LABOR, EMPLOYMENT AND SOCIAL SECURITY IN AN EXPANDING ECONOMY IN HISTORICAL PERSPECTIVE By Thomas R. DeGregori, paper prepared for keynote presentation at the China Labor Forum, Kunming, China, August 2006. I was unable to attend due to illness - paper was read on my behalf and then translated into Chinese.


          LABOR, EMPLOYMENT AND SOCIAL SECURITY IN AN
          EXPANDING ECONOMY IN HISTORICAL PERSPECTIVE
                                        By Thomas R. DeGregori
                                         University of Housto


Criticism of China's labor policies is loud and strident in advanced economies that are losing manufacturing and employment to China as more and more of the industrial base of these countries is being "outsourced." There is far less criticism of India's labor policies even though highly skilled IT positions have been outsourced to India in addition to the export-oriented textile industry that has grown up there over the last two decades. One need not even comment on the truth or falsity of the claims made against China to recognize that even if the most severe criticisms were true, they pale in comparison to the labor practices that characterized the transformation to industrialization of the currently advanced economies.
     First, it has to be recognized that the shift to an industrial manufacturing base has always involved a quantum leap of production over what went before it. This was no less true for England in the 18th century as it was for China from 1978 onward. For this to happen, certain preconditions and concurrent conditions are necessary. First there has to be a transformation in the non-manufacturing sector, primarily in agriculture. This is necessary both to provide the surplus labor to be employed in manufacturing (and other modern sectors as they emerge) and the surplus food production to feed them. England clearly had both in the eighteenth century which along with aggregate population growth, provided a steady stream of workers for industry and mining. China through ages experienced frequent famines down to recent times. Today, in spite of many difficulties and a very high population density in the most productive agricultural regions, China has a highly vibrant agriculture that over the last quarter century has not only kept ahead of population growth in basic food production but has also experienced extraordinary growth in fruit, vegetable, chicken, egg and pork production. The rich diversity of the diet has been reflected in the rapid increase in average height of the younger population which is considered the best indicator of improving nutrition. In addition, China has become the world's sixth largest food exporter and the third largest provider of food aid.
     With the exception of the city-states of Hong Kong and Singapore, all the East Asian and Southeast Asian countries that have transformed their economies over the last four or so decades have all had what could be described as dramatic transformations in agriculture from near famine conditions to nutritional adequacy or nearly so. This does not mean that they were necessarily totally self-sufficient in food production but it does mean that in importing some food products, being close to self-sufficient in others and even exporting food in some areas, they did not have to commit a disproportionate amount of resources to food imports and could therefore have stable macroeconomic policies which facilitated both capital inflow and freed up resources for domestic public and private investment. It is significant as well as being in line with historic development elsewhere, that from 1979 to 1986, the rural sector of the Chinese economy was expanding more rapidly that the urban sector as China was transforming its agriculture laying the foundation for more rapid manufacturing development. One need only be a tourist with several visits over the last three decades to notice the transformation in the nutritional status of the general population.
     Rapid economic expansion requires an even more rapid expansion in the labor force than that provided by freed-up from the agricultural sector. This was as true in 18th century England with its more labor intensive production but smaller scale of output compared to modern production with its more capital-intensive but larger scale output. (It should be noted that compared to what went before in the craft sector, the expansion of production was in many respects of an even greater magnitude than the modern transformations.) The Industrial Revolution was undertaken in England at a time when both birth and death rates were high. Though the high death rates affected mostly children, infectious diseases took their toll across all age groups which meant that large numbers of surviving children became orphans. Urban orphanages were an economic burden on society. Industry made them an asset as companies contracted to obtain them for manufacturing with there even being clauses indicating how many disabled children could be included in each batch of 100 child laborers. Child labor continued to be used extensively in industrializing countries on into the 20th century when legislature emerged limiting their use.
     In the East and Southeast Asian economies, the child demographics worked in a very interesting and beneficial way. Prior to their transformation, these economies had high birth and death rates with corresponding low life expectancies. The high birth rates meant that as they began their rapid transformation they had a large pool of young labor entering into their prime years of productivity. These countries also rapidly reduced their birth and death rates increasing their life expectancies. But since they previously had very low life expectancies, this meant that even with greatly extended life expectancies, there were far fewer people moving in to the older age groups. Given the lowered birth rates, it meant that for these countries, the dependency ratio - the ratio of those employed to those either no longer in the labor force or those not yet in it - was extremely favorable giving them was has been called a "demographic bonus." This has allowed them time to advance their economies to much higher levels giving them a far greater ability to handle the emerging issues of aging.
