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