by
Study undertaken as part of the ILO/EASMAT project, Strengthening the Capacity of the Social Partners for Effective Employment Strategies in the Context of Globalization and Liberalization ILO East Asia Multidisciplinary Advisory Team (ILO/EASMAT) ILO Regional Office for Asia and the Pacific Bangkok April 1996
__________________
* Unpublished document issued without formal editing by ILO. The responsibilities for opinions expressed in this document rest solely with the author and its inclusion here does not constitute an endorsement by the ILO of the opinions expressed therein.
Table of Contents
II. THE EVOLUTION OF UNEMPLOYMENT PROBLEMS AND POLICIES PRIOR TO REFORM
The Evolution of Employment Characteristics During 1952-1962
The Evolution of Employment Characteristics During 1962-1978
III. EMPLOYMENT DURING THE PERIOD OF LIBERALIZATION AND GLOBALIZATION
China's Performance During the Period of Liberalization and Globalization
Factors Contributing to China's Competi- tiveness in the Globalized World Economy
Employment During the Period of Globalization and Liberalization
Trends in Wages, Inequality and Poverty
IV. THE EVOLVING PATTERN OF GLOBALIZATION
The Effects of the Uruguay Round
Capital Movement
V. POLICIES FOR EMPLOYMENT-FRIENDLY GROWTH IN A GLOBALIZED WORLD ECONOMY
A Brief Survey of Findings
The Magnitude of China's Employment Challenge
Continued Growth Based on International Competitiveness
Labour Absorption in the Rural Economy
Improving Labour Absorption in Industries
Labour Market Policies
Regional Policy
Demographic Policies
International Cooperation
Capital Inflow
NOTES
China has experienced extraordinarily rapid growth since it initiated reforms based on the "liberalization" of its economy. The starting point of these reforms is conveniently identified as the Third Plenum of the Eleventh Central Committee of the Chinese Communist Party in December 1978 which authorized large-scale changes in policies, especially in the rural economy. In the beginning of the 1980s reforms started to take definite shape and began proceeding along an irreversible path.
It was also at the beginning of the 1980s that the world economy embarked on a path of increased globalization, an accelerated reduction of barriers to the movement of goods, services and capital among nations. Thus the liberalization of the Chinese economy and the currently ongoing process of the globalization of the world economy have approximately the same date of origin. Indeed the simultaneous occurrence of the two phenomena is far more than a coincidence. They are causally related.
Prior to the 1980s there were two principal impediments to the flow of goods, services and capital that fragmented the world economy. One of these was the system of central planning that insulated the socialist countries from the rest of the world economy and indeed from one another. The other source of fragmentation was the import-substituting industrialization behind the wall of high protection that characterized the development strategy of many less developed countries (LDCs) in the post-World War II period. Policies pursued by pre-reform China, the largest country belonging to both the groups, were major contributors to the fragmentation of the world economy.
The beginning of reforms in China may be said to be one of the earliest major steps in the direction of dismantling the impediments to globalization. It was soon greatly strengthened by the change in the LDCs in the wake of the debt crisis and macroeconomic imbalance that many of these countries faced at the beginning of the 1980s. The search for macroeconomic balance led the LDCs to a gradual understanding of the inefficiencies of the inward-looking development policy enshrined in the strategy of import-substituting industrialization. The process was hastened by the pressure exerted by the donors' policy conditionality for adjustment lending. Faced with few viable alternatives the LDCs gradually began to dismantle the barriers to trade and capital movement as a part of their program of stabilization and structural adjustment. By the turn of the decade the breakdown of the system of central planning signalled the culmination of the process.
The globalization of the world economy therefore was not a phenomenon that hit China from the outside. It was a process of which China was a principal harbinger. Some of the indicators of the extent to which China's development since 1980 has been a part of the globalization of the world economy are shown in Table 1.
China's remarkably rapid and sustained growth since 1980 has coincided with an even higher rate of growth in exports. The latter has been 52 per cent higher than the rate of growth in GDP. Back in 1980 merchandize exports from China amounted to only 6 per cent of GDP. By 1994 it had exceeded 23 per cent. In 1980 China accounted for less than 4 per cent of LDC exports. By 1994 it accounted for more than 12 per cent. Over 26 per cent of the increase in LDC exports between 1980 and 1994 was due to China. By the early 1990s China had become more "open" or trade oriented than an average LDC Table 1. Selected Indicators of China's Development Since the Beginning of Reforms Changes Between 1980 and 1994
Trend rate of GDP growth per year 9.2 per cent
Trend annual growth rate in $ value of exports 14.0 per cent
Elasticity of exports with respect to GDP 1.52
Average share of exports in GDP: 1980 6.0 per cent
1994 23.2 per cent
China's average share of LDC exports: 1980 3.9 per cent
1994 12.3 per cent
China's incremental share of LDC exports
between 1980 and 1994 26.2 per cent Exports as Per cent of GDP
1993 1994
China 15.9 23.2
India 8.0 -
Low-income LDCs except China 11.3 -
All LDCs except China 15.7 - Net Transfer into China
1980 1993
Dollar value of net transfer (billion) 1.62 38.27
Net transfer as per cent of GDP 0.5 6.4
Note: GDP growth is estimated on the basis of the official Chinese index of real GDP. Export elasticity is based on domestic currency values of exports (dollar values converted into yuan at the official exchange rate) and GDP at current prices. The source of these data and of dollar value of exports is China State Statistical Bureau (SSB), 1995. Estimates of growth rates are based on semi-logarithmic regressions and the estimate of export elasticity on double-logarithmic regression, the adjusted R2 being 0.99 or greater in each case. Exports in this table refer to merchandize exports only. Data for the estimates of exports as per cent of GDP and net transfer are from World Bank, 1995 and 1995a and China SSB, 1995. In calculating China's share of LDC exports, the republics of former USSR have been excluded for comparability over time. Also excluded, from the LDC group, are some countries, e.g. Libya and Vietnam, for which the World Bank sources did not have information. Low-income LDCs are countries with less than $660 per capita income in 1993 according to World Bank's "Atlas Method". Net transfer includes net increase in long-term debt plus official grants, net foreign direct investment and portfolio equity flows less interest payment on long-term loans and remittances of all profits. See endnote 2 on the comparison of export/GDP ratios.and vastly more so than a low-income LDC, a category to which it belongs. The significance of these figures can be gauged only in the context of the virtual certainty that, for a given degree of openness of development policy, China would have a smaller export propensity than an average LDC because of its far greater size than the latter.
At the time of writing, most recent international comparisons can be made for 1993, a year in which China's exports, as a proportion of GDP, experienced a temporary dip and were lower than in the preceding and following years. Even so China's export propensity was twice as high as that for India and two-fifths as much more as for the low-income LDCs. When the middle-income LDCs, a category to which the great trading nations like South Korea and Taiwan Province of China (hereinafter referred to as "Taiwan Province" for brevity) belong, are included in the group of LDCs, China's trade propensity still marginally exceeds the average for the group for 1993 and would almost certainly exceed it by a big margin for the LDC group for 1994 once data for the latter year are available.
Another indicator of the external orientation of China's development since the beginning of the 1980s is the trend in the inflow of foreign resources. Net transfer into China - i.e., net increase in long-term debt plus official grants, net foreign direct investment and portfolio equity flows less interest payment on long-term loans and remittances of profits - increased from a mere 0.5 per cent of GDP in 1980 to 6.4 per cent in 1993. By the latter year China had emerged as the LDC with the largest inflow of external resources with twice as much inflow as into Mexico, the LDC with the next highest inflow of external resources.
How China successfully made a transition from a near-autarkic strategy of development to an open strategy, with a remarkable pay off in terms of higher growth, is a fascinating subject which deserves to be studied comprehensively. The objective of the present study is a more modest one of analyzing the relationship between employment on the one hand and export-oriented growth in a globalizing world economy on the other. The focus of the study is on both directions of the relationship: the effect of export-led growth on employment and income of China's labour force; and the effect of developments in China's labour market on its export-led growth in the context of the increasingly integrated world economy. Section II discusses China's long-term trends in employment and ends with an analysis of the problems of employment that faced China at the time it launched its programme of reform and liberalization. Section III is concerned with the evolution of China's employment problems and policies during the period of liberalization and globalization. It analyzes both the effects of employment and labour market policies on export-led growth and the effects of globalization on employment and earnings of workers. Section IV considers the problems that China faces in adjusting to the increasingly integrated world economy as the recent and ongoing changes in the international economic system continue to evolve. Section V considers policies for employment-friendly growth as China persists with its liberalizing reforms in a globalized world economy.
II. THE EVOLUTION OF EMPLOYMENT PROBLEMS AND POLICIES PRIOR TO REFORM
Table 2 puts together some of the basic data on China's employment. Only since 1984 is it possible to obtain continuous time series on all relevant variables. For earlier years - especially for the pre-reform period - information is available only for selected years and often for only a subset of the variables included in the table.
This section analyzes the trends in employment in the pre-reform period. An analysis of these trends is important in order to understand the nature of the employment problem that China faced when it embarked on economic liberalization. The pre-reform period can be divided into two sub-periods: (a) the decade between 1952 and 1962 and (b) the period between 1962 and 1978. The evolution of China's employment characteristics was distinctly different during the two periods.
The Evolution of Employment Characteristics
During 1952-1962
This was the decade between the completion of land reforms and the emergence from the turmoil of the Great Leap Forward. During this period China experienced tumultuous social upheavals: the collectivization of agriculture, the Great Leap Forward and an alleged loss of tens of millions of life in famine. Due to the latter the rate of population growth in China during this period - averaging 1.6 per cent per year - was far lower than what would be the normal growth rate in the absence of famine. Employment, on the other hand, grew rapidly, at an average annual rate of 2.3 per cent.
The sectoral composition of employment changed very little over the decade. The share of the primary sector - agriculture, forestry, animal husbandry and fishery - declined marginally, from 83.5 per cent to 82 per cent. The share of the secondary sector - manufacturing, construction, mining and electricity - increased slightly, from 7.4 per cent to 7.8 per cent. The share of the tertiary sector - services including transport and trade - increased marginally, from 9.1 per cent to 10.1 per cent. This comparison of change between the beginning and the end of the period conceals tumultuous fluctuations over short periods. Thus, for example, the employment share of the secondary sector (primary sector) shot up (fell) to 27 (58) per cent in 1958, the height of the Great Leap Forward. These forced shifts in employment between sectors led to enormous dislocations in production.
Over the decade there was a qualitative change in the composition of employment by ownership categories. In rural areas the predominantly individual employment in household farming was transformed into employment in collective enterprises: communes and collectively-owned rural industries. Private enterprise in urban areas was also severely restricted. Employment in private and individual enterprises declined from 36 per cent of urban employment in 1952 to only 5 per cent.
