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Hello, and welcome to today's presentation from the ILR School here at Cornell University.
The faculty here at the ILR School hold expertise in a variety of different areas that affect the world of work
and the economy, and today we'll be taking a special look at China
and the role that China is playing in the ever-evolving global economy.
And joining us for today's presentation will be Eli Friedman,
who is here to shed some light on how China is impacting, again, the ever-changing global economy.
Before we get going with the presentation,
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And now, without further ado, I present Professor Eli Friedman.
Eli?
Thanks very much, Don, and thanks to all of you who are joining us online.
The topic for today is China's role in the global economy,
and just as importantly we're going to be talking about the effects of the global economy on China internally.
So I'll give you a little bit of an overview of what will be covered today.
The first thing that we're going to discuss is historical background.
To understand a little bit about China's trajectory from the Revolution in 1949
and up through market reforms which began in the late 1970s.
Then we're going to discuss current problems with the existing model of development.
And many of these problems have become more pressing in recent years,
and in fact a very important meeting ended in Beijing just yesterday in which they were discussing --
in which the Central Government was discussing, some of the ways in which they want to address some of these problems.
And in general this approach to reconfiguring China's approach to development is referred to as rebalancing,
and there's debate about what precisely rebalancing entails and what sets of policies
and political shifts will be necessary to effect rebalancing, and I will be covering many of those today.
And then we're going to discuss ongoing challenges,
which is to say if the general trend for China is to move in this direction of rebalancing, what sorts of obstacles,
economic and political, exist for realizing this.
Okay.
So I'm going to begin with some background.
And, as is well known,
China was a State Socialist economy from the Revolution which took place in 1949 until market reforms began in 1978.
It's important to understand some of the context.
In 1949 China was a very, very poor country, overwhelmingly agricultural.
And starting in 1949 they began a State Socialist-led model of development,
which involved investment in heavy industries, famously steel and other things of that nature,
and while people typically think of the Chinese economic miracle as beginning with economic reforms,
especially in the 1980s and 1990s,
in fact there was a lot of important investments which took place during the State Socialist period which laid the
groundwork for the economic takeoff which has happened in China more recently.
Most importantly was increasing literacy,
and China has very good literacy considering the difficulty of the language and considering its levels of development.
Investing in health, and investing in infrastructure and these sorts of things.
You see major increases in life expectancy which took place during the State Socialist period.
In 1978, Dang Xiaoping came to power.
This was after the death of Chairman Mao.
And when Dang Xiaoping came to power, he very quickly began to set China on a path towards market reforms.
And initially this moved cautiously.
It began with de-collectivization of agriculture in the countryside.
Agriculture previously had been, under the State Socialist system had been, held collectively in these large communes,
and so it was de-collectivized in individuals.
And also very importantly in terms of thinking about China's relationship to the global economy,
they established four special economic zones in southeast China,
and these were areas where they were going to invite foreign investment in
and they were going to allow for private enterprise to develop.
And so that took off during the 1980s.
Of course in 1989, after the suppression of the pro-democracy movement,
there were some questions about what China's relationship to the global economy was going to be,
and some foreign countries were less interested in doing business,
and so it was a decisive moment in China's development.
In 1992, there was another important moment when Dang Xiaoping made the famous southern tour to China
and reaffirmed China's commitment to market reforms and to global integration.
The next very major significant event was China's WTO entry which took place in 2001.
And of course with entry into the WTO they established certain constraints
which were meant to encourage free trade basically.
And these sorts of arrangements come to be institutionalized with China's joining the WTO in 2001.
In terms of thinking about the key features of China's development which are merged during this period,
the first is high reliance on Foreign Direct Investment, or FDI,
and that's what initially these special economic zones were set up to do,
and eventually restrictions on foreign investment in the rest of the country were reduced over time.
So a huge amount of this investment is coming from East Asia,
oftentimes from overseas Chinese communities in Taiwan and Hong Kong and Southeast Asia and other places.
You also have large amounts of investment coming in from Japan, from the U.S., and from Europe.
And so, particularly in the coastal regions in China, there's a very heavy reliance on Foreign Direct Investment.
Now sometimes the extent to which China's development model is dependent on exports can be overstated,
but particularly in certain regions and coastal areas, such as the Guangdong Province, the Pearl River Delta there,
and the Yangtze River Delta around Shanghai.
These sorts of places are heavily dependent on exports,
and that's reflected in the approach to development that they have taken.
As a result of this,
there's also been wage repression because to the extent that the governments are interested in attracting
and retaining foreign investment,
the strategy that they pursued was to keep wages very low to make sure the foreign investors were interested in coming
in there and enjoying low wages, right,
which is the prime reason that they wanted to relocate to China in the first place.