     Advanced economies continued to require a steady supply of cheap labor most of which is not fully covered by labor legislation. The industrialization of the United States was initiated in the late 19th century using a supply of immigrant labor from those parts of Europe, primarily Southern and Eastern Europe that were not experiencing any significant industrial growth. One can see the continuing need for cheap labor in the United States and Europe as immigration, legal and illegal has become a major issue in these countries as they are increasingly becoming dependent on labor from countries of significantly different ethnicities and/or religions. This in spite of the fact that these same economies are losing production to economies with lower labor costs. Poverty may be what is driving the immigrants from their homes seeking a better life but the continuing demand for cheap labor is the magnet that is attracting them to the United States and Europe.
     The East Asian economies all began their assent as low labor cost producers. Rarely mentioned is the fact that all of them were investing in education, scientific research (as well as benefiting from the international agricultural research) and infrastructure. The purpose for a country's economic development is to improve the life of its people which would include higher wages for its workers. A very important measure of success would be raising wages for industrial workers along with a more general rise in personal income across all sectors of the economy. To maintain low labor costs under conditions of rising real wages, these economies had to increase the productivity of labor both by continuing to move up the "technology ladder" to ever more efficient and productive technologies and by education and training to increase labor productivity. Ingenious technological means were often deployed to make labor intensive industries more productive. When the limits to increasing the productivity of these industries were reached, the rising economies of Asia almost completely abandoned the very labor intensive industries upon which their ascent had been based allowing their entrepreneurs to take these industries to other areas of Asia where the labor costs were lower. These are some of the same industries that the United States and Europe are attempting to protect (even with the expiration of the multi-fiber agreement) two centuries after they were central to initiating the Industrial Revolution. For United States and Europe with a large domestic consumer base, protectionism is costly both to the countries themselves and to potential exporters to them, it is nevertheless manageable. To the export oriented Asia Tigers, protectionism was not a viable option so that flexibility has become a critical component for sustained economic development.
     I was living in Bangladesh in 1988 and saw the Korean and Singaporean entrepreneurs investigating the possibilities for relocating their industries to a country whose leading export was raw jute. Today, 70% off Bangladesh's exports are textiles and it is considered to be one of the very few countries that can compete with China in textile production under a regimen of completely free trade. Similarly, in 1996 in Viet Nam, I saw the Taiwanese, Singaporean, Korean and Malaysian investments beginning the transformation of that country in any number of areas in which Viet Nam has become a significant competitor to Thailand in rice exports and to China in a number of areas of manufacturing. For the last decade, exports of ASEAN Countries such as Malaysia to their traditional United States and Europe market for electronic goods have been flat as their rising standards of living have made them less competitive for finished products. Nevertheless, Malaysia and other ASEAN countries have experienced rapid economic recovery since the financial crisis of 1997 by exporting components to China for final manufacturing and assembly and re-export. This has been to the benefit of the ASEAN countries, to China and ultimately to the consumers around the globe.
     It is important to note that investment and advances in basic education preceded the industrial transformations in England and the United States as well as the East and Southeast Asian economies that have transformed themselves over the last half century. And as the economies expanded, the education and research spending continued to grow at even a faster pace. Education and economic advancement strongly tend to result in slower population growth. In the 1950s, the countries that were to become the Asia Tigers had the highest rates of population growth ever recorded and were spending a vastly larger percentage of their GDP on education than was the case for other countries in comparable income levels such as most of Sub-Saharan Africa. Today the East and Southeast Asian economies with vastly larger GDPs, dramatic reductions in birth rates and with a much smaller percentage of their population of school age are providing educational opportunities for their school age population up through the University level (having developed some outstanding Universities) yet their education spending as a percentage of GDP is about half that of African countries most of which are having trouble providing basic education and literacy to their population. This is another instance of the demographic bonus for Asian countries. In many if not most of Sub-Saharan Africa countries, literacy rates are falling as is also the situation for the percentage of school-age children actually in schools.
     Along with education the research component has to develop. Countries have to have their own research capability. This is as true for those where the driving forces for initiating their transformation are foreign investment and technology transfer as it was for the economies that developed the technology and from where the foreign investment originates. In agriculture, it was the countries that had research and development capability that were able to take advantage of the potential of the Green Revolution. African countries largely were unable to participate in the Green Revolution for a number of reasons including not having the agricultural research infrastructure to adapt the high yielding crop varieties to their local conditions.