Since employment grew at a much faster rate than population, it is likely that the rate of unemployment declined although a firm conclusion can not be reached in the absence of a reliable estimate of the change in the labour force. In China labour force is defined to be the sum of urban and rural employment and urban (open) unemployment. Open unemployment is assumed not to exist in the rural economy and no account is taken of underemployment that may exist. The rate of urban unemployment fell from 13 per cent in 1952 to 6 per cent in 1957. No estimate of urban unemployment is available for 1962. Table 2. Basic Data on Employment and Related Variables (Numbers in millions unless stated otherwise)
--------------------------------------------------------------------------------------------------------------------------
Year Population Employment Urban Labour Working Age
Unemployment Force Population as
as % of Total
-----------------------------------------------------------------------------------------------------------------------
1952 574.8 207.3 3.8 211.1 46.5
1962 673.0 259.1 - - 45.4
1970 829.9 344.3 - - -
1978 962.6 401.5 5.3 406.8 -
1980 987.1 423.6 5.4 429.0 -
1984 1043.6 482.0 2.4 484.4 57.9
1985 1058.5 498.7 2.4 501.1 59.1
1986 1075.1 512.8 2.6 515.4 60.1
1987 1093.0 527.8 2.8 530.6 60.7
1988 1110.3 543.3 3.0 546.3 61.1
1989 1127.0 553.3 3.8 557.1 61.5
1990 1143.3 567.4 3.8 571.2 61.0
1991 1158.2 583.6 3.5 587.1 61.3
1992 1171.7 594.3 3.6 597.9 61.5
1993 1185.2 602.2 4.2 606.4 -
1994 1198.5 614.7 4.8 619.5 61.4
Note: Working age is 15 to 59 for men and 15-54 for women.
- means data not available. A blank means data are/may be available, but not shown.
Source: China SSB, 1995.
Table 2. Continued.
-------------------------------------------------------------------------------------------------------------------------
Year Labour Force Labour Force Urban Population Urban Employment
as % of Working as % of as % of Total as % of Total
Age Population Population
----------------------------------------------------------------------------------------------------------------------
1952 79.0 36.7 12.5 12.0
1962 - - 17.3 17.5
1970 - - 17.4 -
1978 - 42.3 17.9 23.7
1980 - 43.5 19.4 24.9
1984 80.5 46.4 23.0
1985 80.7 47.3 23.7 25.7
1986 80.5 47.9 24.5
1987 80.9 48.5 25.3
1988 81.6 49.2 25.8
1989 81.5 49.4 26.2
1990 81.9 50.0 26.4 26.0
1991 82.7 50.7 26.4
1992 82.9 51.0 27.6
1993 - 51.2 28.1
1994 84.2 51.7 28.6 27.4
Table 2. Continued.
--------------------------------------------------------------------------------------------------------------------------
Year Percent of Employment in Per cent of Urban Employment in
Primary Secondary Tertiary State Collective Private Other
Sector Sector Sector Enter- Enterprise & Individual Enterprise
prise Enterprise
---------------------------------------------------------------------------------------------------------------------------------------------
1952 83.5 7.4 9.1 63.6 0.9 35.5 0
1962 82.0 7.8 10.1 72.9 22.3 4.8 0
1970 80.7 10.1 9.2 75.9 22.6 1.5 0
1978 70.5 17.4 12.1 78.3 21.5 0.2 0
1980 68.7 18.3 13.0 76.2 23.0 0.8 0
1984
1985 62.4 20.9 16.7 70.2 26.0 3.5 0.3
1986
1987
1988
1989
1990 60.0 21.4 18.6 70.2 24.1 4.6 1.1
1991
1992
1993
1994 54.3 22.7 23.0 66.7 19.5 9.3 4.5
Over the period under consideration the ratio of employment to population increased, from 36 per cent in 1952 to over 38 per cent in 1962. This was due to a rise in the ratio of employment to working age population. Working age population as a proportion of total population actually fell. A final point to note is that during this period the ratios of employment to population in urban and rural areas were very similar though this ratio rose over time in both areas.
The Evolution of Employment Characteristics
During 1962-1978
This period began with the emergence from the turmoil of the Great Leap Forward and ended just before the launching of the liberalization programme. It includes the years of Cultural Revolution beginning in 1966 and ending in 1976.
Reversing the famine-induced reduction in population growth during the preceding decade, this period started with a rapid acceleration in the rate of population growth, which averaged 2.65 per cent per year during 1962-70. The rate of population growth started moderating thereafter - averaging 2.18 per cent per year during 1970-75 and falling to 1.37 per cent per year between 1975 and 1978. China's demographic transition therefore began in the pre-reform period and clearly preceded the policy of single-child families.
Again "labour force" estimates are not available except for the terminal year of the period. It however seems safe to assume that the ratio of employment to labour force was roughly constant during this period at least by Chinese definition. To remind, labour force is defined to be the sum of employment and urban unemployment. The rate of urban unemployment at the end of the period was about the same as in 1957. Throughout the period the growth in employment exceeded the growth in population. Employed labour force increased at annual rates of 2.88 per cent during 1962-70, 2.08 per cent during 1970-75 and 1.7 per cent during 1975-78. Between 1962 and 1978 the ratio of employed labour force to population increased from 38.5 per cent to 41.7 per cent. There are no data to separate the effect of the rise in the ratio of working age population to total population from that of the rise in the ratio of employed labour force to working age population during this period.
By 1978 the ratio of employment to population was far higher in urban areas (0.55) than in rural areas (0.39). This sharp rise in urban participation rate relative to rural participation rate was probably due to the return to the urban areas of millions of middle-school graduates who had been sent to the countryside during the Cultural Revolution.
During this period the sectoral composition of employment changed sharply in favour of the industrial sector. Agriculture's share of employment fell from 82 per cent to 70.5 per cent. The share of industries more than doubled, from 7.8 per cent to 17.4 per cent. The rate of tertiarization of employment was rather slow: the share of services in total employment rose from 10.1 per cent to 12.1 per cent. During this period the industrial sector decisively overtook the services sector in terms of employment share.
The rise in industries' share of employment was far greater than the rise in urban sector's share of employment, 9.6 percentage points as compared to 6.5 percentage points. Clearly much of the increase in industries' share of employment was due to rural industrialization. A large part of the reduction in the incremental absorption of labour in agriculture was matched by an increase in employment in rural industries while the remainder went to urban industries and tertiary employment.
The trend towards the gradual abolition of the private sector continued during this period. By the end of the period employment in private and individual enterprises had been virtually eliminated.
Due to discontinuities and gaps in data one can at best make rudimentary estimates of sectoral employment elasticities. These estimates however indicate that 1970 was a major turning point in trends in sectoral employment growth and employment elasticities. Between 1962 and 1970 agricultural output averaged a growth rate of 5.9 per cent per year. Much of this growth took place between 1962 and 1966, partly representing the recovery from the low outputs during the Great Leap Forward. With the launching of the Cultural Revolution in 1966 the rate of growth of agricultural output declined. The average annual increase in agricultural employment, steadily sustained between 1962 and 1970, was 3.4 per cent. Thus the elasticity of employment with respect to agricultural output during this period was on the average 0.58. One gets the picture of a rapidly growing agriculture during the 1960s, with healthy labour absorption. The situation changed dramatically in 1970. After 1970 the rate of growth of agricultural output was very low; it averaged 1.8 per cent per year between 1970 and 1978. During this period agriculture's absorption of labour also slowed down to a near halt; between 1970 and 1978 average annual growth in agricultural employment was a mere 0.24 per cent per year implying an employment elasticity of 0.13 on the average. As a belated effect of agricultural stagnation, induced by Cultural Revolution, the growth of agricultural employment slowed down to a trickle after 1970.
The industrial sector averaged an annual growth of output of 15.2 per cent and a growth of employment of 7 per cent during 1962-70, implying an average employment elasticity of 0.44. If anything this indicates a relatively low degree of labour intensity of industrial growth for a labour-abundant economy. Between 1970 and 1978 industries averaged an annual growth of output of 8.7 per cent. But the annual average rate of growth in industrial employment was a staggering 9.1 per cent, implying an employment elasticity of 1.05! The employment elasticity of the services sector for this period was also very high, 0.92. Clearly these non-agricultural sectors were absorbing labour in excess of what was dictated by productive efficiency.
To summarize the employment situation immediately preceding the launching of reforms: demographic transition had clearly been under way. The rate of growth in labour force was still high - though beginning to decline - due to the lagged effect of high population growth in the past. Long stagnation in agriculture had drastically reduced the rate of labour absorption in that sector. Since open unemployment was an anathema, much of the incremental labour force had to be accommodated, partly in the form of concealed unemployment, in the non-agricultural enterprises, which were under state and collective ownership. Migration to urban industrial and tertiary employment was strictly controlled by a system of residence permits so that a high proportion of the incremental labour force was absorbed in rural non-agricultural enterprises. The reason behind the transfer of concealed unemployment from agriculture to industries and services is not entirely clear. It however appears that the stagnation of agriculture and the high growth rates of non-agricultural sectors might have provided the motivation. Earnings in agriculture might have fallen to such low levels that a sharing of work and income in non-agricultural enterprises seemed a desirable policy for the reduction in the imbalance between sectoral earnings. This policy of expanding employment as an instrument of income redistribution - an informal system of unemployment insurance - was a major factor behind the inefficiency of state and collective enterprises.
III. EMPLOYMENT DURING THE PERIOD OF LIBERALIZATION AND GLOBALIZATION
China's Performance During the Period of
Liberalization and Globalization
Since 1978 China has been implementing a vast agenda of systemic reform. A shift of development policy, away from the inward-looking strategy of the past towards an outward-looking, export-led strategy, has been an integral part of the reform programme. Despite sharp fluctuations, China's overall growth performance during the pre-reform period compared very favourably with the average growth of the LDCs. After the launching of reforms this already high rate of growth underwent substantial acceleration. Trend rates of growth for pre-reform and post-reform periods were as follows:with an adjusted R2 of 0.99 and Y = GDP, T = time (=1 for 1965, 2 for 1966 etc.), and Z = a dummy variable with a value of 0 for pre-reform years and 1 for post-reform years. The coefficient of T is the trend growth rate for the pre-reform period while the sum of the coefficients of T and ZT is the trend growth rate for the post-reform period. Note that all the coefficients are significant at 1 per cent level (the numbers within parentheses are t values). There are some problems with these measurements that deserve to be brought out. For Y the index of GDP is used for the period 1978-94 from China SSB, 1995 and the index of "national income" is used from 1965-78 from China SSB, 1990 and the two series are spliced together. GDP and "national income" appear to have been estimated on the basis of different methodologies although the extent of the difference is not known. Also, as discussed in note 2 above, GDP estimates in China are substantially understated though it is not clear how this might have affected the measurement of the rate of change in GDP over time.
Between 1965 and 1977 6.4 per cent per year
Between 1978 and 1994 9.2 per cent per year
The extraordinarily high post-reform growth rate has been sustained on the average for more than a decade and a half, an unprecedented experience for a large and heterogeneous country.