Briefly, some of the internal changes that resulted from this economic reforms within China.
The first is a shift away from an agricultural economy,
and I'll show you another slide in a moment which will give you some numbers.
Increased prevalence of the private sector, right,
so under the State Socialist economy almost everybody was employed either in State-owned firms in cities
or in these agricultural communes in the countryside.
An increasing share of people have been employed in the private sector.
And the largest migration in the history of human civilization.
There is now estimated to be 260 million rural migrants, people who leave the countryside
and move to the cities to look for work.
To give you some sense of this, here we can see the percentage of total employment in China from 1978.
And what you can see here is that the primary industry, which refers mostly to agriculture, it's agriculture
and mining, declines really, really rapidly,
and so this is an indication of people leaving the countryside for the city, and they're coming to the city
and they're finding work in secondary sectors, which is mostly manufacturing.
It also includes construction in this accounting.
But quite noteworthy is that tertiary industries, which includes service sector,
actually overtook the secondary sector already in the mid-90s.
So although we think of China as having, you know, limitless millions of factory workers,
it turns out actually more people have been employed in the service sector for a long time,
and the gap between secondary and tertiary employment is likely to continue to grow.
So if we think about China's future development, the development of service industries is really, really important.
Now the global impact.
Everybody in the United States
and in western Europe is well aware that there's been a massive relocation of manufacturing from developed countries
in the global north to China.
Not exclusively China, but China has been the largest recipient of new manufacturing jobs,
and China is now the world's largest recipient of Foreign Direct Investment.
And the model that's developed is that the United States, and other countries like the U.S.,
essentially outsource production to China, and in turn China outsources consumption to the United States.
One way to think about this is you think about some of the largest American corporations, such as Apple and Wal-Mart,
and their model would not be possible without China.
The massive amounts of production, of -- Wal-Mart will be producing clothes and toys and consumer goods
and things like that, and in the case of Apple, electronics.
Nobody can produce on the scale and with the speed that China can.
Nobody else in the world, including in the United States.
So if you want to think about the development of these companies, it's impossible to think about them without China.
Now thinking about this issue of the U.S. outsourcing production to China,
China outsourcing consumption to the United States,
this next slide here shows cumulative current account balance between 1980 and 2008.
This slide, I think, really captures something fundamental about the structure of the global economy
over the past 30 years.
When you take a look at this slide,
one thing jumps out immediately which is that the United States is incredibly dark red, right,
which is to say we have a huge current account deficit, and China is very dark green,
which means it has a huge current account surplus.
No, China is not the only country in the green.
You can see that Japan and South Korea and Germany and other countries also have very significant surpluses.
But this relationship between China
and the United States has been one of the most fundament engines of global growth over the past generation.
But some signs of weakness began to emerge in this model during the 2008 economic crisis.
I assume people are familiar with what's happened here in the United States,
but what happened in China is that very quickly after the financial crisis emerged in the West,
you have a collapse of the export sector, right, as credit dries up in the West,
and people don't have access to the same kind of money to buy stuff,
while all those people who are producing things in China go under.
What this means for workers is that you immediately had 20 million migrant workers who were thrown out of work
within just a few months.
And this, of course, creates potential for social instability, which is an ongoing concern of the Chinese state.
In response to this, the Central Government unleashed a massive stimulus program.
A stimulus program which, in terms of percentage of GDP, was much,
much larger than the stimulus program we had here in the United States.
And most of this stimulus was actually directed towards investment,
and this question of over-investment has become quite pressing in recent years.
And now we'd like to hear from Professor Eswar Prasad, who is going to weigh in on China's economic (inaudible).
China has been growing at a very rapid clip over the last decade,
although it has slowed down a little bit in the last two or three years.
But it's still one of the fastest growing economies in the world.
Now there is the impression that China's growth has largely been driven by exports, but in fact,
it's domestic investment that has been the primary driver of growth.
And this is has meant that unlike in most other economies,
private consumption has not been playing a major role in growth.
Private consumption is rising quite fast,
but the real story is that investment has accounted for more than half of GDP growth.
Now for a developing economy like China, a lot of investment is not necessarily a bad thing.
The concern, however,
is that the investment is being financed by State-owned banks that are largely financing State-owned enterprises,
so not all of this may be good, productive investment.
So the notion of rebalancing is essentially one of shifting away from an investment-heavy model of growth
which has not been delivering commercial benefits to the average Chinese citizen, has led to environmental degradation,
and has had some other negative consequences even though growth has been very good.
