This is the fourth installment of an occasional series on China's transformation.
Understanding employment is fundamental to understanding how contemporary China works. The need to maintain near-universal employment — or at least the appearance of it — forms the bedrock of Chinese political economy. It structures the financial system, long-term industrial policy, the incentive structure for bureaucrats and everything in between. Strikingly, post-Mao Chinese policy and propaganda exists to ensure that unemployment is limited and, just as important, largely invisible as a nationwide phenomenon. Whether concerning the anti-corruption campaign or the government's efforts to loosen restrictions on the household registration system and spur urbanization in the interior, employment is China's fundamental and overriding imperative.
But several recent events bode ill for China's industrial sector and, in turn, the people it employs. In 2015, Stratfor forecast that average home prices would steadily decline and growth in real estate investment would slow in regions such as northern and northeastern China. Potentially destabilizing employment crises would subsequently afflict these regions, which depend on construction and heavy industry.
In September, for example, Heilongjiang Longmay Mining Holding Group Co., northeastern China's largest coal mining enterprise, announced it would cut more than 40 percent of its 240,000-strong workforce in the coming months. In mid-December, authorities in Guangdong province arrested three prominent labor organizers on charges of fomenting unrest. Meanwhile, according to the China Labor Bulletin, the number of large-scale labor-related protests rose to a four-year high of 301 in November, up 30 percent from the previous month and more than double the monthly average in 2014. In the first three weeks of December alone, at least 252 incidents were recorded.
China is certainly not the first country to have organized its political and economic institutions around the goal of preventing unemployment.
Even if one disputes these figures (the actual rate is likely much higher), it is clear that labor unrest is on the rise — as is the government's anxiety that unrest could boil over unless it is effectively managed. Local officials and business leaders in China's depressed coal and steel country, and even in southeastern manufacturing hubs such as Guangdong, doubtless are dreading the Chinese New Year holiday (Feb. 8), as workers across the country begin to demand payments often held in arrears for six months or more. The same could be said of the hundreds of thousands, if not millions, of workers whose jobs, paychecks and pensions hang in the balance.
In this installment of our occasional series on China's evolving role in and relationship to the world system, we consider how the need to maintain high employment has shaped China's development in the decades since Mao Zedong's death in 1976, especially as demographics and the international division of labor from the poorest to wealthiest economies, or value chain, change. In doing so, we hope to shed light on what makes China's current predicament different from those faced by Japan, South Korea and Taiwan between 1960 and 1990. In turn, we will explain what China's economic situation means for its government's reform initiatives in 2016 and beyond.
Employment in East Asia
China is certainly not the first country to have organized its political and economic institutions around the goal of preventing unemployment. The fear of unemployment and the social instability it breeds sits, in many ways, at the heart of modern conceptions of the proper role of the state in regulating economics. For example, Western Europe and the United States, having extended voting rights in the 19th and early 20th centuries, made monetary policy decisions with an eye toward keeping employment high and protecting the economic well-being of their newly empowered constituents. Out of this process grew the view, spurred by the global depression of the 1930s, that absent the state's mediating hand, capitalism would generate iniquities so great they would undermine the foundations of society. Translated into monetary and fiscal policy, this view became known as Keynesianism, a doctrine that dominated economic decision-making in Europe and the United States for more than four decades.
But in industrialized countries with well-developed democratic institutions, such as the United States and much of Western Europe after World War II, the pressure to maintain employment had limits. These countries could count on the adaptability of their educated, mobile and technologically savvy workforces and their globally competitive enterprises to ensure that opportunities in one part of the economy would compensate for unemployment elsewhere. Moreover, regularly scheduled elections ensured that in the worst cases economic disruption might doom individual leaders or administrations but would not threaten the legitimacy of the government itself. Thus, while the focus on employment was a central component of fiscal and monetary policy in Western democracies, it was not the only determinant for economic decision-making.
The same could not be said for the export- and investment-led economic growth model of the newly industrializing economies of East Asia. The governments of postwar Japan, South Korea in the wake of colonialism and a devastating civil war, and post-1949 Taiwan each faced large and rapidly growing pools of unemployed urban workers, many of them migrants recently displaced by war and land reform. Each government responded by launching state-led industrialization programs unprecedented in scope and speed and unique in their use of state power to foster industrial giants capable of competing in the global marketplace. For all three countries, as well as for China and to some extent for the post-colonial states of Southeast Asia, rapid export-led industrialization was first and foremost a means to generate employment, ensuring social stability and the security of their fragile governments.
Also like China, all three countries eventually exhausted the utility of their labor-intensive, low-cost export growth models and were forced to shift up the value chain to produce higher-value goods. Crucially, when the time came for Japan, South Korea and Taiwan to move from producing low to high value-added industrial goods, these countries could rely on the ever-growing and ever-wealthier foreign consumer markets — namely, the United States — to take in the swelling volumes of expensive goods they produced. No matter how much these countries produced throughout the 1980s, 1990s and 2000s, their goods almost always found ready overseas buyers.
