China’s growth obsession may spawn jobless upturn
China is pulling all the stops to keep the economy growing by at least 8 percent, a pace considered necessary to absorb millions of migrant workers and graduates that hit the job market every year.
Ironically, with all its attention focused on the vigorous “defense of the eight”, Beijing risks losing sight of its ultimate goal — creating enough jobs to preserve social peace — and may end up engineering a jobless recovery.
Not only the rate of growth is important, but also its sources. Expansion led by capital-intensive industries will not be as effective in creating jobs as one driven by more labor-intensive sectors.
Statistics of the past three decades show that with the focus on investment, rise of heavy industries and China’s wish to move up the value chain, more and more economic growth has been needed to create the same number of jobs.
The latest efforts to shield the world’s fourth largest economy from the global financial crisis, including a nearly $600 billion stimulus, also focus on capital-heavy infrastructure projects.
“If your concern is jobs then targeting growth is not the best approach because the link between growth and jobs is not fixed, and different sources of growth have widely different impact on employment,” says Bill Bikales, a senior economist for the United Nations Development Program.
“It is unusual that China starts with a growth target,” He added. “(U.S. President-elect Barack) Obama has spoken several times about how many jobs he wants to create but he does not say how much growth he wants to produce.”
To boost employment and maintain social stability, Beijing should put more emphasis on labor-intensive sectors and move away from capital-intensive heavy industries that have been favored in recent years, several economists say.
Traditionally, China’s development policies have favored capital-intensive industries, such as auto, steel, machinery that are seen as key to modernization and sustained economic growth.
NEGLECTED LIGHT INDUSTRIES
In recent years the authorities have tried to move away from low value-added light industries, even though they have played a big part in the boom of the past three decades and have a potential to create more jobs, especially for unskilled workers.
China reckons it needs to add about 9 million jobs every year — about 3 percent of its urban workforce — for the 8.4 million some villagers moving to the cities every year. However, since early 1990s it has met the goal only when growth exceeded 10 percent. And over the years the link between growth and jobs has weakened.
In the 1980s, each 1 percent increase in gross domestic product led to a 0.3 percent rise in employment. This has dropped to a mere 0.1 percent jobs gain in the following decades, leaving the authorities undoubtedly frustrated that the country’s stellar growth performance has had such a modest impact on jobs.
The stimulus package and other measures aimed to help leading industries may help Beijing hit its growth targets, but may again disappoint leaders on the jobs front.
“Investing in capital-intensive sectors can stimulate growth in the short-term but has limited impact on employment,” said Yang Du, chief of division of labor at the Chinese Academy of Social Science, a top government think tank. “This might lead to a jobless recovery.”
Urban registered jobless rate stood at 4.0 percent at the end of September, which does not count migrant workers. The real unemployment is closer to 9.4 percent, reckons the Chinese Academy of Social Science. The World Bank estimated in its December report that right now, China needed to grow 9.5 percent to keep unemployment steady.
Premier Wen Jiabao has urged state-owned companies to “do everything possible” to refrain from job cuts. He said the auto industry’s current difficulties concern him the most because the industry has a long supply chain.
But as China’s companies are increasingly privatized and more profit-minded, ordering them to refrain from laying off people is unlikely to prove very effective.
The premier is probably betting on a wrong horse with his focus on the carmakers, not only because cars are being sold less briskly but also because growth in such capital-intensive industries is not effective in absorbing migrant labor, a group that the financial storm hit hardest.
Most of China’s migrant workers are employed by small private exporters. Large investment concentrated in a few industrial sectors could make urban-rural income disparity and overall inequality even worse.
World Bank economists Jianwu He and Louis Kuijs suggest China should shift its focus to the services sector from industry, and recommend Beijing to let consumption, instead of investment and exports, to play a bigger role in the economy.
The authors acknowledge, however, that changes cannot be made overnight. Otherwise growth will collapse and employment conditions will still suffer.
“Reducing the importance of investment needs to be a gradual process and needs to go hand in hand with higher efficiency, more reallocation of labor out of agriculture, better allocation of capital, and a redirection of factors and resources towards sectors that require less capital,” they wrote in a report.
— At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund.–