So the idea of rebalancing to shift away from investment towards more consumption,
and also from an industrial-oriented economy to a more service-oriented economy which would presumably
also generate more jobs, and therefore again more benefits for the common household.
The reality is that the Chinese economy has become increasingly unbalanced in the last few years.
In fact, during the financial crisis when virtually every economy got hit and (inaudible) its growth rate,
China's growth actually held up quite well.
And it held up well because they undertook a massive amount of bank-financed investment.
In fact, the financial crisis led to an even more unbalanced economy
and China is still dealing with the consequences of that investment boom which have carried through
for the last three or four years.
Now in the last year there has been some progress,
at least in the sense that the balance in the economy hasn't gotten worse.
There's been a very mild pickup in the increase in the share of consumption in overall GDP,
the share of investment in terms of its contribution to overall growth is no longer increasing, so that, at least,
is seen as progress.
So it's like the big ocean liner sort of trying to turn it around,
but at least it's starting to move in the right direction although it's not fully pointed in the right direction yet.
Ultimately, if China can shift towards a more consumption-driven economy, that might be better for China.
But, again, consumption by itself is not a great driver of growth.
The point is that if China is getting more efficiency from the investment that it does undertake,
if it can use its factors of production, its labor, its physical capital, its natural resources more effectively,
and that drives up consumption, that is a good thing because that is going to improve the welfare of Chinese citizens.
But it will also have big benefits for the rest of the world because if China is investing less
and consuming a lot more, it will pull in a lot more imports from the rest of the world including the U.S.
If the income level of the average Chinese household starts rising at a faster clip
and they have more disposable income, they are going to buy more goods,
they are probably going to buy more high tech goods of the sort that advanced economies
like the U.S can provide in better measure,
so it could be good for China and for the rest of the world including the U.S.
It will be very important for the world because China has still been exporting a fair amount to the rest of the world,
and it (inaudible) creates surplus, which means that it exports more than it imports.
If China starts importing a lot more, then its trade balance gets closer to balance,
that it's importing as much as it's exporting.
That's going to be very good for the rest of the world because that will mean that China is increasing demand
for products from the rest of the world.
And this is going to lead to an overall rebalancing around the world if other countries can, in fact,
grow by exporting more to China.
But I know China does import a lot of commodities and certain other products,
but having much greater imports of other types of goods to China would certainly be helpful
in terms of this global rebalancing.
Right now one of the key issues is that China has a very weak social safety net
and it has undeveloped financial markets.
So in fact what should be happening in a fast-growing economy where households expect very high income in the future
is that they should be trying to borrow against their future income and consuming more today.
Yet, paradoxically, what is happening is that Chinese households are saving an even greater proportion of their income.
The reason they are doing this is partly because the State is not providing certain services like healthcare.
The Chinese population is growing older, they have fewer kids they can count on to protect them in their old age,
there have been pension reforms, so even older Chinese citizens are saving, even out of their pensions,
so retirees are saving out of their pensions.
Plus financial markets are not very well developed so you cannot take on a lot of debt.
So if you want to buy a house, you want to buy a car, you have to put up a lot of cash.
So Chinese households also end up saving in order to consume.
So if you had better financial market development, that would actually help Chinese borrow against the future.
And right now there is no major threat for debt crisis because borrowing levels in China are very limited.
And, in fact, I think it would help the Chinese people if they could use financial markets to insure risk,
to get better returns on their savings, and also to borrow against future income.
So long as financial market regulation makes sure that debt levels don't reach very high levels,
I think financial development would be a net plus for China.
So thanks to Professor Prasad for offering those views.
Let's take a look at some of the numbers, some of the things that just were being discussed there.
If you look at China's GDP growth, you can see on the sort of top chart there,
you can see an increase in the amount of growth that's being driven by investment,
and this is one of the major issues in rebalancing that we're talking about.
You can also look at private consumption in China, and here on the bottom you can see comparisons between China,
Japan and South Korea, number of years after economic takeoff.
And what you can see is that China's private consumption is quite low when compared to these other countries
in East Asia.
Now another notable thing, if you look back at the top chart,
is that the trend lines start in 1992 for private consumption is downwards continuously.
So in terms of thinking about what was this model of development that existed before,
why is private consumption falling?
Well, in part this question of wage repression explains this decline because, again,
China is outsourcing consumption to the United States.
They don't want people to be consuming domestically because they want to keep those wages really low.
Now, initially the Chinese leadership was unconcerned with this.
This was the model of development.
But since at least 2003, the Central leadership has been talking about trying to increase domestic consumption.
