Jobless growth in China

China is experiencing the same disjunction between economic growth and employment generation that is plaguing many other developing countries.

FOR some time now, policymakers in India and elsewhere in the developing world have been looking to China as the source of inspiration for policy - often in utter disregard of the very specific institutional conditions in China and other specificities that ought to be recognised.

It is certainly the case that China's spectacular rate of aggregate economic growth for nearly three decades as well as the substantial reduction in poverty are deserving of admiration and also emulation as far as possible. But some features of that growth suggest that uncritical emulation is unjustified, and that China is now coming up against problems similar to those faced by many other fast-growing developing countries.

The common problem everywhere, it seems, is that of employment generation. China is increasingly seen as the manufacturing powerhouse of the developing world to which manufacturing jobs from the North are increasingly being transferred. However, the actual evidence on Chinese employment shows a somewhat different recent reality.

To begin with, in the past two decades, the share of the secondary sector in total employment has changed very little, increasing from 21 per cent in 1985 to 23 per cent in 1995 to just under 24 per cent in 2005. This is despite the fact that though the share of the secondary sector in the gross domestic product (GDP) increased to reach nearly half of GDP in 2005.

Much of this is because the pattern of growth has been - as elsewhere in the world - much less labour-absorbing than in the past. Overall, employment elasticities of output growth have been low. But more to the point, they appear to have fallen sharply in the 1990s compared to the previous decade.

It is expected that primary sector employment elasticities will be low, and indeed they turned negative in China in the 1990s. After all, development is all about shifting people from agriculture and other primary activities to other sectors. However, even industrial employment generation has been inelastic, and the elasticity has fallen by five times between these decades, to only 12 per cent over the 1990s. This explains the low aggregate employment elasticity to GDP for China as a whole over the decade until 2000.

For any other developing country such figures would hardly be surprising, but China has become synonymous internationally with rapid economic growth based on the export of relatively more labour-intensive commodities. This naturally leads to the expectation that manufacturing growth will be such as to generate relatively more employment, and that the employment elasticity of manufacturing output at least would be relatively high.

In fact, exports have grown dramatically in the past 10 years in particular, and within that, the share of processing exports has increased sharply also in the last decade, going from less than 20 per cent of the total value of exports in the 1980s to more than 55 per cent in the most recent period. Processing exports are seen as generating less value addition but more employment, and, therefore, are more likely to generate more employment generation than resource-based or capital-intensive exports. This makes it all the more possible to expect that the pattern of Chinese growth would be such as to create more employment in manufacturing.

But the extraordinary thing is that despite all these favourable features, manufacturing employment in China peaked in 1995, when it was still less than 100 million workers. Thereafter, and remarkably in the context of the enormous boom in export-oriented manufacturing that has been evident over the past decade, total manufacturing employment has actually fallen. There has been a slight recovery in recent years, but according to the official Chinese government statistics, it is still around 12 per cent below the levels of the mid-1990s.

The reason for this apparently surprising result is that China is now becoming more like other countries of the developing world that have gone in for export-oriented manufacturing production along with trade liberalisation. Other "successful" exporting countries of East Asia and South-East Asia, as well as Latin America, have seen domestic production being eroded by import competition, which has adversely affected employment-intensive small producers in particular.

The loss of employment in import-competing units has in most cases not been enough to offset the increase in employment in export-oriented activities. This has typically meant a net decline in manufacturing employment even in the most dynamic exporting countries.

In the case of China, the process of trade liberalisation has been more belated and was certainly more limited until the early years of this decade. Indeed, comparable trade liberalisation has occurred only after its accession to the World Trade Organisation (WTO), which has exposed many more domestic producers to the same tough external competition. This is why the process of net manufacturing employment loss, which began even in many dynamic exporting countries in the early 1990s, started somewhat later in China, in the late 1990s.

As a result, the rapid expansion of export-oriented manufacturing in recent years has still not been enough to compensate for the loss of jobs in manufacturing production, which has been threatened or eliminated by import competition.

To this must be added the effects of the ongoing "reform" of state-owned enterprises in China, which has involved substantial reduction of the workforce in these. The loss of manufacturing employment has been most sharply felt in the state sector.

The share of state-owned enterprises in urban employment fell from more than 70 per cent in the early 1980s to less than 30 per cent in the early years of this decade. Indeed, in 2005, the share of private units was more than that of state enterprises for the first time.

The problem of unemployment is deeper than is revealed by official statistics, which show relatively low open unemployment (between 4 and 6 per cent) but do not include a significant proportion of workers laid off from state-owned enterprises and urban collectives. When these workers are included, the rate of unemployment in 2000 was much higher at around 12.5 per cent of the working population. The data also do not capture the jobless rural migrants.

It is now estimated that rural-urban migrants number around 150 million, most of whom are employed in informal activities, but a significant fraction of whom are unemployed.

So, despite the much higher aggregate export-oriented growth, the Chinese economy is experiencing the same disjunction between economic growth and employment generation that is plaguing many other developing countries, including India.