Is the undervalued Yuan really a red herring? Is China’s economic miracle dependant upon artificially low wages?
As an article in the China Daily recently points out, the proportion of China’s GDP that goes to wages has been steadily declining for 22 years. This revelation is in stark contrast to China’s neighbours who also followed export driven models. So the question is, is China’s continued competitiveness really due to a forced, and prolonged, stagnation of industrial wages?
China’s pre-eminent success at implementing an extreme mode of the East-Asian export driven economic miracle has been dependant upon a number of critical factors; both domestic and international. On one hand, China’s emergence onto the global stage coincided with the an unprecedented explosion in international trade that saw the traditional industrial workhorses of the world embark on a program of de-industrialisation the likes of which had never been seen before, beginning in the 1980s. This explosion was driven primarily by two factors – a dismantling of capital restrictions around the world and the ubiquitous adoption of containerisation.
As China adopted the model already proven by economies such as Japan, Korea, Hong Kong and Taiwan, the world was teetering on the edge of the single greatest shift in manufacturing patterns since the dawn of the industrial revolution. And as the western world’s appetite for cheaply produced foreign imports grew, China was set to take full advantage of its enormous levels of cost competitiveness locked within its massed pools of cheap labour. But that doesn’t explain why China was able to remain so competitive long after other countries following similar models found their competitive edge dulled. Taking a closer look at the other nations that have followed similar export driven models, it looks possible that urban biased policies and neglect of rural development may have forced industrial sector wages to stagnate – keeping China cheaper, longer.
Arguing against this point, many international observers contend that China’s competitiveness is due to fixed exchange rate system that many contend pitches the Yuan at an artificially low level against major currencies – most notably the dollar. However, even if the Yuan were to appreciate by as much as many of the fiercest critics in the US administration currently demand, 20-30 percent, that would still not make Chinese industrial wages anything close to that of its most comparable neighbouring economies – for the sake of argument say, Korea or Taiwan.
Another school of thought contends that China’s continued tapping of vast rural inland labour pools has created the illusion of unlimited supplies of cheap labour – appearing to go on long after many comparable countries ran dry at equivalent levels of development. But a closer look at the underlying economics paints a slightly less obvious picture.
In many ways, this illusion of bottomless pools of low cost labour can be seen not, in fact, as a function of population structure – but as a consequence of economic policies that, intentionally or not, slant the balance of economic development in favour of coastal populations at the expense of rural populations creating an almost unending exodus from the land.
The impact of China’s imbalanced development can be seen by comparing the country’s development with that Japan, Korea and Taiwan – societies composed of similar demographics in terms of rural and industrial composition during similar stages in their development.
In the case of all three of these economies, the rural/urban income divide never reached the polarised levels currently seen in China largely due to wealth redistribution programs and fiscal measures such as infrastructure spending, agricultural development loans and grants, tax relief, import tariffs, education spending and farm subsidies. This ensured agricultural workers remained on their land. Improved infrastructure meant factories could be built closer to rural populations, allowing the local populace to supplement their incomes without abandoning their ancestral homes to become full fledged migrant workers. These policies had two main consequences; the first saw rural incomes rise to between 60 and 95 percent of urban levels across the economies; the second was cut off the flow of cheap labour into the cities and industrial hubs, forcing urban wages up in return.
Although the overall effect of these policies across the three economies was largely similar – effectively removing the rural/urban wage divide – the motivations for implementing them varied. In the case of Japan, the ruling Liberal Democratic Party depended on the rural demographic to maintain it democratic mandate; in the case of Taiwan and Korea, in the context of the Cold War, it was to maintain food security and pre-empt any leftist sympathy emerging from the rural classes as a result of the social dislocation traditionally caused by rapid economic development.
This urban bias and the resulting redistribution of resources from country to town has created numerous negative effects within the Chinese economy.
One such negative effect of this agrarian crisis on the Chinese economy has been the creation of over-dependence on continued cheap labour. As comparable economies developed and industrial wages rose, this drove a corresponding development in overall economic efficiency within industrial production cycles as the relative cost of research and development fell in relation to wage costs. This would certain seem to be the case in China where energy input per unit of GDP has actually seen a net increase since the end of the Mao era.
Another negative effect has been to contribute to the excessively high savings rate across the economy. As I pointed out in a previous post addressing overcapacity, the savings rate is something of a misnomer in that it doesn’t necessarily mean that people are directly saving – instead it implies a more general disparity between production and consumption which can ultimately be fuelled by stagnating wages within a growing economy. This excessively high savings rate undoubtedly contributes to China’s over-dependence on the global economy and its inability to stimulate domestic demand in times of economic uncertainty.
But perhaps the most serious, given the government’s current fear of social turmoil is the simple desperation and hopelessness caused by the economic situation of those caught in the rural poverty trap.
In the next post in this series I will look at the reasons how this imbalance was created and way in which it can be addressed.
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