But if you look at the numbers, you can also see since 2003 that consumption has been essentially flat.
And so part of the question is why have they been unable to increase domestic consumption
even if they realize that this is a major issue.
Now, moving on, now we're talking about rebalancing,
and this question of economic rebalancing is probably the most important development question
that China is facing right now, and there is major implications of China's rebalancing
for the global economy more broadly.
I should say that when I'm discussing rebalancing, this is a concept which is subject to debate,
and what exactly ought to be rebalanced, and in what way, and in what order, and how to go about doing it,
is the subject of some debate.
So not everything that I say the Chinese Central Government agrees with.
There are some points of convergence.
But the first thing, and this is something that the Government and almost all economists agree on,
is this attempt to reduce investment.
Well why has investment been going up so much?
In part it's a response to this economic crisis which takes place in 2008.
The Chinese Government has been, for a long time, trying to maintain eight percent growth,
which they believe is going to be necessary essentially in order to employ enough people
so that they can avoid social instability.
So there's some political calculations in there as well.
So they have this massive investment, which manages to prop up growth since 2008, and China's growth,
certainly in the context of the global economy over the past five years, has been really quite strong.
But there's been over-investment, right, investment in some things which are not particularly wise investments.
There have been some good investments, and anyone who has been to China and has ridden in the new high-speed trains,
or the metro lines which are expanding in all of the major cities, you know,
life has been improved to some extent from some of these investments.
But there's been a lot of wasteful investment and investment which has led to other sort of social
and ecological problems, which we'll get to.
The other issue is the global imbalance.
And just think back to that previous chart I showed which was of current account balance between globally
and China has a massive surplus, the U.S. has a major deficit, and this is a concern for a lot of economists.
The other thing which needs to be addressed is regional inequality.
At the outset I mentioned that China first experimented with market reforms in coastal areas.
And the coastal areas were the places that attracted and retained the most investment
and have been the most dynamic places during the 1980s, 1990s, and the first part of the 2000s.
But what this meant is that the interior and western parts of China were not enjoying the benefits of growth,
and so there's really severe regional inequality, which was worsened, very significantly, over the previous generation.
And there's been major steps to address this, and it may be improving somewhat,
but it continues to be a major problem for China.
Perhaps more vexing is ongoing class inequality.
And this is a very serious problem for China and raises, again, the possibility of social instability.
China, in 1978, on the eve of market reforms, was one of the most equal societies in the world.
Inequality has grown really dramatically over the previous 30-plus years,
and China is now one of the most unequal societies in the world.
The official government statistic for the genie coefficient, which measures inequality, is 0.47.
Now that puts it at the very, very high end of inequality, sort of sitting in the general range as the United States.
An unofficial, independent research discovered that China's genie coefficient was actually 0.61.
And if that's true, that's really a terrifying number.
That would make China absolutely one of the most unequal societies in the world.
So this is a really major problem for a variety of reasons.
One, because people at the lower end are not receiving enough money to consume,
and so this is increasingly a concern for the Chinese government if they want to increase domestic consumption.
If people don't have any money, they're not going to be able to buy anything.
And it's also a political concern, right, because as inequality grows wider,
then you have the possibility for social instability.
The ecological destruction.
This has been a really major issue, and fortunately it's now gaining some traction in Chine
and you've seen some sort of pushback on the massive ecological destruction that has taken place in China.
Again, anybody who has been to China is aware of this because as soon as you step off the plane in Beijing,
you look up at the sky, and you don't see sky.
All you see is smog.
But it's not, there are statistics which actually back up the individual experience of the terrible environment there.
There has been a report in The New York Times which said that there were 1.2 million premature deaths
in China in 2010 as a result of air pollution.
So this is almost a humanitarian crisis.
There have been independent foreign researchers who looked at the effects of air pollution,
and they found that in northern cities in China, above the Yangtze River,
that there has been an average reduction in life expectancy of 5.5 years because of air pollution.
So the effects on people's livelihood is really, really significant, and it's generated a lot of protests
and social instability as a result over the past few years.
So this is something that if the government does not address could be another potential political problem.
There's also an economic consequence to this ecological destruction.
An official government agency reported that in 2010,
the costs of environmental destruction were $230 billion in China,
which is three-and-a-half percent of their total GDP.
And that's the official estimate.
And independent estimates put the number quite a bit higher, right, so it's not just sort of social costs,
but also economic costs.
One of the major things, and one thing that we as ILR really want to focus on here,
is what have been some of the changes in terms of labor and employment.
And so now I want to turn to Steve Miranda for some of his thoughts on the issue.