     One needs to distinguish between technology transfer where the recipients have the knowledge and skills to command the technology and those where the skill component of using the technology is largely operated and maintained by expatriates. In this latter case, the recipient country may have bought and paid for the factory but they do not own the technology because they lack the knowledge to command it and the capability of expanding into other sectors and economic activities. In others words, the technology transfer is not sustainable and therefore, neither is economic development. We too often identify technology with its hardware embodiment and ignore at our peril, the intellectual software that went into its development and is required for its sustainability and continued development. Technology as being primarily and predominantly ideas is a conceptualization that I have long promoted. Many countries with a long history of receiving foreign investment still largely require turn-key factories and expatriates to manage their operations and maintain their equipment. In some cases, machinery has actually to be sent out of the country to be repaired resulting in a long period of lost production. Needless to say, economic advancement under such circumstances is painfully slow.
     The Asian Tigers and Little Dragons all demanded technology transfer as a condition for access to their markets and export potential as China has done and continues to do. My fellow Americans with a grossly outdated perception of modern China have been in a state of shock seeing multinational Chinese enterprises taking world leadership positions in a wide array of advanced and sophisticated manufacturing and exploration technologies and science.
     A great expansion in production, particularly for export requires a transportation infrastructure to move the goods. Modern production also requires an infrastructure of electric power for production and managerial capability to oversee the efficient utilization of the infrastructure networks. Infrastructure has been an often unstated condition for rapid economic advance since the start of the Industrial Revolution. England and parts of Western Europe had the advantage of compact size and river system often connected by canals to move goods cheaply by the standards of the time. For several hundred years, the region had created the rudiments of hydropower with the use of the waterwheel and gearing to transmit the power. For two hundred years, there had been a steady harnessing of the power of steam culminating with the Watt steam engine in the 1870s. Given the England's revolution in textile production expanded with extraordinary rapidity, the industry was as dependent on a global market for its products as the modern export oriented economies are for their production. Increasingly efficient ocean shipping and control of the sea trade routes was essential for England and Western European beginning industrialization. In the United States, industrial development began in the far northeast in a region called New England where there was abundant water power and excellent port and water transportation. In the 19th century, industrialization moved western as canals were built and later railroads. Abundant supplies of coal and iron ore fueled both the growing railroad network and the rapid industrial of the Northeast corridor through to the Midwest cities of Cleveland, Detroit and Chicago from the U.S. Civil War until after World War II. Industrialization remained almost exclusively in this area and in a strip along the now more densely populated West Coast until the 1950s. The development of the electric power grid allowed industry then to diffuse across the United States. At this time, we began to see hints of what was to come as industries migrated from high wage unionized areas of the country to lower wage non-unionized regions. The Southern regions of the United States which very vociferously complain about losing their textile employment to low wage areas such as China are precisely areas that attracted these industries from the Northeast in the first place because of their low wages.
     Modern globalization was made possible by an extraordinarily rapid decline in the cost of ocean transportation. Without containerization, which is now exactly 50 years, the global economy as we now know, would simply not exist. Also contributing for some specialized items has been the revolution in air cargo both to move goods and information brought about by the 747 and the revolution in communication and information transfer which was enhanced by the internet. Without the latter, India's economic advancement over the last decade would have been impossible. Cheap, reliable ocean transportation does a country little good unless it has the transportation network to get their products to the port and modern efficient ports to handle them. This gave the port cities of Singapore and Hong Kong an early advantage which they capitalized on continuing to invest in improving their ports and airports. Other Asian countries followed with innovative ways of financing the creation of a transportation network as allowing private firms to build toll roads under the scheme known as BOT for Buy, Operate and eventually Transfer to the government.
     My fellow Americans have become somewhat aware of the great advances that China has made in port infrastructure and management. Unfortunately, the lesson was learned in a spirit of near xenophobic hysteria over the managing of Panamanian ports by the outlet of the Panama Canal by Hutchison Port Holdings, part of the Hutchison Whampoa Limited group prior to the even greater hysteria over the possible takeover of some U.S. ports by Dubai Ports. The fact is that U.S. ports and domestic companies operating them have become relatively backwards compared to those of Hong Kong or Shanghai. More important, China has spent billions developing its transportation infrastructure. Potential foreign investors see both the transportation network and generally consider the provision of power to be reliable. These are major reasons why India may "shine" in IT and be competitive in textiles; it is a long way from being a competitor in overall production. Americans see China solely through the lens of "cheap" labor being largely unaware of the modern production facilities and transportation infrastructure. Roughly 60% of China's exports to the United States are in American owned plants that in most cases are identical to their counterparts in the U.S.