As noted in the introductory section, the acceleration in China's growth in the post-reform period was accompanied by an even sharper acceleration in the growth of exports, the income elasticity of exports being 1.52. China's export performance during this period does not merely consist of a very high rate of growth but also of remarkable diversification. Table 3 shows that between 1980 and 1994 the export of primary goods as a proportion of total exports fell from 50 per cent to 16 per cent while concomitantly the export of manufactured goods as a proportion of total exports rose from 50 per cent to 84 per cent. Table 3. Composition of Merchandize Exports (Values in Billions of Current Dollars)
Year Total Export Primary Manufacturing
Value Value % of Total Value % of Total
1980 18.1 9.1 50.3 9.0 49.7
1985 27.4 13.8 50.4 13.6 49.6
1990 62.1 15.9 25.6 46.2 74.4
1992 85.0 17.0 20.0 68.0 80.0
1993 91.7 16.7 18.2 75.0 81.8
1994 121.0 19.7 16.3 101.3 83.7
Clothing & Light Industries Machinery &
Garments Transport Equip.
Value % of Total Value % of Total Value % of Total
1980 4.0 22.1 0.8 4.4
1985 2.1 11.6 4.5 24.9 0.8 2.9
1990 6.8 11.0 12.6 20.3 5.6 9.0
1992 16.9 19.9 15.3 18.0 13.3 15.6
1993 18.3 20.0 15.9 17.3 15.3 16.7
1994 21.9 18.1
Source: Data on clothing & garments and "light industries" (including yarn, fabrics, metal products, non-metallic minerals and miscellaneous manufactured goods) from World Bank, 1994a. All other data from China SSB, 1995. Table 4. Direction of Trade, 1994
Destination/ Exports to Imports From
Origin (Per cent of Total) (Per cent of Total)
Japan 17.8 22.7
Hong Kong 26.8 8.2
Rest of Asia 16.1 28.5
Africa 1.4 0.8
Latin America 2.1 1.9
Former SU & EE 2.4 4.6
OECD Europe 13.1 17.0
North America 18.9 13.7
(USA) (17.8) (12.1)
Australia/NZ 1.4 2.4
(OECD total) (51.3) (55.8)
Other - 0.2
Source: China SSB, 1995
Note: SU & EE = Soviet Union & Eastern Europe; NZ = New Zealand
China's export surge began by displacing the exports of light industrial goods and textiles from some East Asian economies at higher stages of development, e.g. Hong Kong, South Korea and Taiwan Province. But the share of these exports appears to have peaked at about 37 per cent of total as China has rapidly expanded its exports of machineries and transport equipments. Within a very short period of time China has demonstrated a substantial broadening of the range of its comparative advantage in exports. In spite of the shift, first, away from primary products and, next, in favour of capital goods, China's export structure has been found by a World Bank study to have moved in the direction of greater labour-intensity.
In terms of geographical diversity of destination/origin, China's external trade is more diversified than average LDC trade. The proportions of its exports sold to the OECD countries and imports bought from the OECD countries are lower than LDC averages (which in 1993, the most recent year for which information was available at the time of writing, were respectively 58 per cent and 61 per cent). Between 1980 and 1994, however, the concentration of China's exports to the OECD has grown while the concentration of China's imports from the OECD has fallen.
A second feature of the outward orientation of China's development has been the sharp increase in the flow of external resources. Table 5 summarizes the basic data. China had little inflow of external resources until the early 1980s. In 1980 external resources consisted of less than $ 2 billion of borrowing from private and public sources with a negligible amount of official grant from abroad. By 1993 China had become by far the largest recipient of external resources among all LDCs. It accounted for a fifth of all net resource flows into LDCs: a tenth of all official development assistance, nearly a fifth of all borrowing from private sources, five per cent of portfolio equity and, most strikingly, two-fifths of all foreign direct investment (FDI). FDI has continued to increase to reach $ 38 billion (42 per cent of the total for the LDCs) in 1995. Table 5. Net Resource Flow (Values in Billion Dollars)
1980 1993 1993 Flow as % of
Flows to All LDCs
Long-term borrowing from
private sources ) 8.2 18
Long-tern borrowing from ) 1.9
official sources ) 4.6 )
Official grant negligible 0.4 ) 10
Portfolio equity 0 2.3 5
Net foreign direct investment 0 25.8 40
Total net resource flow 1.9 41.3 20
Total net resource flow as
per cent of:
GDP 0.6 6.9
Investment 1.8 15.9
Source: World Bank, 1995 and 1995b.
During the entire history of pre-reform development China had little inflow of external resources. Its domestic investment of typically 30 to 35 per cent of GDP was financed entirely by domestic saving. By 1993 the rate of domestic investment had reached a staggering 43 per cent of GDP. Part of the explanation of the acceleration in the rate of investment is that by 1993 net inflow of resources from abroad had reached 7 per cent of GDP and 16 per cent of investment.
A third important feature of the outward orientation of China's development is its rapid acquisition of technology. This is directly linked to the two features noted above. Rapid expansion of exports provided China with the means to expand the volume of imports. With imports of capital goods approaching an annual average value close to $ 50 billion in the early 1990s, China had an enormous bargaining power to gain access to sophisticated technology. Chinese policy makers used this leverage quite effectively to attract FDI by requiring that local production be a part of the imports from the foreign supplier.
China has thus derived a great deal of benefit from its successful exploitation of the opportunities provided by the globalizing world market. Its success in expanding exports has contributed to productive efficiency by enabling it to specialize in the direction of its comparative advantage, benefit from the exploitation of economies of scale, and overcome production bottlenecks that were endemic in the past due to the shortage of imported inputs. External competition also helped Chinese industries gain efficiency. The inflow of FDI - attracted largely by the effective domestic demand for imports - provided both the resources to further augment investment and to facilitate access to sophisticated technology. The inflow of FDI and access to technology have in turn benefited growth and export expansion, completing a virtuous circle.
Factors Contributing to China's Competitiveness
in the Globalized World Economy
A comprehensive discussion of the factors behind China's success in promoting export-led growth must consider all aspects of China's development policies. This is beyond the scope of this study. Instead this study will focus on the factors directly contributing to China's competitiveness in an integrating world economy. A critical precondition of international competitiveness is a low and stable real unit labour cost in foreign exchange. In improving the market share of exports and in attracting FDI a country must keep its unit labour cost in foreign exchange lower than in the competing countries. The change in real unit labour cost in foreign exchange (U) consists of three components: (i) the difference between the rate of change in the real wage rate (w) and the rate of change in labour productivity (v); (ii) the difference between the rate of change in cost of living (Pc) and the rate of change in domestic producers' prices (Pp) and (iii) the rate of change in the exchange rate (e). As long as the rate of increase in real wages is no greater than the rate of increase in labour productivity the real cost of labour in domestic currency does not increase. Success in this respect depends on labour market policies and the myriad of policies - involving access to human capital, organization of production and the appropriateness of investment decisions - that promote labour productivity. For a given change in the ratio of real wage to productivity, the profitability of industries is adversely affected if the cost of living of the workers rises faster than producers' prices. This depends on the success of macroeconomic policies in containing the rate of domestic inflation to the rate of inflation in the rest of the world so that the rise in the prices of non-traded goods like food and housing - the major determinants of cost of living - is not out of line with the rise in the prices of traded goods that are constrained by world prices. Finally, if real cost of labour in domestic currency rises - either due to the failure to limit the rise in real wages to the rise in labour productivity or due to the failure of macroeconomic policies to contain the rate of inflation - the real labour cost in foreign exchange can still be stabilized by an appropriate adjustment in the exchange rate. Following Mazumdar, 1993, the change in the real cost of labour in foreign exchange can be estimated as shown below (a dot represents the rate of change in the variable over time):The first term is the difference between the rates of change in real wage and labour productivity; the second term is the difference between the rates of change in consumer prices and producers prices; and the final term is the rate of change in the exchange rate.
. . . . . .
U = (w - v) + (Pc - Pp) - e
Table 6 shows estimates of each of the above components for various periods between 1978 and 1994 for China's industrial sector. Except during 1978-80, when it rose sharply, the real unit cost of labour in foreign exchange has fallen steadily and rapidly. The principal sources of the fall have been the sharp rise in labour productivity - a somewhat mysterious phenomenon to which we shall return later in this section - and a steady adjustment in the exchange rate since 1980. Since 1980, real wages increased steadily, though at a significantly lower rate than the rise in labour productivity. Macroeconomic policies have by and large failed to limit the rise in cost of living to the rise in producers' prices. Without an exchange rate adjustment the rise in unit real cost of labour in foreign exchange would have continued until 1985. Since 1985 the role of the exchange rate policy was to bring about an aggressive reduction in real unit labour cost in foreign exchange which would have declined moderately even without an exchange rate adjustment. The index of China's real effective exchange rate (REER), as estimated by the International Monetary Fund, declined steadily from 100 in 1980 to 32.4 in 1991. Between 1982 and 1991 - the common period for which estimates are available for the countries concerned - China's REER fell by 64 per cent as compared to an 18 per cent fall for the Republic of Korea, 4 per cent for Taiwan Province and 51 per cent for Indonesia. Clearly China's exchange rate policy, vis-a-vis that of these countries, was a major determinant of her improved international competitiveness. Table 6. Components of Change in Real Unit Labour Cost in Foreign Exchange (Per cent Per Year)
. . . . . .
w v Pc Pp e U
1978-80 7.2 5.4 4.6 1.0 -5.5 10.9
1980-85 3.8 5.2 4.2 1.9 14.4 -13.5
1985-90 2.4 6.0 10.6 9.7 10.2 -12.9
1990-94 5.7 15.5 13.5 13.9 4.8 -15.0
Source: w is the ratio of the index of wage rate in manufacturing to the urban consumer price index; v is the ratio of the index of industrial value added to the index of industrial employment (secondary sector employment less employment in construction); Pc is the urban consumer price index; Pp is the "industrial products producer price index"; e is the Bank of China exchange rate (yuan/$). All data from China SSB, 1995. Dots represent annual percentage changes which are calculated between end points. Table 7. Growth Rates and Elasticities During the Period of Globalization and Liberalization
1978-94 1984-94
Growth Rates
GDP 9.2 9.0
Agricultural GDP 5.0 3.9
Industrial GDP 10.7 11.6
Services GDP 10.6 9.3
Employment 2.71 2.42
Agricultural Employment 1.28 1.20
Industrial Employment 4.19 3.12
Services Employment 6.27 5.41
Labour Productivity 6.45 6.58
Agricultural Labour Productivity 3.72 2.70
Industrial Labour Productivity 6.48 8.50
Services Labour Productivity 4.35 3.84
Elasticities
Agricultural GDP1 0.54 0.43
Industrial GDP1 1.17 1.30
Services GDP1 1.16 1.02
Employment with Respect to GDP 0.29 0.26
Agricultural Employment with Respect
to Agricultural GDP 0.25 0.30
Industrial Employment with Respect
to Industrial GDP 0.38 0.27
Services Employment with Respect
to Services GDP 0.59 0.58
1 These elasticities are with respect to GDP.
Note: All growth rates are estimated by fitting semi-logarithmic regressions. All elasticities are estimated by fitting double-logarithmic regressions. All estimated growth and elasticity coefficients are significant at 1 per cent level.