One of the analyses that has been done has shown that over the last ten years,
United States companies lost approximately five million manufacturing jobs overseas.
And depending upon which analysis you look at,
there are some estimates that about two million of these jobs were lost to China.
What's happening in China today is that the very market forces that caused companies to start to oversea these jobs
into China are now being lost to China to other more aggressive competitors, places like Vietnam, Cambodia,
other smaller countries in the Asia-Pacific region.
So the very dynamics that caused China to become an attractive magnet for labor
and for manufacturing have now started to turn against them.
How the Chinese government responds to this job loss over the next several years is still a process that's playing out.
Two more primary factors have driven this sort of market dynamic.
One is that over the last many years Chinese wages have continued to increase at near double digit rates.
In the Tier One cities, the larger cities in China, rates have been anywhere from 9% to 12% annually.
If you think about the labor points ten years ago,
you can see that repeated increases of nine to ten percent will quickly catch you up to the labor rates
of many Western MNCs.
Simultaneously, the attrition rates, the loss rates, of China labor continue to be very high.
Sometimes anywhere in the range of 20% to 22%, depending upon the particular industry.
When you combine these rapidly-rising wages with attrition rates that continue to be six
or seven times what they are in many Western MNCs,
you can see that the labor market dynamics continue to be very challenging for Western companies
doing business in China.
One of the major issues that they are struggling with nowadays is the same issue that we're struggling with
here in the United States, the issue of pensions, specifically government-provided pensions,
or in the USA, Social Security.
In the USA, we spend about 4.9% of our GDP to fund Social Security annually.
In China it's about three percent.
The challenge is that in China their equivalent of Social Security is administered by approximately 2,500
different entities versus here in the United States it is administered by a central Social Security Administration.
You add that challenge of corruption, misadministration,
lack of centralized control to the fact that China has for the last several decades had a one-child policy,
and you start to get some very interesting market forces colliding.
The support pyramid,
the number of workers that have to be employed in order to pay into the equivalent of the Social Security system
becomes inverted,
where the number of people that are actually working to provide the revenue into the system is unbalanced,
almost an inverted pyramid.
And as a result,
the question about whether the system remains viable going forward is definitely something the Chinese government
will have to struggle with.
Any company coming to the China marketplace as a new entity probably needs to focus on three things.
First of all, relationships matter a lot.
It's not the same as in many Western organizations where if you can bring a specific value proposition
or specific product to the market you can make a go of it.
You need to be connected to the right people in the right organizations.
Number two, the labor force is very quick to move from one opportunity to another opportunity.
So if you've based your business model on a certain level of employee retention,
you may need to rethink that because Chinese employees typically tend to move at significantly higher rates
than their Western counterparts.
And number three, the entire culture is changing.
There's an increased sense of Chinese nationalism.
People are becoming more proud about their Chinese heritage and roots.
And as a result, many of the MBA-driven Western business practices are being modified
and adapted to be more Chinese-culture like in their implementation.
The Chinese have an interesting curse, and the curse goes as follows: May you live in interesting times.
I think the next decade for China is going to bring enormous complexity and enormous challenges,
but also enormous opportunity.
The Chinese corporations are becoming far more nationalistic.
They are taking great pride in their own culture and in their own way of doing things.
You hear phrases from Chinese companies such as the Lenovo Way,
which is a way that's not necessarily consistent with typical Western management practices.
You have increased levels of Chinese nationals returning to China for full time careers and full time opportunities.
So I think as this continues to play out, not only will we see China continue to be an economic powerhouse,
but I'll be curious as to which new human capital practices actually get exported out of China in the next decade.
Thanks very much, Steve.
So I want to continue to address a few issues related to employment.
The first is this issue of why have wages increased and where have wages increased within China.
There's been a lot of noise made in the Western media about the end of cheap China, and wages are going up,
and what does this mean.
Wages have been going up for a couple of reasons.
The first is that in coastal areas, particularly the Pearl River Delta
and Yangtze River Delta there have been major labor shortages that have emerged over the past ten years.
In addition to labor shortages, there's been this problem of attrition,
incredibly high turnover particularly in some of these export-oriented manufacturers
and so they can't hold on to workers, so this has been driving wages up.
But aside from labor market dynamics, there's also been a lot of worker activity, and a lot of strikes
and protests and riots and things of this nature.
And so in response to this, oftentimes workers will go on strike
and will get a major wage increase as a result of that.
In part because of all of this activity from workers, and, again, this threat of social instability,
the government has passed a whole series of labor law reforms over the past several years.
I can't get into too many of the details about it.
The most important one was a law which was passed in 2007
and enacted January 1, 2008 called China's Labor Contract Law.
