 10%.

People may wonder why the unemployment problem is getting worse while

the economy keeps growing. According to many experts, this is because that the

degree of capital concentration of the industrial structure in China has been

increasedsince the mid- and late 1990s. Statistics in recent years also showed that

the Chinese economic growth has indeed relied more and more on investment.

According to my opinion, however, the analysis above can help us understand

what happened, but it does not tell us why it happened.

We may explore the real reason for Chinas jobless growth by solving two

myths. One is why the Chinas economic growth depends more and more on

investment. The other is why the internal-driven industrialization died young as it

contributed significantly to job increase in the 1980s with town-and-village


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The Japan Research Institute LimitedHong Kong Representative Office

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enterprises as its driving force.

The two problems do not seem to have an apparent and natural relationship,but they actually share a common cause beneath the skin. That is, an economic

policy centered on the elite interests (i.e., elite economics) and aGDP-onlypolicy

aiming at growth for the growth. In the following paragraphs, I would like to

discuss how these two factors affect Chinas economic growth that depends on the

expansion of the incremented investment scale.

The influence of elite economics can be viewed mainly from its

obstruction ofthe expansion of domestic consumption. As shown in the event that

a large-scale salary increase for civil employees became the focus of launching thepolicy of expanding domestic demand in 1998, implementation of economic

policies in the mid- and late 1990s were actually centered on the interests of the

elite group in the Chinese society, which mainly consists of civil employees and

managers of state enterprises. The outcome of implementing these policies helped

shape up a middle class that takes approximately 20 percent of the Chinese

population. On the contrary, the living standards under such a high growth for the

majority of the Chinese people increased very little, if not decreased, especially

for farmers and the lower class in the urban areas who are mainly represented by

state enterprise laid-offs. Due to the widened income gaps, the consumption

standards for the Chinese middle class has been close to, or even higher than, their

counterpart in the developed countries with fast increases in demand for expensive

durable goods such as cars, houses as indicators. At the same time, the interactive

impact of consumption demand on economic growth decreases considerably, which

in turn escalates the continuous demand for investment.

On the other hand, GDP-only policy has also played a significant role in the

formation of the growth mechanism for the dependence of Chinese economy on

investment. Under the strong mandate of stability over everything policy,

GDP-only policy was getting ever more popular in the 1990s, especially in the

mid- and late 1990s. During the process of establishing economic policies

governments, especially the local governments, often laid their myopia eyes on the

economic growth rate only and ignored the mid- and long term interests of

economic development for the society. They did not realize that, in any country, it

is essential to balance the development between consumption and investment in

order to achieve a sustainable economic growth. In China, however, because the

elite economics retarded the expansion of consumption demand, investment,

especially the investments that were composed mainly by fiscal funds, became the


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only effective approach. This is why that the aggressive fiscal policy, which was

introduced in 1998 as a temporary strategy to alleviate the impact of Asian

financial crisis, has been lasting till the recent days.

I discussed above the role that the elite economics and GDP-only policy

played in the formation of an economic growth mechanism of the investment

dependency. Let us explore in the following paragraphs how they escalated the

diminishment of the internal-driven industrialization originated in the 1980s.

To review retrospectively the history of the Chinese economic development

since the reform and open market, we would know from the exploration about who

were the main forces for the economic growth that there were big differencesbetween 1980s and 1990s. In the 1980s the driving force of the Chinese

economic development is the labor-concentrated town-and-village enterprises. In

other words, internal-driven industrialization that has a considerable expansion

effect on the increase of job opportunities contributed significantly to catalyze the

economic development. Interestingly, foreign enterprises became the new driving

force in 1990s to the economic development, which forced the internal-driven

industrialization died young with bankruptcies of domestic enterprises that

consisted mainly of the town-and-village enterprises. It is in this deteriorating

process of the internal-driven industrialization that the unemployment crisis

emerged to become the main factor that affects the social stability and economic

development in China. Elite economics and GDP-only policy played important

roles to catalyze its occurrence.

Specificallyspeaking, it is because that the central governments economic

policies biased toward the elite class, the Chinese society has been getting

polarized more than before. The consumption of the elite class who are in control

of the majority of the nations wealth has become the absolute dominant group. To

meet their needs, China on one hand imported large quantities of top-line durable

goods, while on the other hand introduced with all its efforts from other countriesand areas capitals and technologies to develop capital-concentrated industries.

Facing the large-scale influx of foreign capitals into China, labor-concentrated

town-and-village enterprises could not compete with their counterparts and,

consequently, went bankrupt one after another in large amount, resulting in

soaring on unemployment.

In addition, China faced a structural change in the 1990s. That is, it had

insufficient internal resources to sustain its economic growth. By analyzing this


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change, we can observe that how GDP-only policy made internal-driven

industrialization die young and made the unemployment problem deteriorating.

Though state enterprises could not compare with town-and-village enterprises interms of magnitude of increasing economic development, they contributed

considerably to the economic growth and employment of the 1980s with the

support of generous loans from state banks. However, this remedy of convenience

provided mainly by state bank loans but without a systemic reform cannot solve

the essential problems of the Chinese state enterprises; neither can it impact

deeply on the national economy. In fact, from the end of 1980s to early 1990s

China experienced two hyper inflations. At the same time, state banks suffered

technically from bankruptcies due to large quantities of non-performing loans. To

sustain the speed of the economic growth under such a severe situation, thegovernments from top down offered various enticements to hastily attract foreign

investors. Unfortunately, the result of taking this strategy not only retarded the

process of the internal-driven industrialization, but also attributed to the ever

escalating unemployment rates. This enlarged amount of unemployment

population has become one of the most serious threats to the stability of the

Chinese society.

We would understand from the analyses above that, in China, the issue of

unemployment is not only a cyclic problem that goes up and down with the

economic environment, but also has its structural factor that is deep inside. Thus,

how should overseas enterprises, include Japanese enterprises, face this challenge?

As we all know, overseas enterprises had used China as their manufacture base for

a long period of time in the past. They did not have to worry too much about the

unemployment problem in China. However, to many overseas enterprises, todays

China is not limited to being a manufacture base only, it is also an important stage

for the competition of survival. Thus, an enterprise should take all the problems

that China is currently facing into consideration as one of their business risks,

including unemployment. At the same time, they should also offer their hands in

helping China solve these problems.

J u l y 7 ,2 0 0 4 i n H on g Ko n g )

*T h i s ar t i c l e appe are d or i g i na l l y i n J apan Re se arc h Re v i e w Augus t 2004 i n

Japanese .

jobless growth in china

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