Source: All data from China SSB, 1995.
Employment During the Period of Globalization
and Liberalization
How has China's employment situation evolved during the period of globalization and liberalization? Some indicators of growth characteristics for this period are summarized in Table 7. They suggest that the dynamism of China's growth performance has not been translated into a change in the structure of employment.
It is useful to begin by noting some of the basic trends about the growth in labour force. As noted in the previous section, the rate of population growth had dropped to 1.37 per cent per year in the period before the beginning of reforms. The rate increased a little in the 1980s before falling to 1.2 per cent in the early 1990s. The rate of growth of labour force continued to remain very high for a period after the beginning of reforms - averaging about 6 per cent per year between 1978 and 1984 - and then dropping gradually. The average rate of growth of labour force in the early 1990s remained as high as 2.1 per cent. In the early years of reform the astronomical growth in labour force was largely due to a sharp rise in the ratio of working-age population to total population. This ratio stabilized in the late 1980s. There was however a steady rise in the ratio of labour force to working age population, a rather striking phenomenon for a country which already had about the highest participation rate among all LDCs.
This was not only a period of very high overall economic growth but also one of structural transformation of the economy in so far as the growth rates of the industrial and services sectors were far in excess of the rate of agricultural growth. This was particularly true of the decade 1984-94, when agricultural growth slowed down appreciably after the spurt following the abolition of the communes. And yet the sectoral composition of employment changed far less dramatically than one would expect. Between 1978 and 1994 agriculture's share of employment fell by only 16 percentage points and industry's share of employment increased by only 5 percentage points. Between 1984 and 1994 employment share of the industrial sector increased by a mere 2.7 percentage points in spite of an annual growth in output of close to 12 per cent sustained over the decade. For comparably rapid growth of the economy, agriculture's share of employment in South Korea declined from 51 per cent in 1970 to 24 per cent in 1986 and 18 per cent in 1990.
Over the period 1978-94 the employment elasticity of agriculture averaged 0.25. This elasticity however turned negative in very recent years; since 1992 agriculture has been shedding labour in absolute terms.
Labour absorption in services has been at a moderately high rate; employment elasticity for the sector was close to 0.6. The sector provided 43.4 per cent of all incremental employment during the post-reform period. By 1994 it had overtaken the industrial sector in terms of its share of total employment.
It was the industrial sector that had an apparently dismal employment performance. Employment elasticity of the sector was 0.38 for the post-reform period as a whole and it fell to 0.27 during the decade 1984-94, a period of accelerated industrial growth and rapid expansion in manufactured exports which, as the evidence quoted earlier in this section claims, were labour intensive and consistent with China's comparative advantage.
To get an idea of how dismally low a degree of labour intensity of growth the employment elasticity of 0.27 represents, it may be useful to cite the following employment elasticities for manufacturing industries in South Korea:
During 1970-80 0.67
During 1980-90 0.45
By the 1980s South Korea had been transformed into a high-wage economy by LDC standards. It therefore seems appropriate to consider the elasticity for the earlier period as the one relevant for comparison with China. Employment elasticity of industries in China has been only three-fifths of the lower of the two estimates for Korea!
Table 8. Employment in Urban State, Collective and Other Industrial Enterprises and Township and Village Enterprises (Million Workers)
Urban Industries Township and Village
State Collective Other Total Enterprises (TVEs)
1990 43.64 18.76 1.37 63.78 92.65
1991 44.72 18.98 1.82 65.51 96.09
1992 45.21 18.62 2.38 66.21 106.25
1993 44.98 17.00 4.28 66.26 123.45
1994 43.69 16.04 6.07 65.80 120.17
Source: China SSB, 1995, pp. 85, 376.
Note: Urban industries include manufacturing; excavation; and the production and distribution of electric power, gas and water. Manufacturing accounted for 83 per cent of urban industrial employment. The category of other industries includes private enterprises, individual enterprises, joint ownership enterprises, share-holding enterprises and foreign-owned enterprises.
How might one explain the paradox that industrialization based on the expansion of labour-intensive export industries resulted in such slow growth in employment? The explanation seems to lie in the phenomenon noted in the previous section: during the years preceding reforms Chinese industries were absorbing labour far in excess of requirement. By the beginning of reforms industries in China, almost entirely state and collective enterprises, had come to be burdened with vast amounts of excess labour. During the post-reform period the estimated employment elasticity does not reflect the concealed absorption of labour by way of a reduction in the degree of underemployment in industries. This is the only way to explain the phenomenal growth in labour productivity at 8.5 per cent per year sustained over a decade. The actual increase in "labour input" was greater than the increase in the headcount of employment in industries.
Some further evidence for this explanation can be gleaned from an examination of the separate data on industrial employment in urban state, collective and other forms of enterprises and rural township and village enterprises (TVEs) in very recent years (Table 8). During the 1990s urban industrial employment has increased very little and has actually declined after 1993. The decline in employment was sharpest in collective enterprises, 15.5 per cent between the peak year of 1991 and 1994. In state enterprises the decline was much more modest, 3.4 per cent between the peak year of 1992 and 1994. In private and other enterprises employment increased rapidly, but not by as much as would be necessary to offset the fall in employment in state and collective enterprises.
In the rural collective sector, the TVEs, employment peaked in 1993 and then fell by 2.7 per cent over the following year.
It is possible that some of the decline in employment in state and collective enterprises was due to the conversion of ownership of some of these enterprises to private and other forms of enterprises. One obvious evidence that this is unlikely to explain the change is that the increase in urban industrial employment in private and other forms of enterprises failed to offset the fall in employment in state and collective enterprises. A more convincing evidence consists of indications that output per worker increased rapidly in state and collective enterprises during the period over which they were experiencing reduction in employment. Unfortunately output figures can not be estimated for the exact categories for which employment has been shown in Table 8. It is however clearly documented that gross output values in state-owned and collective-owned industries increased rapidly. Average annual productivity growth in state-owned industries rose to 7.7 per cent during the 1990s as compared to 4.5 per cent during twelve years of reform preceding 1990.
The failure of the industries to absorb labour during the decade of reform and globalization should therefore be seen as an attempt on the part of China's state and collective industries to reduce the enormous underemployment that they were burdened with. Global competition clearly provided the impetus to reduce underemployment sufficiently quickly to bring about a sharp net reduction in employment during a period of rapid output growth. Labour market reforms provided the state and collective enterprises with the opportunity to gradually move away from the traditional "iron rice bowl" system of life-time guaranteed employment. The most important of these reforms, introduced in 1986, was the regulation that all new employment in state enterprises would be based on fixed-term contracts for three to five years. These contracts can be terminated by the enterprises. Simultaneously, state enterprises were granted power to dismiss workers for inefficiency. In 1988 State Bankruptcy Law was introduced to make it possible to liquidate or drastically restructure state enterprises with consequent reduction in employment.
It however appears that so far state enterprises have used, or have been allowed to use, the opportunity to reduce employment to a far lesser extent than is warranted by economic efficiency. It remains very difficult to file for bankruptcy largely because the capacity of the government to absorb redundant workers in the nascent unemployment insurance programme is very limited. This, together with a strong sense of responsibility on the part of the enterprises to their workers, means that many redundant workers are kept on enterprise payroll. It is common for the redundant workers to be temporarily sent home for a fraction, approximately a half, of the wage that is paid the working employees.
What happens to the workers who are finally dismissed and removed from the payroll of the enterprise? These workers receive an unemployment benefit paid by the local government. The payment is based either on the minimum wage, which has by now been adopted by all provinces except Tibet and Gansu, or the official "poverty income threshold" for the locality. Minimum wage is typically less than half the average wage. Thus minimum wage in Beijing was 210 yuan per month in 1995, raised to 260 yuan in 1996, as compared to the average manufacturing wage of 520 yuan in 1994, the most recent year for which its level is reported (Table 11). Poverty income thresholds are usually lower than minimum wages. Unemployment insurance is typically set at 70 per cent to 80 per cent of minimum wage. It is not entirely clear what happens to nonwage benefits, e.g., housing and medical insurance, of the workers who are dismissed. It is however clear that the transfer of an employee from payroll to unemployment insurance reduces his/her cash earnings to a third of wages or less. The maximum duration of unemployment benefit is two years. Given the inadequacy of skills of the redundant workers and the limited retraining facilities, it is not uncommon for workers to remain unemployed for more than two years. Only a handful of cities - Shanghai, Dalian, Qingdao, Guangzhou, Fuzhou, Xiamen and Wuxi - had instituted a system of minimum protection by extending the payment of a subsistence benefit beyond the first two years of unemployment. In 1994 the amount of this subsistence payment in Shanghai was 23 per cent of the average manufacturing wage.
The unemployment insurance scheme is financed by a contribution by the enterprises of 0.6 per cent to 1 per cent of their wage bill. The trend is towards extending the system of unemployment insurance to enterprises under all forms of ownership. The programme has very limited funding which often needs to be supplemented by the local government. This has led to the strict limitation of entitlement to this benefit to: the workers in enterprises which have declared bankruptcy or have received official notice of bankruptcy; contract workers whose contracts have been terminated; workers who have been dismissed by enterprises; and workers in enterprises which have either been dissolved or have their operations suspended under state regulations. As a consequence, enterprises still continue to provide a great deal of concealed unemployment insurance in so far as they routinely send home some of their work force at approximately 50 per cent of wages. Thus older state enterprises, with a lot of underemployed work force, continue to be at a disadvantage in relation to new and non-state enterprises although the extent of this disadvantage has been reduced somewhat by the opportunity to transfer some of their redundant work force to unemployment insurance.
The urban unemployment rate, which had declined to 1.8 per cent in 1985 went up to 2.8 per cent in 1994. But this estimate, excluding all but the officially unemployed among those holding official urban resident permits (hukou), is just the tip of the iceberg. There are at least two other groups who should be included in this category: those who are on concealed unemployment insurance in enterprises and those among the floating migrants from rural areas who remain unemployed. With information lacking and institutions and official vocabulary in a state of transition, it is very difficult to arrive at an approximate quantification of these elements. The following attempt is largely illustrative.
First consider those on concealed unemployment insurance at their enterprises, i.e., those who are temporarily sent home at half the wage. Information given by the Beijing Labour Bureau and the Beijing Job Centre showed that at the end of 1995 the stock of workers "laid off" in one form or another was 100,400. Of these, only 22,000 - less than 0.4 per cent of the work force - were unemployed and had been transferred to unemployment insurance. The remainder - 3.6 times as many as the officially unemployed - were on some form of concealed unemployment insurance principally in state enterprises. If they are included among the unemployed, the Beijing unemployment rate would rise from 0.4 per cent to 1.8 per cent! If the extent of concealed unemployment insurance in urban industries elsewhere in China is proportionately as serious as in Beijing, the rate of urban unemployment should be above 12 per cent!
