Opinion

The Great Debate

China’s growth obsession may spawn jobless upturn

By Wei Gu
January 7, 2009

Wei Gu – Wei Gu is a Reuters columnist. The opinions expressed are her own –

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.–

Comments
10 comments so far | RSS Comments RSS

The authorities have realized what you have said,and they are doing their best ot crub this trend convyed by your stuff.Now i am preparing for the postgraduate exam,there is one discipline called politics(Zhengzhi in Chinese),what i have to learn by heart is the advices offtered by you.

Posted by JOE | Report as abusive
 

You made a good argument in China’s obsession to keep the economy growth by at least 8 percent. The academics and analysts are now placing bets on both sides.

In fact it is true that the job market is more important than whether it can hit the target. There are still so many internal conflicts in China. The stable job market can largely help to stabilise the social condition.

Perhaps the digital “eight” is too special for the Chinese. It has a metaphor of fortune and wealth. Particularly they are so proud of their shining Olympic Game which was held on 8-8-2008 (and 8pm). So you can see it is highly likely that they believe the digital “eight” can really help to bring some luck.

Posted by Leno | Report as abusive
 

Although paying more investment to the labor-intensive industry would result in incresing of employment ,it
would inhance the structural problem of Chinese economy.So to some extent ,it is a dilemma for the authority,who is pursuing the scientific development .

Posted by wtangya | Report as abusive
 

I agree with many valuable points made. However, one should consider “obsession” as beneficial. Obsession will mean pressure to find employment. One point not mentioned was the use of public-works (Keynesian style solutions) to help combat potential unemployment. I think it likely that we will see a government programme rolled out to develop large amounts of infrastructure like rail and road. This is more likely when considering Beijing’s “Go West” policy to develop inner and western regions of China. However, caution must be acknowledged to avoid such issues as building bridges to no where, as was seen in Japan. Less we forget China’s impressive currency reserves to support these potential public schemes.

Posted by Sebastian | Report as abusive
 

It is easy to comment on what the government has done to protect the economy from financial crisis, however, it is quite difficult to take an effective and efficient measure to realize it in a country with a population of 1.3 billion. I don’t see any difference between the measures taken by Obama and those by China. Don’t always complain, anyway, the government is taking actions.

Posted by Michael | Report as abusive
 

well, the problem’s hard to solve. when the era came to a technology world, those with good educations could easily get a decent position; while those had nothing but manual capacitis had to struggle for survive. The whole economy is benefiting from the high-tech, unfortunately we sometimes outsmart ourselves, the high-tech now take its toll, that is, few employment since we are neglected before machines and PCs comes!

Posted by maohaifeng | Report as abusive
 

It would be difficult for China to solve these problem at this stage when around the world are heading into recession. Even though China have try to stimulus with $600 billion dollars on infrastructure project and others.

China May be a mother of all manufacturing around the globe, but consumption and demand are weak could cause further down turn in China. If demand falling over 50% how can china keep the economy growing by at least 8 percent. I would said end of this year could be good for china when everything start to recover.

 

A reluctant choice, in my opinion, has been made by the Chinese Gov to face up to such a dilemma as to keep on running or to have a rest.

These years, China is happy to see the fourth position it has got among the world’s economies. However, this decent position is far to cover up the economic gap between China and other western countries, whose GDP may close to China’s or even lower. Relatively poor infrastructure, area-unbalanced development and other issues are afflicting China, who has found out that there are still a long way to go.

In the mean time, most people there feel tired. Peasants from rural areas are living from hand to mouth. To find a way out, they are sending their young people to the big cities to make some money. Ironically, people, living in the urbanized areas, struggling with the increasing price of foods and commodities, are angrily joking there that they would rather like to move to countryside, where at least they would be able to afford a place to live in.

So, it’s really a difficult situation for Chinese Gov to make a decision. Although the Communist Leaders, preaching “harmony society” everywhere, are definitely worring that the unemployment and poverty would lead to riots, now they have decided. As the Chinese saying goes, “To cross a river by probing the stones”, now they have stepped on the GDP stone, leaving the miserable unemployed behind. Whether it is the right one or a dead end. We have to wait and see.

Posted by Frank | Report as abusive
 

A comment on the following from the article:

>>Most of China’s migrant workers are employed by small
private exporters.

The above just can’t be true and isn’t. A site should be given for facts that are questionable. Unless the author thinks China consists of the costal cities. I don’t think the government can capture the numbers of rural migrants anyway.

>>Large investment concentrated in a few industrial sectors could make urban-rural income disparity and overall inequality even worse.

The above was confusing, going which way? For example if in coal the effect depending on the projects could be a great boost to rural migrants or hurt them.

 

It is interesting to watch. China is in a predicament right now and very vulnerable as is Russia. I don’t believe that it is because of wall street fraud and irresponsible homeowners. I think there is an economic battle being waged here on the global scene. It’s hard to spend money on your military when when your economy is in the tank.

Posted by jason | Report as abusive
 

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