[09.9.1 N.Y Times]China Must Adjust Model to Succeed

渔音谦谦

Published: August 31, 2009
http://www.nytimes.com/2009/09/01/business/global/01inside.html?_r=2&scp=1&sq=China%20Must%20Adjust%20Model%20to%20Succeed&st=cse
By ALAN WHEATLEY

    BEIJING — Beijing frets that the global economicslump is exACerbating unemployment. So it is. But the main culprit forthe lack of jobs is China’s own development model.
      Theconventional image of millions of Chinese hunched over sewing machinesand workbenches churning out the world’s T-shirts and toys conveys theimpression of a labor-intensive economy drawing on a bottomless pool ofworkers.
Only up to a point. A striking characteristic of China’seconomy is that it devours capital at an ever-growing rate, therebycapping job growth, reducing labor’s share of the economic pie anddepressing household consumption — one of the major macro imbalancesthat underlay the global financial crisis.
“We have longmaintained that China’s growth is capital-intensive and doesn’t createas many urban jobs as a different type of growth would have done,” saidLouis Kuijs, an economist with the World Bank in Beijing.
Thebank estimates that China’s capital stock climbed to 295 percent ofgross domestic product in 2008 from 248 percent in 2000, underliningjust how much China’s double-digit growth this decade has been poweredby capital spending.
Making the economy even more lopsided,households in China do not share much, if at all, in the fat profitsthat state-owned firms make with their subsidized investments. Thishelps to explain a plunge in the share of wages in national income tojust 39.7 percent in 2007 from 52.8 percent a decade earlier.
Withincome growth stunted, it is little wonder that Chinese householdsconsume less as a percentage of G.D.P. than any other country, just35.3 percent last year.
To be sure, urban job growth hasaveraged 3.8 percent a year since 2000, according to the NationalBureau of Statistics, but Mr. Kuijs said China had generated fewer jobsthan, say, South Korea or Japan did at similar stages of development.
“Theview that China could have done better in terms of job creation stillstands, and that is something that the authorities should try tochange,” he said. “If anything, the motivation for it has beenstrengthened by the crisis.”
True, high output and subpar employment imply gains in labor productivity, the ultimate key to rising living standards.
“Nevertheless,the low rate of employment growth is clearly a concern even to theChinese authorities, as it has implications for economic but alsosocial stability,” said Eswar Prasad, a professor of trade at CornellUniversity.
An estimated 23 million migrant workers lost theirjobs in construction and export factories as a swoon in the propertymarket coincided last winter with a collapse in foreign demand forChinese goods.
The ensuing unrest feared by the authorities hasbeen conspicuous by its absence. Still, officials regularly describethe job market as grim and grave. A government group last yearestimated China’s unemployment rate at 9.4 percent, more than doublethe 4.3 percent rate in June for urban registered jobless.
Thegap between job demand and supply will increase further from 2008, YinWeimin, China’s minister of human resources and social security, saidlast month.
So what needs to be done?
First, China shouldstop favoring capital-hungry heavy industries, which benefit from cheaploans from state-owned banks, an undervalued exchange rate andunderpricing of key inputs such as land and energy.
The relativeimportance of manufacturing typically shrinks as economies mature, butin China, industry’s share has risen to 48.6 percent in 2007, from 47.9percent in 1978, when economic reforms began.
Another statisticillustrates Beijing’s love affair with heavy things you can drop onyour foot: Industry and construction added 45.5 million jobs from 2003to 2007, while employment in services grew by only 31.1 million.
Second,Beijing should replicate the path of reform it followed in industry andallow private and foreign firms to compete with state giants thatdominate services like banking, transport, telecommunications,logistics and media.
“You have a monopolistic services sectorcompletely dominated by the state, with entry barriers preventingothers from coming in,” said Yolanda Fernandez-Lommen, an economist atAsian Development Bank in Beijing.
The share of services inG.D.P. has increased, to 40.1 percent in 2007 from 23.9 percent in1978, but for a country at China’s stage of development, the figureshould be around 55 percent, Ms. Fernandez-Lommen said. In the UnitedStates, it is about 80 percent.
The aversion to services is alegacy of central planning, which frowned on any economic activity thatcould not easily be quantified. The bias persists even though servicesgenerate many more jobs than industry for every dollar of investment.
IfChina were to invest in human capital and technology to increaseproductivity, a shift toward services could create more than 100million jobs by 2025, according to McKinsey Global Institute, theconsulting firm’s economics research arm.
“Services will need tofill the employment gap that China’s industry-focused model has left aswell as to boost incomes,” a recent McKinsey Global Institute reportsaid.
Recalibrating China’s model to create more jobs is easy onpaper. In practice, it will be fiendishly difficult politically. Itwould require Beijing to ease administrative controls that make it hardfor rural Chinese to move with their families to cities, where theywould generate demand for services.
It would mean weaningstate-owned industrial firms off myriad subsidies and making themdisgorge more of their profits as dividends. It would also mean endingthe monopolies or oligopolies of state firms in services.
“Thatis hard to tackle, because you have a lot of interest groups and thestate-owned sector has a big influence on policies,” said WenshengPeng, chief China economist at Barclays Capital in Hong Kong.
Alan Wheatley is a Reuters columnist.