Information on the floating migrants is even scarcer although the situation should improve once the results of a Labour Ministry survey of these migrants in 22 major cities, carried out in January 1996, become available. Official sources suggest that approximately 50 million rural residents have moved to urban areas. Of them 30 million have crossed provincial boundaries and flocked to major urban centres. The phenomenon is not so very different from what is observed in many LDCs except that the urban household permit system in China makes them a distinct group which has no claim to employment in urban state and collective enterprises or to housing, unemployment insurance and other benefits that urban residents can claim but do not necessarily receive without an indeterminate waiting period. It is impossible to know where these migrant workers belong in the picture of labour force put together in Table 2 although one would surmise that they continue to be included in the rural labour force and are excluded from the urban labour force. Most of the migrant workers have found work. The preliminary results of the Labour Ministry Survey show that 46 per cent of these migrants have received temporary work permits which allow them to work in construction projects and many other types of occupations. According to the Beijing Labour Bureau, the migrant workers, with temporary work permits, receive job introduction service; about a third of these workers end up with wage employment; and the remainder set up small business or find self employment. They have contributed to the emergence of a substantial informal sector in the urban economy. The incidence of outright unemployment among the migrants appears to be small. Those in wage employment receive the same wage as the workers with official residence permits in the same occupation although the migrants seem to be concentrated in arduous and low-paid employment categories. The principal disadvantage that they suffer from is their exclusion from highly subsidized official housing and other entitlements. Their living standard is thus generally lower than that of the urban resident workers, perhaps even lower than the living standard of those on open or concealed unemployment insurance, since the latter also have access to informal urban activities. It is however highly probable that as a result of the migration of these workers the living standard in rural China has improved partly due to the reduction in the number of consumers per rural household and partly due to net income remittance made by the migrant workers to their rural families.
To conclude the description of the changes in the composition of employment during the period of reform, it is important to note that the employment share of enterprises under private, individual and other forms of ownership - the most market-responsive category - has increased rapidly. These categories of employment had been wiped out by the Cultural Revolution. By 1994 they accounted for 14 per cent of urban employment. In rural areas almost the entire employment was in collective agriculture and non-agricultural enterprises owned by the communes at the time economic reforms began. The share of the TVEs reached a peak of 29.9 per cent of rural employment in 1993 and then fell to 26.9 per cent in 1994. While the TVEs continue to be classified as collective enterprises, their operation today is far more market responsive than was the case before reforms began. In 1994 another 6.4 per cent of rural employment was accounted for by private and individual non-agricultural enterprises. The remainder by and large consists of employment in household farms. Table 9. Indices of Real Wages
Year Agriculture Manufacturing Trade
1978 100.0 100.0 100.0
1980 121.2 115.0 114.7
1985 145.8 138.8 136.2
1990 155.0 156.4 148.6
1994 188.8 195.1 174.5
Annual growth rate
between 1978 and 94 3.5 3.9 3.2
Note: Annual wage rates for manufacturing and trade have been deflated by the urban consumer price index. For agriculture the consumer price index is obtained by splicing the index of overall retail price index with the rural consumer price index which is available only since 1985. All wage rates and price indices are from China SSB, 1995. Growth rates are estimated by fitting semi-logarithmic regressions. Table 10. Gini Ratios for Urban and Rural China
Year Urban Rural
1978 - 0.32
1979 - 0.28
1980 0.16 0.26
1981 - 0.23
1982 - 0.22
1983 - 0.25
1984 - 0.27
1985 - 0.30
1986 - 0.31
1988 0.23 0.34
Note: Urban Gini ratio for 1980 from World Bank, 1985. Urban and rural Gini for 1988 from Khan et al., 1992. Rural Gini for 1982 to 1986 from Ahmad and Wang, 1991. Estimates for 1978 to 1986 use grouped distributional data from household surveys of SSB. Estimates for 1988 are based on individual household data from a survey specifically designed to study the distribution of income.
Trends in Wages, Inequality and Poverty
Table 9 shows the indices of real wages in agriculture, manufacturing and trade (the largest of the services sectors in terms of employment). Real wages in all sectors had healthy rates of growth though these growth rates have been lower than the rates of growth in labour productivity (Table 7) and in per capita GDP. Thus although the living standards of the wage-earning workers have improved rapidly, their share of GDP has fallen.
Table 10 shows the available estimates of Gini ratios of income distribution for urban and rural China. These indicate that in rural China inequality declined in the early years of reform and then rose steadily since 1982. For urban China the only estimates available are for 1980 and 1988 and between these years there was a significant increase in inequality. It also seems certain that urban inequality has increased a good deal further since 1988. This is because of the greater inequality in the distribution of earnings among workers, with rising gaps between working employees and the employees sent home and between resident workers and migrant workers.
Estimates of the incidence of poverty are available from World Bank sources for the period 1978 to 1990 (World Bank, 1992b). These measurements use a poverty income threshold (PIT) based on the cost of a subsistence basket of food and nonfood goods. Its food component provides 2150 Kilocalories per person per day and is very heavily weighted in favor of low-cost cereals. According to this procedure the incidence of urban poverty was negligible: it went down from 1.91 per cent of urban population in 1978 to 0.3 per cent in 1984. Thereafter it fluctuated between 0.2 per cent and 0.4 per cent until 1990. For rural areas the incidence of poverty was very high in 1978, 33 per cent of rural population. It rapidly declined to 11 per cent by 1984. Thereafter there has been no trend in the ratio of rural population in poverty which remained 11.5 per cent in 1990.
It has been alleged that the World Bank PITs are unrealistically low because their assumption that most of the food energy is supplied by low-cost cereals is inconsistent with the preference of the consumers at the relevant levels of income. The use of a more diversified source of food energy leads to higher PITs and much higher incidence of poverty: respectively 30.6 per cent and 6.6 per cent of rural and urban population in 1990 (Jamal, 1995). While there still are no clear trends in the incidence of poverty since the mid 1980s, the absolute numbers of poor are higher in 1990 than in the mid-1980s for both rural and urban China according to these higher PITs.
Comparable estimates of the incidence of poverty are not available for more recent years. According to the information given by the Ministry of Civil Affairs some 15 million urban dwellers (about 5 per cent of urban population) are estimated by the SSB to be living below the urban PIT of about 1,440 yuan per person per year in 1994. According to the estimates made by All-China Federation of Trade Unions (ACFTU) the urban poor numbered more than 20 million in 1994. Many of these poor belong to the families of redundant workers and retirees. To the best of our understanding these estimates exclude the poor among the migrant population. Without doubt the incidence of poverty among the migrants is higher than among the residents. Assuming that a modest 20 per cent of the transprovincial migrants are in poverty, the estimated urban poor in China would range between 21 and 26 million, i.e., 7 per cent to 9 per cent of urban population. While these estimates for 1994 are not comparable with the estimates for earlier years, they point to the unmistakable fact that poverty has become an increasingly serious problem in urban China.
To summarize: under most favourable interpretation, the proportion of population in poverty in rural China has remained undiminished since the mid 1980s while the absolute number of poor has increased. In urban China the incidence of poverty appears to have increased significantly in recent years. While much of the poverty has traditionally been geographically concentrated in the North, Northwest and Southwest, in more recent years new categories of poor have emerged, especially in urban areas, in the form of the employees of loss-making enterprises, retirees, unemployed and the migrant population.
It therefore appears that China's record on the distribution of income and the incidence of poverty has been rather poor during much of the globalization and liberalization period. Are the two causally related? Table 11 indicates that this is a distinct possibility. About 80 per cent of China's exports originate in 11 coastal provinces (marked with asterisks in the table) that account for only 40 per cent of China's population. These provinces, and Beijing, are much richer than the average: eight of these twelve provinces are ranked among the eight top provinces in terms of both the manufacturing wage rate and per capita GDP in 1994. Only three - Liaoning, Hebei and Shandong - have lower wage rate than the average for China and only two - Guangxi and Hebei - have lower per capita GDP than China. As Table 11 shows, the eight highest-wage provinces achieved the highest increases in manufacturing wages between 1989 and 1994. The only export-intensive provinces which are not in the same category are the three ranked lowest among the eleven in terms of wage rates. Thus the export-orientation of China's growth has by and large disproportionately benefited the richest provinces. The same conclusion holds even more strongly if the comparison is made in terms of per capita income: ten of the eleven export-intensive provinces achieved a higher than average rate of growth in per capita income. A recent official report (China Daily, March 22, 1996, p. 4) states that between 1991 and Table 11. Average Annual Manufacturing Wage Rates in Provinces (Current yuan)
1994 1989 Ratio of 1994 Per Capita
wage to 1989 wage GDP 1994
Shanghai* 7020 2624 2.68 14542
Guangdong* 6838 2766 2.47 6340
Beijing 6242 2369 2.63 9636
Zhejiang* 5054 1990 2.54 6211
Tianjin* 5022 2264 2.22 7755
Fujian* 4714 1926 2.45 5295
Hainan* 4691 2062 2.27 4655
Jiangsu* 4660 1977 2.36 5779
Yunnan 4632 2037 2.27 2473
Gansu 4498 2323 1.94 1899
Guangxi* 4457 1892 2.36 2764
Qinghai 4184 2387 1.75 2916
Tibet 4167 2584 1.61 1941
Xinjiang 4138 2248 1.84 4128
Liaoning* 3972 2008 1.98 6354
Sichuan 3927 1882 2.09 2477
Guizhou 3918 1875 2.09 1507
Hebei* 3870 1871 2.07 3362
Hunan 3824 1915 2.00 2666
Shandong* 3800 1999 1.90 4466
Hubei 3785 1759 1.67 3285
Ninxia 3737 2242 1.67 2659
Anhui 3483 1737 2.01 2500
Shaanxi 3476 1900 1.83 2432
Shanxi 3348 2096 1.60 2804
Inner Mongolia 3339 1767 1.60 3017
Jilin 3324 1772 1.89 3764
Henan 3191 1711 1.86 2436
Jiangxi 3091 1641 1.88 2570
Heilongjiang 2898 1838 1.58 4408
China 4283 2001 2.14 3679
Note: Provinces have been arranged in descending order of manufacturing wage rate in 1994. Data are from China SSB, 1990 and 1995. For 1994 wages refer to manufacturing industries but for 1989 they refer to "industries". The latter however includes very little non-manufacturing employment, if any (it excludes construction). For China the 1994 per capita income refers to GNP while for provinces they are GDP.
1995 "China's gross national product (GNP) grew at an average annual rate of 11.7 per cent. However, that average rate reflects a 16 per cent growth rate in the east, but only 9 per cent growth in western and central China."
Another aspect of inequality in China that has increased during the period of globalization is that between urban and rural areas. One measure of it is the ratio between manufacturing wages and agricultural wages which increased from 1.22 in 1980 to 1.52 in 1994. Another measure of it is the ratio of per capita disposable income of the urban households to the per capita net income of the farmers which, after an initial decline from 2.37 in 1978 to 1.72 in 1985, rose steadily to reach 2.6 in 1994.