Consequently, Japan, South Korea and Taiwan did not need to rapidly boost domestic consumption to offset declines in antiquated export industries. They could continue to rely on exports, or at least the financial returns on exports produced by their companies' overseas operations, to fund employment and maintain quality of life back home. To be sure, all three today boast large consumer markets, but most of their imports come from energy, raw materials and parts for processing and re-export, rather than imported goods for consumption. To a far greater extent than the United States and most of Western Europe, these economies rely on manufacturing and exports to drive growth, not services and consumption.
China's Developmental Experiment
Since the introduction of its economic opening and reform policies in 1978, and especially in the decades following the protests in Tiananmen Square, China has followed a similar path to those of Japan, South Korea and Taiwan during the 1960s-1980s. Like these earlier incarnations of the developmental state, China has used state power to foster globally competitive "national champions" in areas including energy, construction, shipbuilding, finance and heavy industry. Like Taiwan, it has used these state-owned conglomerates to lay the foundations for a private sector-led manufacturing export boom. More recently, it has focused on cultivating, like South Korea and Japan, several privately owned but state-aligned technology and manufacturing firms. Beijing looks to these firms to drive the country's nascent shift up the global value chain. And like its predecessors, China has done this to maintain employment across an increasingly diversified workforce.
It is unclear whether China's shift up the value chain and cultivation of a capable workforce can occur quickly enough to offset the impacts on employment of declines in low-cost exports and a slowing construction sector. What is clear is that unique challenges stand in Beijing's way of doing so.
China may simply be too large a producer — and the United States, Europe and other advanced economies too small of consumers — to follow the pattern established by Japan, South Korea and Taiwan exactly.
In the decades following World War II, Japan helped create a clear international division of labor, enabling it to grow its way out of poverty through exports to mainly American consumers. In time, as rising costs pressed Japan to advance toward higher value-added industry, South Korea and Taiwan took its place at the bottom of the international division of labor. Critically, this process coincided with the gradual de-industrialization of the U.S. economy and the movement of the United States' workforce into service-oriented sectors.
All of this worked because of the progressive industrialization of the East Asian developmental states and the U.S. economy's shift toward services and consumption. The size of the American consumer market was such that even as China entered at the bottom of the supply chain in the early 1990s, pushing South Korea, Taiwan and Japan further up, there was still no shortage of demand.
Today, as China struggles to carve out its own place in the global market for high-tech and advanced manufactured goods (all the while trying to retain its grip on low-cost export sectors), it is unclear whether global market demand is, or soon will be, sufficient to absorb future Chinese output. China may simply be too large a producer — and the United States, Europe and other advanced economies too small of consumers — to follow the pattern established by Japan, South Korea and Taiwan exactly.
Of course, the Chinese government is aware of the pitfalls of relying too much on demand to drive the economy's shift from low to high value-added manufacturing. Beijing's decision to highlight and accelerate financial reforms in the second half of 2015 suggests as much. Instead, by relaxing controls on the yuan, instituting programs such as depositor insurance and a strong social safety net, and accelerating urbanization in the interior of the country, the government intends to cultivate a domestic consumer base sufficient to absorb more of what Chinese industry produces. But doing so on a scale sufficient to underpin nationwide economic growth will be extraordinarily difficult. Though it is growing, private household consumption in China is 36.5 percent of gross domestic product, which is extremely weak in comparison with other export-intensive economies such as Germany, Japan and South Korea (all of which boast consumption-to-GDP ratios over 50 percent). Cultivating strong and sustainable household consumption takes time, and in China's case it will require significant financial reforms aimed at improving the confidence and financial power of Chinese citizens.
In following the export-led growth model pioneered by Japan, South Korea and Taiwan, China's size presents problems. Certainly these countries have suffered setbacks and crises as they developed economically. Japan, in particular, has struggled to free itself from the constraining institutional legacies of its developmental past. But none faced quite the same web of challenges that China does: to cultivate an advanced manufacturing-based economy grounded in high levels of human capital (and correspondingly high wages) while creating the high-income consumer base necessary to sustain that economy. Where Japan, South Korea and Taiwan could look to the American consumer to help them climb up the value chain, China must look first and foremost to itself.
For China, 2016 is only the beginning of this long and likely arduous process. In the years to come, China will have little recourse but to rely on other countries to consume the increasingly advanced goods it produces; its safest bet is to beat out South Korea and Taiwan on price if not quality. In the meantime, China's leaders will do what they can to roll out reforms and initiatives that they hope will begin to generate the kind of domestic consumption the country desperately needs. However, this will almost certainly come at the cost of full employment. The question is whether China's political structure can bear the social consequences.