China: Preserving Employment at a High Cost

3 MINS READNov 21, 2008 | 12:02 GMT
Dong Jinlin/ChinaFotoPress/Getty Images
Chinese Social Security Minister Yin Weimin said Nov. 20 that the employment situation in China is critical and could get worse. Vice Minister Zhang Xiaojian added that unemployment levels could reach 4.5 percent by the end of the year, up from the current 4 percent, and could go higher still in 2009. The figure of 4.5 percent sounds low, and it in fact only represents officially registered urban unemployment. It does not take into consideration China's migrant workers (some 200 million strong) or those laid off by state-owned enterprises. Employment levels have long been a critical measure of economic performance and a driver of economic policy in China. In recent years, Beijing has set its target gross domestic product (GDP) growth rate based on the estimated pace needed to keep up with new workers entering the workforce, and to absorb those laid off or made redundant as industries are restructured, made more efficient or move up the skill scale. Prior to the Asian economic crisis of 1997-98, Beijing pegged necessary growth at around 7 percent. It raised this figure to 8 percent after the crisis, and now puts the critical number at 9 percent. The infatuation with employment figures is seen clearly in the series of policy pronouncements coming out of Beijing, many of them reversing efforts to slow growth in recent years and shift away from the country's overdependence on exports and investment flows. Chinese officials have implemented tax cuts and reforms to encourage export and high-employment industries. They have frozen the minimum wage, ending a fairly steady rise in wages. They have also increased export rebates for companies, in essence subsidizing exports — something that will likely raise complaints from other countries in the future. They have required government approval for any substantial layoffs in certain provinces. Finally, they have reduced loan quotas. There is still talk of shifting the economy to one driven by domestic consumption rather than one still dependent upon exports and investment flows; in practice, however, Beijing is focusing on propping up these less-efficient but more-reliable engines of money, growth and employment. While this may help China weather the crisis as it did in 1998-99 and in 2003, that comes at a cost. Beijing once again is pumping money and incentives into the low-skilled, labor-intensive export-based industries for the sake of maintaining employment levels. This means government-subsidized inefficiencies, selling at below cost to maintain employment, and probably a return of growing bad loans as companies borrow to keep employment despite falling profits. This intense focus on employment as the imperative is what has kept the Chinese from ever really restructuring to a more sustainable, rather than a growth-based, economy even when they knew the pitfalls of the model followed by Japan, South Korea and the Asian tigers. While China may hold employment and social stability in check with these measures, it may well come out of the immediate crisis weaker, flabbier and even less efficient than before.

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