The two most important sources of inequality in China - viz., the inequality between regions and the urban-rural disparity - were both exacerbated by the concentration of the benefits of globalization in the richest coastal provinces and in their urban industries. The remarkable fact that China failed to reduce the incidence of absolute poverty in a decade in which its growth rate was about the highest in the world was due to the phenomenon - largely deriving from the pattern of growth in a globalizing world economy - that the poorest regions did not adequately share the benefits of growth.
Part of the explanation that the benefits of export-led growth did not spread widely outside the coastal provinces is to be found in China's development policies. Central and western provinces were at considerable disadvantage vis-a-vis the coastal provinces, especially the urban centres in the coastal provinces. There was little attempt on the part of public policy to compensate for this bias either by the allocation of public investment or by an adjustment of incentives for private investment. Linkage between remote provinces and rural areas and the coastal poles of export growth has been weak due to inadequate transport and other infrastructural facilities. Official obstacles to the movement of labour into cities have contributed to the widening of the difference between urban and rural earnings. Barriers to rural-urban migration has been breaking down rapidly. Unfortunately, the process through which this is breaking down does not promote as rapid a reduction of inequality between urban and rural earnings as freer labor movement would.
IV. THE EVOLVING PATTERN OF GLOBALIZATION AND ITS EFFECTS ON CHINA
The Effects of the Uruguay Round
With the successful completion of the Uruguay Round, the process of globalization of the world economy is expected to enter a new, accelerated phase. There are significant uncertainties about the pace and the pattern of implementation of the Uruguay Round. Above all, the terms of China's membership of the World Trade Organization (WTO), the body that will oversee the implementation of the Uruguay Round, are yet to be worked out. There are also questions whether post-Uruguay Round negotiations on trade would advance or reverse the past trend. Some of the ongoing rhetoric in the advanced industrial countries on the need to introduce environmental and labour standards in post-Uruguay Round trade negotiations have caused concern among trade theorists and policy analysts (Bhagwati, 1995). In the immediate aftermath of the conclusion of the Uruguay Round there has however been a widely-shared optimism that its implementation will be a major source of new dynamism for the integration of the world trading system. At this stage only the bare outline of the likely outcome of the implementation of the Round can be drawn. The following summary draws upon a recent World Bank study.
Industrial countries' tariff on LDC exports will be reduced by an average of 30 per cent, as compared to an average 40 per cent reduction in their tariff overall. Furthermore the reduction of tariff on important labor-intensive manufactures (textiles, clothing and leather goods) and certain processed primary goods (fish products) will be below average. Even so these tariff reductions will substantially improve the access of LDC exports into industrial countries' markets. More importantly, the reduction in the coverage of non-tariff barriers against LDC exports from 18 per cent to about 5 per cent - in particular the abolition of the Multifibre Arrangement (MFA) - will substantially improve LDC access to industrial countries' markets in manufactured goods.
The LDCs will reduce their maximum tariff rates by an average of 28 per cent. Tariffs in Asian LDCs will be lower than in any other LDC group of countries. Thus access to the LDC markets, especially those in Asia, will also be increased substantially both for the other LDCs and the industrial countries.
There will be a negative impact on net food importers among the LDCs due to the likely rise in world food prices as the production of food in advanced industrial countries declines as a result of reduced protection and as the food-importing LDCs increasingly enter the world market as net buyers. There is also the concern that compliance with the Uruguay Round commitments will deprive the LDCs of their ability to promote their legitimate "infant industries", industries in which there is a time lag before international competitiveness is attained through learning by doing and fully exploiting the advantages of economies of scale. This last concern seems to be exaggerated. The Uruguay Round provides for special and differential treatment of LDCs in the reduction of tariff, the length of the period of transition to agreed arrangements and the ability to support domestic industries. It is unlikely that the full implementation of the Uruguay Round by the LDCs will take away their ability to provide adequate support to their infant industries.
Attempts have been made at the World Bank and the GATT to numerically estimate the gains from the implementation of the Uruguay Round by using detailed models. The results of these models must be interpreted with due caution. They are highly sensitive to the assumptions concerning the counterfactual (i.e., the state of affairs without the Uruguay Round) and to numerous features of the economies of different countries. On the basis of these models the World Bank analysts conclude that the income gain, on a 1992 base, for the World as a whole would be about $ 200 billion or about 0.9 per cent of GDP (World Bank, 1995b, Chapter 2). About a third of these gains should accrue to the LDCs, amounting to 1.3 per cent of their GDP. Thus for the LDCs as a whole, the benefit of increased market access will be significant, though small.
Of course the effects on a specific country will vary from these overall effects depending on its initial structure of production and trade and, perhaps more importantly, on the policies that it pursues. A more detailed model - using a 24-region and 22-commodity classification of the world economy with China shown as a separate entity - has recently been carried out (Harrison et al., 1995). Its estimates of the overall benefits of the Uruguay Round are similar to the ones of the World Bank reported above although it differs from the latter in many details. It estimates that China will be a major beneficiary of the phasing out of the MFA (the long-run welfare impact reaching $ 1.7 billion at 1992 value) but a loser on account of agricultural reforms in exporting countries (in the long run an annual welfare loss of $ 0.8 billion). China's gain from additional manufacturing exports due to greater market access provided by the Round has been estimated to reach $ 1.2 billion in the long run. The study puts the aggregate long-run gain for China from the complete reform at $ 2.0 billion or about 0.5 per cent of GDP. This again is not an insignificant gain, though it would amount to a small addition to the growth that China has recently been used to.
It should however be noted that these estimates - uncertain as they are - are based on the assumption of existing patterns of trade and policies. If China's past policies of ensuring a high degree of international competitiveness, vis-a-vis its competitors, continues, it is possible that China will be able to improve its share of the increment in world exports due to the Uruguay Round.
The question of the effect of China's membership of the WTO on its ability to protect its legitimate infant industries and to promote its legitimate infant exports is tricky. The problem arises due to the opposition of the developed industrial countries, led by the United States, to China's membership of the WTO under the preferential terms provided for the LDCs. The argument is that China's presence in the world economy is already so overwhelming that it should not receive the preferential treatment that other LDCs, including India, are entitled to. China has recently given up its position that it needs developing-country status for every industry and has agreed to review the terms sector by sector. It has offered to bring down its tariff rate to less than 30 per cent by the year 2000, thereby making "its tariffs look much like those that Chinese manufactured goods face in OECD markets." It has pledged to make its currency freely convertible by the end of the century. China has further proposed to dismantle some state controls on foreign trade over five years allowing domestic firms to trade in more than just their designated products and allowing foreign firms to do the same. Most recently China has also announced tariff cuts on more than 4,000 imported items and elimination of quotas and licensing on about 170 tariff lines. It is hard to predict how these negotiations will evolve. It however seems extremely unlikely that China would become a member of the WTO under terms that would make it impossible for it to support its worthwhile infants or to make an orderly restructuring of its existing industries. It is also not at all clear that China has anything to lose by doing so as long as it is able to retain its most favoured nation (MFN) status with the United States and its current trading arrangements with other major countries.
Capital Movement
As argued in the previous section, China has had enormous success in attracting external capital over the last decade and this has contributed to its growth in a variety of ways. So far China has absorbed this surge of external capital by avoiding most of the problems that LDCs in similar circumstances often encounter. At the most recent accounting, at the end of 1993, the present value of China's future debt service stood at 19.6 per cent of GDP and 81.3 per cent of exports. These ratios are higher than for South Korea (13.9 per cent and 46.2 per cent) but considerably lower than for almost any other major LDC including India (29.1 per cent and 227.6 per cent) and Indonesia (58.5 per cent and 194.6 per cent). Until recently China also successfully avoided an undesirable appreciation of its exchange rate following the large inflow of external capital by making prudent interventions, e.g., the accumulation of reserves to offset the large flows in 1994. Since 1994 however the real exchange rate of China must have appreciated significantly as the nominal exchange rate has remained unchanged while the rate of domestic inflation has far exceeded the rate of world inflation. What are the prospects that in an increasingly globalizing world economy China will continue to benefit from large inflows of external capital without succumbing to the adverse effects of capital surge that recently proved so disastrous for Mexico?
The aggregate demand for external capital of all the LDCs, including the former centrally-planned economies, will rise rapidly if these countries are to realize their growth objectives. The average gross national saving as a proportion of GDP in industrial countries in the early 1990s is four percentage points lower than what it was in the late 1970s (World Bank, 1995b, p.11). Those who are optimistic that a global capital shortage can be avoided - e.g., the World Bank - argue that the declining trend in the saving rate of the advanced countries will be reversed, at least for a time, as the baby boom generation enters its prime saving years. The proportion of population in the net saving group (40-64 years) is likely to rise from 40 per cent today to 45 per cent by 2010 in the industrial countries while the proportion of population in the net borrowing group (20-39 years) is likely to decline from 42 per cent to 34 per cent. This demographic shift is expected to offset the negative effect on saving of a steady rise in the proportion of population in the age group 65 and over (World Bank, 1995b, p. 11). With all the uncertainties about the evolution of public sector deficits in the industrial countries, especially in the United States, the above optimism at best rests on fragile foundations.
For China the maintenance of its share of foreign capital should be easier than for most LDCs since most of its capital inflow consists of FDI, borrowing from private financial institutions being the distant second source. As long as China is able to maintain its international competitiveness and its domestic market continues to grow, FDI is likely to continue to flow in. Although China's share of official development assistance (ODA) is substantial, ODA as a proportion of capital inflow in China is low (about 12 per cent). A decline in the volume of ODA is therefore unlikely to have a serious effect on China.
Even so, prudence dictates that China be careful about increasing its dependence on external capital. Its debt burden, although still well below danger level, has increased rapidly and is significantly above that of South Korea and Malaysia (and Taiwan Province). Also, as a country with a very high rate of domestic saving, China should be able to finance much of its investment needs from its own resources.
The other problem - the volatility of private capital - is quite distinct. As the recent Mexican experience showed, LDCs can hardly be stoical about the volatility of foreign funds, making use of these inflows when they come and not lamenting their departure for other pastures at other times. This is because unsustainable surges can inflict serious economic damage by causing an appreciation in the exchange rate above the level that is warranted by a healthy current account. As the exchange rate keeps appreciating and the current account sinks deeper and deeper into deficit, the owners of private foreign capital suddenly decide that the country is no longer a viable place for investment. A dramatic and traumatic flight of private capital follows with crippling effect on output and employment of the recipient economy. All this happens because, unlike a current transaction in international trade, capital flows involve returns in the future about which information is incomplete and hence capital mobility is anything but perfect.
As already noted, China has by and large demonstrated a good deal of alertness to capital surges although the trend in its real exchange rate over the last two years is some cause of worry. It must continue to remain alert by carefully assessing if the rate of inflow has crossed the limit of sustainability and find a way of arresting the appreciation of its real exchange rate. These are extremely difficult tasks and perhaps there is some virtue in being conservative. Also, capital surges respond to domestic macroeconomic policies and hence, in addition to the stabilization of short-term capital movement, China must take care in limiting distortions in its macroeconomic policies.