And the law does a variety of things,
but the most important thing is that it makes it somewhat more difficult for employers to fire workers,
to fire employees.
It gives them greater job protections.
And so that's also been something which has increased costs.
Additionally there have been some changes in union activities.
The union in China is called the All China Federation of Trade Unions.
It's controlled by the government and operates very, very differently from unions in the United States.
And it's typically been seen as being quite passive.
There have been some things which have happened over the past few years including pushing collective negotiations,
in some places holding experiments with democratic union elections, and these sorts of things.
But the union has not been a major driver of pushing up wages.
It's mostly been workers, just sort of labor market dynamics and workers' strikes.
Now another thing the government has been doing in terms of thinking about this question of rebalancing,
as we've already heard, if they are interested in trying to get people to spend more,
a really crucial issue is the social welfare system in China, which is not in good shape.
So over the past several years, particularly starting in the early 2000s, there's been increased spending on health,
education, and pensions.
And this is really, really crucial because the provision of many of these social services during the 80s
and 90s was totally marketized.
And particularly in the case of health,
this has been a complete disaster where people do not have adequate health insurance, or hospitals are gouging people.
There's a lot of shady health practices and these sorts of things.
So healthcare, you talk to sort of the average Chinese person on the street,
healthcare costs are really a major concern for many of them,
and one single illness could put a lot of people in the poor house.
The pension system is very complicated, but suffice it to say that a lot of people,
and particularly rural migrants who come from the countryside to the city,
cannot count on having a pension when they retire.
And then a second point is that there has been more diversion of resources to these western provinces.
I talked about this regional imbalance, and since the early 2000s,
the government has diverted a lot more resources in terms of infrastructure and things of that nature to western
and interior provinces which lagged behind for a lot of the 90s and early 2000s.
I want to look at some of the numbers here on healthcare spending.
The notable thing here for healthcare spending is that you can see that the individual, the out-of-pocket expenses
go up really dramatically over the course of the 90s, and then beginning in the 2000s they decline.
And you can see that that's as a result of increased government spending.
Now most people would say that the government spending on health coverage is still not enough,
that the safety, the sort of protections afforded to people are still insufficient,
but you can see the general direction is, they're moving in the right direction.
Similar things with education.
You can see that in the 80s and 90s that individual costs for education were increasing really dramatically
and government costs were going down,
and then again beginning in the 2000s the government begins to spend more money on education.
Education continues to be a major problem, particularly for people who are these rural migrants.
And here we can see some numbers about social insurance protection for migrant workers.
I can't say too much about this, but in China they have this thing called the Hukou or household registration system.
When you leave the place where you have your household registration and go to a different place,
you're not guaranteed access to social services.
And you can see in these numbers here very low rates of social insurance protection among migrant workers.
And, again, we're talking about a very large group of people here, 260 million people,
so it's quite significant that they are being excluded.
Now to return to this question of regional rebalancing,
here we can see a map of economic growth province by province in the year 2011.
And you don't need to worry about sort of every province, but what you can see here is that it is the interior
and the western provinces which are the brightest red, which means that they are growing the most quickly,
and the coastal provinces, which have been the traditional economic powerhouses over the past generation,
are now growing more slowly.
They're still growing pretty good by, you know, certainly by American standards, but growth there is slowing
and it is moving inland.
Now there are a number of ongoing challenges in terms of this process of rebalancing.
The first is stabilizing the workforce.
We've heard about this issue of attrition, high levels of turnover, labor market shortages and things of that nature.
And the question then arises, why are people leaving their jobs so frequently?
Why is turnover so high?
I think part of the answer is that a lot of these jobs in export manufacturing areas are bad jobs,
and particularly young people are beginning to have higher aspirations.
They want something more from life than just working 16 hours a day
doing the same monotonous tasks over and over again.
So that's going to be a major problem.
The next issue is integrating 250 million new urbanites.
The Chinese government has recently announced that they want to move 250 million people, an absolutely massive sum,
from the countryside to the city by 2030.
This is going to pose all sorts of problems.
It's going to pose problems of urban planning, where are all these people going to live?
How are services, both sort of the hardware in terms of water and things like that, schools,
how are those going to be extended?
And how are social services going to be extended to these migrants who don't have guaranteed access to things like
education, pensions, healthcare, etc.
But the government believes that moving people into the city is going to be necessary
if it wants to increase domestic consumption
because typically it's urbanites who consume more than people in the countryside.
Overcoming entrenched interests is a major issue, but, of course,
as this model of economic development has developed over the past generation,
there have been some people who have done incredibly well in this, and this includes a whole host of people,
both exporters and people in State-owned enterprises and things of that nature.