     It was thought to very recently that Asia had an inexhaustible supply of low cost labor and a hinterland of considerable depth where production could be moved when rising wages priced more advanced Asian areas out of the market. The idea of an inexhaustible supply of low cost labor was reinforced when China began its march towards industrialization. We can now observe a tightening of the skilled labor market in the Pearl River area of China and in some parts of India. Other than minor areas such as Cambodia with a low absorptive for locating industry, there is no longer a cheap labor frontier in Asia. Sub-Saharan Africa remains a cheap labor frontier but lacking skills and vital infrastructure finds itself losing manufacturing to areas with much higher labor wages but lower overall production costs. When "cheap" labor is inefficient, it may be higher labor costs not lower ones. And of course, the purpose of our discussing the economic development of the Trans Pearl River region is to turn regions of labor supply into regions that provide their own self sustaining development of employment, labor utilization and economic development.
     The demands of the former sources of migratory labor in China and India are being heard. In India, a government with a very good record of economic growth running under the slogan of "India Shining" was surprisingly turned out of office in an election that they were expected to win. The then opposition promised to continue the policies that were bring rapid economic change but with a significant difference. Their promise was to use a significant portion of the increased revenue that economic growth was providing to develop rural infrastructure in the form of roads, irrigation and credit for agricultural inputs. Similarly in China, some of the economic gains of the past decades are being turned towards the major infrastructure investments in the less developed western regions of China.
WHAT ARE THE LESSONS FOR THE ECONOMIC DEVELOPMENT OF WESTERN CHINA?
     An understanding of the lessons of those who have already experienced rapid development and major economic change is certainly relevant to needs of Western China or more specifically, Southwestern China but has to be modified to fit the unique conditions of the region. The region lacks some of the preconditions such as a cheap labor frontier that allowed other areas to begin their economic ascent. The trick of economic development is often to turn apparent liabilities into assets. One needs to take an inventory of the regions advantages and disadvantages and how to respond to them before trying to define a comprehensive development strategy.
1)   China is making huge investments in education and research intending to be a world leader in such areas as biotechnology and nanotechnology. Southwestern China has to focus on both getting the research funding to participate directly in these developments and develop the capabilities of utilizing them as they emerge. Not having a cheap labor frontier, Southwestern China has to place even more early emphasis on skill and knowledge development than did China and the other Asian regions in their development. A country like China has to develop a broad range of capabilities and seek excellence in all of them. A region such Southwestern China has the option of focusing in a limited number of areas of research such as agriculture and sectors such as tourism attracted by the regions ethnic diversity, its natural beauty and its role in conservation of plant species diversity.
2)   Much of China's energy needs have been met using its abundant supply of coal. Though this has been largely successful economically, it has come at a price of health problems, pollution and other environmental costs. China is turning more to hydropower in Southwestern region where the potential is the greatest giving the region a potential of relatively clean and possibly inexpensive supplies of energy.
3)   Critical to the region's development is the planned infrastructure investments for the overall Western region. Undoubtedly there is already close coordination and integration between infrastructure plans and economic development objectives.
4)   Kunming and Yunnan Province have a location advantage that should be further exploited. As part of the Mekong Group, Yunnan has important ties to neighboring countries of different levels of development. This is particularly important since China has long encouraged the development of cross border trade as a general principle. When the Greater Mekong Sub-region Group's infrastructure (funded by the Asia Development Bank and other donors such as Japan and supported by an advisory group of countries) further developed, Yunnan will have shorter routes for access to ports for exporting such as through Viet Nam to Hai Phong and rail links through Laos to Thailand and with the Mekong River links to most of Indo-China. The Japanese funded all weather east-west road corridor across the region should also open other regions to Southwestern China trade. The slogan of turning Indo-China from a battle field into a market will become a reality with Yunnan in a position to both benefit from it and to provide benefit to their southern neighbors in a truly win-win situation.
5)   The ASEAN countries have effectively used the idea of growth triangles to promote economic development by bringing together countries or regions with different levels of development to cooperate together to use make use of their differing capabilities in much the same way as through trade Malaysia and China cooperate by one producing components and the other assembling them to be able to market a product that they might not be able competitively produce on their own. The Mekong region provides numerous possibilities for Yunnan in creating and participating in growth triangles.
6)   One of the most ambitious programs put forward for the Greater Mekong Sub-Regional Group is one to jointly develop the region's tourist potential, a program that has the support of international wildlife conservation groups such as the WWF*. It is rightly being touted as a poverty reduction program.

Thomas R. DeGregori, Ph.D.
Professor of Economics
University of Houston
Department of Economics
204 McElhinney Hall
Houston, Texas 77204-5019
Ph. 001 - 1 - 713 743-3838
Fax 001 - 1 - 713 743-3798
Email trdegreg@uh.edu
Web homepage http://www.uh.edu/~trdegreg