V. POLICIES FOR EMPLOYMENT-FRIENDLY GROWTH IN A GLOBALIZED WORLD ECONOMY
A Brief Summary of Findings
China achieved a very high rate of growth in income during the last decade - the decade of globalization - by following a strategy of export-led development. China's employment performance during this period has been more ambiguous. The principal problem has been the low headcount rate of labour absorption in industries. We have surmised that this was largely due to a hidden increase in employment in the form of a reduction in underemployment in state and collective enterprises. One might take the optimistic view that in efficiency terms the outcome was quite favourable in so far as the effective use of labour increased due to a reduction in hidden unemployment. One would however have to recognize the unfavourable outcome from the standpoint of equity in so far unemployment rose. Urban open unemployment, as officially measured, still remains low by international standards. But this is because much of urban unemployment remains concealed in state and collective enterprises and the unemployed members of the large migrant labourers are not included in official estimates of urban unemployment.
During the period of globalization the inequality in the distribution of income increased. The evidence for the period 1984-90 shows that the incidence of poverty was at best unchanged as a proportion of population and rising in absolute numbers. Evidence for the early 1990s suggests that the incidence of urban poverty has increased significantly. For a country experiencing an unprecedented rate of growth in per capita income this is an extraordinary experience. This outcome was largely due to the concentration of the benefits of export-led growth in the coastal provinces and the failure of this growth to be transmitted to the inland provinces, especially their rural areas. The weakness of the backward linkage of export-led growth was due to the limitations of infrastructure and physical restrictions that prevented factor movements. The rise in urban poverty in recent years was due largely to the increase in unemployment, induced by the drive for efficiency in an environment of global competition, without an adequate safety net. This is the context in which future policies for a more employment-friendly and poverty-alleviating strategy of growth must be designed.
The Magnitude of China's Employment Challenge
China's employment targets need to be put in the proper perspective in order to judge their feasibility. An illustrative employment profile for China during the Ninth Five-Year Plan (NFYP), 1996-2000, is presented in Table 12. Its benchmark figures refer to 1995 and are based on the extrapolation of the official figures shown in Table 2 for 1994. The net increase in labour force over the NFYP period, implying a realistic annual growth rate of 1.4 per cent, is the projection of the State Planning Commission (SPC). Urban benchmark labour force includes the official estimate of the resident labour force and the estimated 50 million migrants. This is projected to grow at 2.1 per cent per year. Since the "natural growth" of urban labour force is likely to be a shade lower than the overall growth rate of labour force, this projection allows for an additional 10 million net migrants from rural areas over the NFYP period which seems consistent with the SPC projection. Benchmark underemployment in state and collective enterprises is assumed to consist of 20 per cent of their employees and benchmark unemployment/underemployment of the migrant workers is assumed to be 20 per cent. This gives an effective (i.e., "full-employment equivalent") benchmark urban employment of 183 million. By the end of the NFYP urban unemployment will be allowed to go up to 12 million, 4.8 per cent of the labour force, a figure that is roughly consistent with the SPC projection. If all underemployment, and unemployment in excess of 4.8 per cent of the labour force, is to be eliminated by the end of the NFYP, effective urban employment must grow at an annual rate of 5.6 per cent over the plan period. How feasible is this target?
Table 12. Illustrative Employment Projections for the Ninth Five-Year Plan Period (1996-2000): Figures in Millions
1. Benchmark employment 625
2. Benchmark urban resident employment 172
3. Benchmark urban resident unemployment 5
4. Benchmark labour force (1+3) 630
5. Benchmark urban resident labour force (2+3) 177
6. Migrant labourers in urban areas 50
7. Total benchmark urban labour force (5+6) 227
8. Urban underemployment in state
& collective enterprises 29
9. Unemployment/underemployment of migrants 10
10. Total benchmark urban
effective employment (7-3-8-9) 183
11. Increase in labour force over NFYP 45
12. Increase in urban labour force over NFYP 25
13. Urban unemployment at the end of NFYP (4.8%) 12
14. Effective urban employment
at the end of NFYP (7+12-13) 240
15. Annual increase in effective
urban employment over NFYP 5.6%
16. Benchmark rural labour force/employment 403
17. Increase in rural employment over NFYP 20
18. Annual increase in rural employment over NFYP 0.97%
The NFYP has a target GDP growth rate of 8 per cent. Using the elasticities shown in Table 7 this means a 10.4 per cent growth for industries and an 8.2 per cent growth for services or approximately 9.5 per cent for the urban economy as a whole. The elasticity of employment for services has in the recent past been close to 0.6. If the elasticity of employment in industries approaches 0.6 - a significantly lower figure than was achieved by Korean industries in the 1970s - then the target growth in urban employment will be well within the range of feasibility. The rural counterpart of the scenario is as follows. Official benchmark rural labour force is relieved of the migrants who have moved to urban areas. A third of the future increase in rural labour force will migrate to urban areas. Employment in the rural economy will need to grow at an annual rate of less than one per cent. To the extent that a combination of an increased absorption of labour in agriculture and increased employment in rural industries and services, including those in newly-created small townships, may result in a growth in employment of more than one per cent, the prevailing underemployment in agriculture will decline though not be eliminated. Prima facie these tasks do not appear beyond reach once China adopts the right kind of employment and development policies. We next turn to a discussion of these policies.
Continued Growth Based on International Competitiveness
The maintenance of a high and efficient rate of growth, based on international competitiveness, is a necessary precondition for the alleviation of China's problems of unemployment and poverty. China's growth policies have met such great overall success that it is unnecessary to discuss the whole range of such policies. Instead we shall concentrate on a few essential elements.
One of the remaining tasks is to make further progress by way of reforming the trade regime, the price regime and the regime of direct controls and regulations that condition the system of incentives. At this time all these segments of the incentive system are still subject to arbitrary interventions. The direction of socially desirable investment is not always easy to identify. With the increasingly important role of the private sector, it is urgent to make the incentive system reflect social scarcities and priorities more accurately. This is essential to ensure the adherence of China's export-led growth to the country's comparative advantage in labour-intensive industries.
Growth should continue to be based on international competitiveness which has so far been the key to China's export-led growth in the era of globalization. As outlined in section III, the key determinant of international competitiveness is the unit labour cost in foreign exchange which has three components: (i) the difference between the rates of change in real wages and labour productivity; (ii) the difference between the rates of increase in cost of living and producers' prices; and (iii) the change in the exchange rate.
During the last decade China was successful in avoiding an increase in the first element. It was able to contain its moderately rapid growth in real wages within the limit of the growth in labour productivity. It should be recognized that the growth in real wage per worker was accompanied by a substantial increase in the "intensity of employment" per worker (i.e., a reduction in the degree of underemployment in state and collective enterprises). Real wage per unit of work effort increased at a smaller rate than real wage per head. This means that the increase in labour productivity has so far been achieved in state and collective enterprises largely by reducing the degree of underemployment. To this extent the apparently healthy rate of increase in labour productivity is deceptive. In the immediate future this process should continue to provide China's industries with a source of growth in labour productivity. As underemployment in industries gradually vanishes, further increases in labour productivity must be achieved by endowing the labour force with increased human capital. During the last decade, China's investment in social sectors - education, health and related activities that are critical for the improvement of human capital endowment of the labour force - has fallen. Investment in social sectors fell from 1.3 per cent of GDP in 1985 and 1986 to 0.8 per cent in 1992 and 1993. These trends need to be reversed urgently if China wants to maintain the ability of its labour force to improve its productivity at a rate that is consistent with a decent improvement in living standard without an unsustainable rise in the real cost of labour.
China's success in containing the second element of unit labour cost was less commendable. This is because of the failure of China's macroeconomic policies to contain inflation to ensure that the rise in cost of living does not exceed the rise in producers' prices that is consistent with international competitiveness. The effect of inflation on international competitiveness was more than offset by changes in the other components of unit labour cost, especially the change in the exchange rate. As China moves towards full convertibility and a market-determined exchange rate, the issue of price stability will assume greater importance in the future. So far China has always acted decisively whenever the rate of inflation went out of control. The most recent experience - that of 1993/94 - however shows that macroeconomic controls have numerous loopholes. The tightening of credit in the second half of 1993 strained the state enterprises which were burdened with the requirement to finance a large concealed unemployment insurance programme. These enterprises were successful in pressurizing the People's Bank of China to relax its tight monetary policy. The effort of the government to bring down the level of fixed investment from its overheated 1993 level was less than successful due to the ineffectiveness of control over local government decisions. A great deal of work remains to be done to improve the effectiveness of monetary and fiscal controls.
Until recently China used the third instrument, the exchange rate, with great agility and success. China unified its dual exchange rate on 1 January 1994 and adopted a system that can be described as a managed float. With the labour market making a gradual transition towards a greater role for market forces and the continued uncertainty concerning China's ability to control domestic prices, the need to use the exchange rate to ensure international competitiveness will continue in the future. As already noted, China was unable to prevent an appreciation in the real exchange rate over the last two years. This trend needs to be reversed.
Labour Absorption in the Rural Economy
In recent years the rate of labour absorption in rural China has been declining steadily and employment in agriculture has been falling absolutely. Between 1991 and 1994 rural employment increased at an annual rate of 1.2 per cent while agricultural employment fell at an annual rate of 1.4 per cent. The illustrative projections above assume that rural employment will continue to rise, albeit at a slower rate of just under one per cent per year. One favourable factor is the projected reduction in the rate of growth of labour force to 1.4 per cent during the NFYP. Most of the job creation in the rural economy must take place in non-agricultural sectors. The government is well aware of this need and is planning to slow the tide of migration to urban areas by creating small townships in rural China with provisions for non-agricultural employment. It is however unrealistic to expect the indicated growth in rural employment without slowing the reduction of agricultural employment. Ways must therefore be explored for the stabilization, even an increase, in agriculture's labour absorption. One policy that deserves serious consideration is a reform in the system of land ownership. Investment and labour absorption in land improvement activities might increase substantially if the peasants were endowed with the permanent legal right to own land.
Improving Labour Absorption in Industries
We have demonstrated above that during the NFYP period China's industries should be able to absorb labour at a rate that is dictated by the need to employ its shares of the natural increase in urban labour force, the increase in migrant labour, the benchmark underemployment in state and collective enterprises and the benchmark unemployment and underemployment among the floating migrants. A major hope of expansion in productive employment in industries lies in the expanding role of the private industries. These industries in recent years have experienced the most rapid growth in employment. Careful promotion of these industries, avoiding the distortions that tend to reduce the labour intensity of investment, will go a long way to achieve the goal of rapid labour absorption in industries.