So dealing with these people who are committed to the current model of development is going to be a major political
challenge, and it's not totally clear to me that the Central Government has the capacity to do that.
And then there's the problem of expansive unrest.
And I've already touched on the problem of social unrest among workers,
but also among farmers who are being thrown off the land.
This is a major issue for China.
China is now spending more on domestic security than they are spending on national defense,
and so this is a bit of a wild card.
It could move in lots of different directions.
Now just in wrapping up I want to talk a little bit about global implications.
The first thing is the potential for ecological catastrophe.
And maybe this sounds a little bit dramatic,
but if the general direction that China is moving in is wanting to increase domestic consumption,
imagine if every person in China consumed like an American.
They bought cars like Americans.
They lived in houses the size of Americans.
And they bought clothes and electronics and then threw them out in precisely the same way as Americans.
I don't think that the ecosystem could sustain this level of consumption.
So if they are interested in increasing domestic consumption, there are reasons to consider this as a policy.
It's going to have to be much more service oriented.
In other words, you want China to continue to develop, but you don't want them to buy more things, right,
so how can you get people to buy more services rather than things?
Increasing wages are a good sign.
A lot of exporters have really complained about this.
But over the past generation and the process of globalization,
we've seen the emergence of this thing that some people call the race to the bottom,
where workers in different countries are competing against each other for lower and lower wages,
and you have this situation where the wage floor collapses.
Well many people have said the race to the bottom sort of ends in China.
If wages are going up in China, that's a good thing because it could increase wages in other places,
and there's a possibility that manufacturing jobs in other wealthier countries might sort of stay put.
Now some people would say, well, if wages go up in China, then things are just going to move to a different country.
That's possible.
But China, nobody can beat China in terms of the scale and the volume and the speed of production,
and so I think a lot of manufacturers are going to stay in China even if wages increase.
If we look around the world, there's ongoing stagnation in many other countries, not just the U.S. and western Europe,
but including places that had been growing really rapidly including Brazil and India.
So the importance of China comes to be increasingly important.
So I'll conclude with just a question that I don't really have the answer to.
Could China lead us to a more sustainable global economy?
Right now, it's unclear, right, and maybe the chances are not great.
But if we are interested in an economy that's more sustainable, that's more environmentally friendly,
and that's more equitably distributed, then, of course, China is going to play a very important role.
So, I'm going to leave it at that for today, and now we'll turn to some questions.
Great.
Well, thank you very much, Eli, very informative,
and I think we're just kind of skimming the surface of the issues here.
We did get some calls.
We've had some technical issues with the questions and what not, but we have gotten some in,
and we'll continue to take them as they come in.
One person wrote in, it was Len, who wanted to know how are Chinese factory workers paid.
I know you kind of alluded to some of that, but can you give some specifics in terms of this way or that way.
But in general, how are factory workers paid?
Some people seem to think that it's a workers' paradise out there, and everyone is paid equally,
and that's how it works, but really, how does it work for the average worker in China?
So, of course it's complicated.
China is a large country with a very diverse, not just manufacturing, but service sector,
and so people in all different kinds of places get paid all sorts of different ways.
The first thing that I would say is that at the lower end of the labor market, a lot of people don't get paid.
And in fact one of the major issues that the Chinese government has been trying to deal with
over the past several years is nonpayment of wages.
This is a particularly serious issue in the construction industry for a variety of reasons.
But you also see it in manufacturing.
So the first way workers get paid is really not at all.
The employers will provide housing and food, but when it comes time for payment,
a lot of times they don't get, maybe they'll get nothing
or they'll get only a portion of what they are actually entitled to, so this is a major issue.
You know, in manufacturing, it's diverse,
and the main division to think of is State-owned enterprises as opposed to private enterprises.
And State-owned enterprises, it's not the sort of a worker's paradise of old.
They used to have this thing called the Iron Rice Bowl where they had sort of guaranteed cradle-to-grave benefits.
That's not the case anymore.
But wages in these factories are typically higher, they're guaranteed, they're significantly above minimum wages,
they have decent benefits and all of that.
The key issue, and the area where the most problems exist, is within the private sector.
And the default for a number of years for a lot of private employers
has been that the minimum wage is actually the maximum wage.
That's what people are going to be paid.
And minimum wages in China are calculated on a monthly basis, which makes it really difficult, oftentimes,
for employees to sort out if they are working overtime,
it makes it very, very difficult to calculate overtime when you have a monthly rather than an hourly wage.
