Junhua Wu Chief Economist (wu.junhua@jri.co.

jp)

CHINA TREND
Vol. 1,No. 2, August 2004

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 to hard-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. For instance, 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 increased since 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

| 1|

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 a GDP-only policy 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 of the expansion of domestic consumption. As shown in the event that a large-scale salary increase for civil employees became the focus of launching the policy 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 po licy 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

| 2|

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 investme nt 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 differences between 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. Specifically speaking, 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 countries and 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

| 3|

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 in terms 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, the governments 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. iJuly7,2004 in Hong Kong)
*This article appeared originally in Japan Research Review August 2004 in Japanese.

| 4|