Much of the existing employment in industries is of course in state and collective enterprises. Comprehensive reform of state enterprises has been an ongoing process. The advice of the multilateral development agencies, e.g. the World Bank, has emphasized the urgency of shedding redundant labour as an integral part of the reform of state enterprises. Relocation of redundant labour must have its role in a programme of improving the efficiency of state enterprises. But pragmatism dictates that, as far as possible, China should concentrate on "growing out of inefficiency" rather than "downsizing to overcome inefficiency". Undoubtedly the extreme cases of labour redundancy and/or inefficiency must be dealt with by a reduction in employment and possible closure of enterprises. But an orderly transition towards an efficient restructuring of employment in China can not cope with the kind of labour shedding by state enterprises that has characterized the collective enterprises in recent years. Enterprise reform should focus on a comprehensive agenda - separation of social service responsibilities from enterprise management and a restructuring of enterprise debt - and limit reduction of employment to extreme cases and phase it over longer periods in less extreme cases.
Labour Market Policies
As economic reforms propel China towards a greater role of the private sector and a more market-oriented allocation of employment, a great many labour market institutions will need to be created and a multitude of services will need to be provided. This paper can not get involved in a discussion of these issues which have been dealt with is a recent ILO study. Instead three important aspects of policies will be highlighted.
The first of these relates to the physical restrictions on migration from rural areas to urban areas. The principal instrument for the enforcement of these restrictions is the system of residence permit without which a worker is not entitled to employment in formal urban enterprises or to housing and other benefits that registered urban residents are entitled to. Already these restrictions are breaking down and there has been a grudging acceptance of this fact through the granting of temporary work permits to nearly half the migrants and making them eligible for job introduction services. However, a majority of the migrants are still without any form of work permit and the benefits of temporary work permits are obviously less than the benefits of official residence permits. The discriminatory treatment of the migrants has created a duality in the urban labour market. The main reason behind the continuation of the system of residence permits seems to be the worry on the part of the government that unrestricted migration would pose a security threat and constitute a potential source of political instability. The point however is that physical restrictions are hardly an effective method of stemming the flow of migration. This has been amply demonstrated by the 50 million migrants who have moved in violation of prevailing restrictions. Policies should instead concentrate on the reduction of the difference in earnings between rural and urban areas by shifting investment and jobs to rural locations and by reducing the subsidies and benefits in kind that urban employees are entitled to. This brings us to the second aspect of policies affecting labour market. In recent years urban subsidies have been greatly reduced although some important elements still remain. The most important benefit of the residence permit seems to be the entitlement to heavily subsidized housing. Subsidy on housing has been reduced in recent years but still constitutes a very large source of income supplement to urban residents. A gradual and orderly elimination of this subsidy will both reduce the intensity of the incentive of the rural population to migrate and create the fiscal capability to make the structure of urban wages more differentiated to improve efficiency. Thirdly, remedies must be found for the very limited availability of retraining facilities and labour market services. Most of the redundant workers need to acquire new skills before becoming eligible for re-employment and most of the retrained workers need help from job placement agencies.
Regional Policy
China has so far consciously followed the policy of concentrating tax and fiscal incentives as well as investment in its coastal growth poles. Very recently, a shift in emphasis appears to be taking shape. The Fifth Plenary Session of the Central Committee of the Communist Party of China in September 1995 placed a great deal of emphasis on reversing the past policy and giving more support to economic development in central and western areas. A comprehensive set of policies have been outlined for implementation during the Ninth Five-Year Plan period. These include: the development of infrastructure in the central and western provinces; relocation of resource-processing and labour-intensive industries from eastern to central and western China; improving the prices of the resources of the central and western provinces to enhance their ability to develop; improving the attractiveness of these provinces to foreign investors; and shifting the allocation of credit in favour of the central and western provinces.
Demographic Policies
As argued in section II, China's demographic transition preceded economic reform. This has led perceptive analysts (see Sen, 1994) to suggest that China's demographic transition owes far more to its past pattern of development than to coercive policies for one-child family. The features of its past development that contributed to fertility reduction include: (i) the rapid spread of basic education, especially among women; (ii) the sharp reduction in infant mortality and the consequent high probability of survival of children; and (iii) widespread access to secure livelihood which reduced the importance of multiple children as a method of insurance.
While China's demographic transition has been impressive, it has still a considerable way to go to match the achievements of some neighbouring countries. It is vital for China not only to preserve its achievements in this area but also to make further progress. China's failure to make progress in further reducing poverty and the reversal of some of the above achievements in some areas signal a danger for the consolidation of past gain and further progress in demographic transition.
International Cooperation
In the last decade China has come out of comparative autarky to emerge with the largest volume of exports among the LDCs, the largest share of capital inflow into LDCs and by far the largest share of FDI going into LDCs. And yet China is not a member of the WTO or any regional trading bloc. The only international trade organization of which China is a member is the Asia Pacific Economic Council (APEC) which is nothing more than a consultative body. China will need to work out a system of international cooperation that is consistent with its role in an integrating world economy.
In recent times China has made important concessions to the demand made by the industrial countries that it can not enter WTO on terms that are available to LDCs. These concessions have given significant credibility to China's bid for WTO membership. China is almost certainly right in insisting on some differential terms of WTO membership while it no longer demands all the special preferential terms available to LDCs. China needs these terms to make an orderly restructuring of its industry and trade before it can operate in the world economy on equal footing with the advanced industrial countries.
The other issue of international cooperation relates to China's trade with other LDCs whose share of China's exports has declined during the decade of globalization. China's remarkable entry into the globalizing world economy has principally taken the form of its increased share of manufactured LDC exports to OECD markets. China's share in OECD manufactured imports from LDCs was virtually nothing in 1970. It rose to 9 per cent in 1988 and to 22 per cent in 1993. The growth of this ratio will at best slow down in the future. Given the projected growth of the OECD countries in the near future - 2.8 per cent per year, as compared to 4.9 per cent for the LDCs, during 1995-2004 according to the most recent World Bank estimates (World Bank, 1995b) - it is highly unlikely that China can continue to maintain anything like its current growth in exports without turning its attention to the LDC markets. The recent trend towards a greater diversification of China's exports as well as its improved competitiveness vis-a-vis other LDC exporters should help China in expanding trade with LDCs. China and the other LDCs should recognize that the simultaneous liberalization of their trade regimes provides them with the opportunity to substantially expand trade among themselves.
Capital Inflow
During the decade of globalization China has been transformed from a self-reliant economy into an economy significantly dependent on foreign capital inflow. According to the standard indicators of indebtedness, China is not yet experiencing a problem of external indebtedness. Instead China appears to have used its debt to its advantage by augmenting its investment and the acquisition of technology. It has also successfully insulated itself from the adverse effects of surges in capital inflow although in very recent years it appears to have failed to prevent a significant appreciation of its real exchange rate. China's vigilance towards the consequences of massive foreign capital inflow needs to be enhanced. In addition China should view a further increase in the ratio of capital inflow to GDP with caution. --- REFERENCES
Ahmad, Ehtisham and Yan Wang, 1991. Inequality and Poverty in China: Institutional Change and Public Policy, The Development Economics Research Programme, London School of Economics, CP No. 14 (July).
Bhagwati, Jagdish, 1995. The World Trading System: The New Challenges, Manila, Asian Development Bank Conference on Emerging Global Trading Environment and Developing Asia, May (Processed).
Boltho, Andrea, 1994. China's Emergence - Prospects, Opportunities and Challenges, International Economics Department, The World Bank.
China State Statistical Bureau (China SSB), 1990. China Statistical Yearbook 1990, State Statistical Bureau of the Peoples Republic of China, Beijing.
China State Statistical Bureau, 1995. China Statistical Yearbook 1995, China Statistical Publishing House, Beijing.
China State Statistical Bureau, 1995a. China Labour Statistical Yearbook 1995, China Statistical Publishing House, Beijing.
Ffrench-Davis, Ricardo and Stephany Griffith-Jones (eds.), 1995. Coping with Capital Surges: The Return of Finance to Latin America, Lynne Riemer Publishers, Boulder.
Harrison, Glen, Thomas Rutherford and David Tarr, 1995. "Quantifying the Outcome of the Uruguay Round", Finance & Development, December.
Hertel, Tom, Will Martin, Koji Yanagishima and Betina Dimaranan, 1995. "Liberalizing Manufactures Trade in a Changing World Economy", World Bank Conference on the Uruguay Round and the Developing Economies, Washington, D.C., January.
ILO East Asia Multidisciplinary Advisory Team (ILO/EASMAT), 1995. China: Employment and Training Policies for Transition to a Market Economy, Vols. 1, 2 and 3. ILO Regional Office for Asia and the Pacific, Bangkok.
Jamal, Vali, 1995. Transitions, the Asian Way: Growth, employment and equity, ILO Regional Office for Asia and the Pacific (ILO/EASMAT), Bangkok, Draft (September).
Khan, A.R., 1995. Employment in a Globalizing and Liberalizing World: The Case of the Philippines, ILO South-East Asia and the Pacific Multidisciplinary Advisory Team, Manila (Processed; forthcoming as a monograph in 1996).
Khan, A.R., K. Griffin, C. Riskin and Zhao Renwei, 1992. "Household Income and Its Distribution in China", China Quarterly, No. 132 (December).
Khan, A.R., K. Griffin, C. Riskin and Zhao Renwei, 1993. "Household Income and Its Distribution in China" in Keith Griffin and Zhao Renwei (eds.), The Distribution of Income in China, Macmillan, London.
Lardy, Nicholas R., 1994. China in the World Economy, Institute for International Economics, Washington, D.C.
Lim, Lin Lean, Gyorgy Sziraczki and Zhang Xiaojian, 1995. Economic Performance, Labour Surplus and Enterprise Responses: Results from the China Enterprise Survey, ILO, Beijing, August.
Mazumdar, D., 1993. "Labor Markets and Adjustment in Open Asian Economies: Korea and Malaysia", World Bank Economic Review, September.
Rawski, Thomas G., 1979. Economic Growth and Employment in China, Oxford University Press, New York.
Sen, Amartya, 1994. "Population - Delusions and Reality", New York Review of Books, September 22.
United Nations, 1993. World Economic Survey 1993, United Nations, New York.
United Nations, 1995. World Economic and Social Survey 1995, United Nations, New York.
World Bank, 1985. China: Long-Term Issues and Options, Johns Hopkins University Press, Baltimore.
World Bank, 1990. World Development Report 1990, Oxford University Press, New York.
World Bank, 1992. World Tables, Washington, D.C.
World Bank, 1992b. China: Strategies for Reducing Poverty in the 1990s, Washington, D.C., June.
World Bank, 1993. World Tables, Washington, D.C.
World Bank, 1994. China: GNP Per Capita, Washington, D.C.
World Bank, 1994a. China Country Economic Memorandum: Macroeconomic Stability in a Decentralized Economy, Washington, D.C. (October).
World Bank, 1994b. Global Economic Prospects and the Developing Countries, 1994. Washington, D.C.
World Bank, 1995. World Development Report 1995, Oxford University Press, New York.
World Bank, 1995a. World Tables 1995. The Johns Hopkins University Press, Baltimore and London.
World Bank, 1995b. Global Economic Prospects and the Developing Countries 1995, Washington, D.C.
World Bank, 1995c. China: Public Investment and Finance. Washington, D.C.
World Bank, 1996. World Bank News, Volume XV, No. 10, March 14.
[http://zhu/internet/paper/footer.htm]