So that's been part of the reason why local governments in many places have been increasing minimum wages
over the past several years because, again, if the minimum wage is the maximum wage,
they want to try to increase workers' wages so there is more consumption.
So it's a diverse field, but that's a sort of broad overview of the way pay gets dealt with.
I know you generally look at these issues from an academic standpoint,
but at the same time I also know that you have traveled in China.
And I'm kind of curious.
Throughout today's program you're talking about this change that has occurred.
For people on the street, what is the social take on that, how you just said, well, it's not what it used to be,
a workers' paradise -- so socially, and it's a very vague question, I'm sure -- Sure.
But what's the feeling on the street in China about this evolution and this change?
You know, for a long time, and I would say up to the present, people in China remain optimistic about China.
And, you know, if you think about where China was in 1978 is still a really poor country.
And China's development has in many ways been quite spectacular, right?
And for a lot of people, their lives have been getting better.
Now this is not scientific.
I haven't done a fully representative sample.
But it does feel like over the past few years things have begun to change,
maybe particularly for younger people who did not grow up in desperate poverty, and so they're saying, well, look,
we're continuing to work hard, we're making contributions to the economy,
but we're not seeing the kinds of improvements in our lives that maybe our parents saw,
and so this kind of sense of being stuck in place.
So on the one hand people are optimistic about China's rise, they are proud of the accomplishments of their country,
which they ought to be, but inequality has grown so much,
that there is to some extent a kind of cynicism about the possibility for making China more equitable, more fair,
and there's really deep cynicism about the capacity of the government to deal with some of these problems.
Another viewer had written in a question about the ACFTU.
Right.
And the question, they gave some background during the question,
but in general they were wondering if the ACFTU needs to extricate itself from Party influence
in order to truly represent workers.
What's your take on that?
Yeah, so, just as a little bit of background, the ACFTU, the All China Federation of Trade Unions,
which is the only legal trade union in China, was set up by the Communist Party
and is controlled by the Party at every level, so it operates essentially as an organ of the State.
So some people say, well this creates a real problem, and oftentimes at the enterprise level, the Union Chair,
or the person who negotiates on behalf of workers, will also be the director of HR.
So there's some sorts of conflict of interest that emerge there.
So a lot of people say, well, look,
the ACFTU hasn't been effective as a union in terms of representing workers' interests,
and that's certainly been the case.
So how about if it's independent from the Party.
Currently, if you tried to set up an independent union, you'd be thrown in jail.
So some people say, well, if it's independent from the union, would that solve the problem.
And I don't think that that's the case.
The ACFTU has been so fundamentally controlled by the Government for so many years
that I believe that this very sort of conservative nature is really embedded in its DNA,
and even if tomorrow it were a completely independent union,
many of these problems would continue to exist.
They would just as frequently side with the Government or with management against workers,
so I believe you would need some sort of work organization that was independent, that was democratically organized,
and that workers actually trusted, and they do not trust the ACFTU.
Well, we're almost done with our hour of webcast here, and since we're talking about constant change
and constant evolution,
another thing towards that direction is the fact that the ILR School
has struck up a collaboration with Renmin University.
Could you tell us a little bit about that?
That's right, yeah, We have a formal agreement with Renmin University,
and the agreement allows for cooperation on a number of levels.
The first level, which is the most exciting to me, is we have undergraduate exchange.
So seven of our students went to Renmin University this past summer, and they took classes there.
They took language classes, they had an opportunity to learn about life in Beijing.
And this semester we're hosting two students from Renmin University who are taking classes at ILR.
In fact I had lunch with these two students just yesterday,
and so I was asking them if they had any complaints about the program.
And they said that their only complaint was that it wasn't long enough,
that they could only be here for a semester rather than a year.
And one of them actually is trying to figure out if she can transfer to ILR.
So I don't want to take her away from Renmin,
but I think it's been a very successful program in exposing students from both these countries to new experiences.
We've had graduate student exchanges.
Last year we hosted a Ph.D. student from Renmin here,
and we will have students in the future who will be based at Renmin for their own research.
And we have cooperative faculty research,
and so I'm currently engaged in a project with Professor (inaudible) with faculty from Renmin University.
And so the relationship is really developing on multiple levels, and I think it's great for both schools.
Well, that seems like a great place to wrap it up.
So thanks again to Professor Eli Friedman for giving us some great insight into how China is impacting the world
and the global economy.
We continue to provide insight here from the ILR School at Cornell.
Our next ILR online program is scheduled for January 29th, and we'll be looking at the Lilly Ledbetter Fair Pay Act.
And please join us then.
Thanks for joining us today.
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