Lopsided China Needs to Free the Labor Market
 
Philip Bowring IHT
Tuesday, November 20, 2001
BEIJING Joining the World Trade Organization is a milestone in China's move toward a market economy and integration with the world. But it confronts a big challenge if it is to combine a high growth rate with social stability: freeing the labor market.
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Visitors to Shanghai and Beijing are struck by the new buildings and highways and the absence of shantytowns. Visible modernity is a symptom both of China's success and of its extreme income inequality. The gap between the coastal cities open to trade and investment and interior provinces is often noted. A bigger divide is between rural and urban. Two-thirds of the population is still rural.
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According to official data, in 1978, the year reform began, urban incomes were 2.5 times rural ones. By 1986 this had shrunk to 1.8 times, as the liberation of peasants from commune bondage led to a surge in output and incomes. However, by 2000 the situation had reversed with a vengeance to 2.8 times and still rising, as rural incomes stagnate while official city dwellers continue to acquire more mobile phones and household appliances. In India, Brazil or the Philippines, the rural poor can drift to the city, build a shack, find whatever work they can, put their children in the local school. Not so in this "people's paradise" where the household registration, or "hukou," system, the old Communist method of social control, has become a system for protecting privileged urbanites. For sure there is freedom of movement. People can travel wherever they want, and there have been big population shifts, especially from rural areas to the export factories of Guangdong. It is not hard for peasants to move to small, nearby towns - but work there is scarce. Greater opportunities lie in the bigger cities, but they are least likely to admit workers from rural districts.
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Big cities also have controls that impede the informal service sector, which could absorb newcomers. Residence permits that give access to education and social benefits are very hard to acquire. In Shanghai you need a postgraduate degree. Everywhere, urban workers without a permit are second-class citizens.
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Agriculture accounts for half of the work force but only 15 percent of GDP, so obviously lack of labor mobility is a severe economic constraint.
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It has helped cause overinvestment in factories making cars and consumer durables while consumer demand for low-end items like textiles and basic services languishes because of lack of buying power.
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The fiscal system favors the cities. Decentralization of educational funding has meant that rural people have little chance of advancement. Only 13 percent of senior secondary students are from rural areas.
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The lack of a land ownership system holds back rural development. People cannot sell the land they till; this prevents consolidation into more efficient units. Meanwhile, fear of loss of land use rights is a deterrent to moving off the land permanently. The government views the rural areas as self-sufficient places to which workers can return if they lose jobs in town. This safety net concept may serve short-term social stability, but it does nothing for equity or growth. It is producing an agricultural surplus but very low farm incomes and massive underemployment. WTO membership will likely cause farm prices to fall further.
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Keeping people on the land has damaging environmental consequences. Desertification in northern China is the result of overcultivation of what once were grasslands. Populations tied to poor land tend to exploit it beyond sustainable limits. Restrictions inhibit a shift in population from the dry north to the well watered south.
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The hukou system is increasingly under fire from official think tanks. The central government is planning reforms, and a few big cities are giving residence permits to outsiders who have been in the city for a few years. But change will be difficult.
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Vested interests in the most prosperous cities want to keep out migrants, or treat them as a cheap labor force which can be removed at will. State-owned enterprises, once a feather bed, are still shedding jobs, so established urban residents fear change.
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Concerned about social stability, the government wants an urban income safety net in place before full-scale liberalization. That could take years, but change there must be if China's growth is to follow the East Asian model of using improved income distribution to sustain demand growth.
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Freeing labor markets and giving equal rights to all is essential for longer-term social stability. If it happens, it will have a profound and beneficial impact on the shape and pace of China's modernization. International Herald Tribune

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