There is a very interesting graph on page 14 of the World Bank’s December 2008 Quarterly Update on China. I am not smart enough to figure out how to reproduce the graph but I will describe it. It shows private consumption and wage share in China as a function of China’s GDP, from 1993 to 2007. From 1993 to 1996, wages rose from 50% of GDP to 54%. During that same period private consumption rose from 47% to 49% of GDP.
Both remained more or less stable for the next three years, but then beginning in 1999 and over the next eight years wages declined from 52% to 40% of GDP. During that time private consumption declined from 47% to 37% of GDP. In almost every year except two both figures move in the same direction.
Over the last fifteen year, in other words, private consumption as a share of GDP has been very highly correlated with the level of wages. China has very weak labor unions and worker representation, so in the fight between workers and capitalists for a share of the economic pie, workers have been on the losing end, and it is hard to see how they will do much better in the future, but it is probably in China’s best long-term interest that they do. As wages have risen and fallen as a share of GDP, so has private consumption. This isn’t a surprise, but the relationship is pretty dramatic.
Unfortunately the World Bank report also says:
Direct government spending, in the form of government direct consumption or investment, typically creates more economic activity than an increase in transfers or tax cuts. This is because higher transfers or tax cuts that increase income may not necessarily induce spending, especially by higher income people or when times are especially uncertain. Stimulus targeted at increasing demand for products of sectors with excess capacity will have a larger activity and employment effect. In the short term, however, there is no difference in the growth impact between government investment and government consumption.
That means, as I see it, that in the long run it is very important for China to raise wages as it tries to develop an internal market, but it will be hard to exploit the crisis to force through wage increases since in the short term they are less effective than government spending. There have been rumors about wage increases that have then been denied, so I have no idea where this idea stands in the hierarchy of policies, but I suspect that companies will use the crisis as a way of arguing that the last thing China needs is wage increases.
I think you have to be careful in assuming causation and interpreting correlation.
What happens over the last 30 years is that household savings have remained constant, but between 2001-2007 corporate earnings grew dramatically as unproductive state owned enterprises were shut down, and so corporate savings increased considerably. There are huge incentives in the US to reduce corporate savings and boost share prices, the incentives among Chinese corporations is to maximize revenue and retained earnings. The reason the incentives are that way was so that fix the NPL problems of the 1990′s.
At this point corporate savings and household savings are roughly comparable and so switching one to the other wouldn’t case too much change.
Also one thing that the statistics miss is that in the 1990′s, a lot of the workers wages came from bank loans, and paying for wages for unproductive corporations was the primary reason for the NPL problem. If you reduce corporate earnings too much, then this makes corporations extremely sensitive to an economic downturn as they have no cushion of retained earnings, and we end up with failed corporations and broken banks.
One curious thing is that a lot of the problems that China faced with its industrial sector are being faced with the automotive sector in the United States such as General Motors.
China spends less than 1% GDP on health care. I think boosting the health service industry is even more urgent than income redistribution at this point.
It is not very easy to see what Chinese government can do to raise wages.
Like Twofish implied, many large state-owned enterprises (SOE) are increasingly market-oriented and profit-driven in the last 7-8 years. Banks have been very careful in making loans to loss-making companies since much of the banking sectors are now publicly-listed.
In a sense, the lower share of wages in GDP is one direct result of the last decade’s reform and restructuring of the SOE and banking sectors. The other way to look at it is that SOEs and large banks are much more profitable now.
Fundamentally, China simply has a large working-age population and surplus of low-skilled labor. It will take decades of economic development to absorb these labors. Anyone who has owned a business in China knows that it’s so much easy to hire unskilled or low-skilled workers in China but quite difficult to find suitable professional and managerial talents. It’s no wonder that the majority of China’s workers don’t have much bargaining power vs. employers.
And you can’t accuse that Chinese government is totally indifferent to the situation. The controversial Labor Law, which tries to protect many of the labor rights, was enacted this year and was widely blamed for many of the layoffs and bankruptcies.
What Chinese government can do to directly raise wages is to raise the wages of the civil services workers, and they’ve done it many times before. But I think it’s a bad idea.
This is not to suggest that the Chinese government can not do anything at all to increase people’s income and wages. I think they can lower personal income tax, establish/enhance the basic health care, unemployment insurance and retirement systems, and to spend more on education. These will indirectly increase people’s income.
Most people would agree China should increase private consumption, but it’s not that easy to achieve that in a short term.
I feel that the outcome of this situation will be bad.
If we make the decision matrix,it look like this:
china:
decrease the export -loss
increase the export -gain
rest of world:
decrease the (chinese) export -gain
increase the (chinese) export -loss
So,there is no common interest.
in this case,the outcome clear:
The US and the EU will cut off the chinese export with tarif barriers.
There can be intermediate solution,but all of them requiring from china to run a trade deficit.
It mean that if china increase dramaticly the import,the world can come out from this situation well.
Example buy a lot car from the US,for a few hundred billion $.
oh,the matrix for the chinese import:
china:
decrease the import-gain
increase the import-gain
rest of world:
decrease the (chinese) import -loss
increase the (chinese) import -gain
So,china can increase the import,or will die dou to the (new) trade barriers.
I think that it will collapse,and the west will have to re-build quickly the manuf. capacity again
Buy US cars or die!
Wages rise as productivity increases, and what government in any economic system has ever been able to affect productivity, except to unintentionally decrease it by intervening in the market? Incentives can increase productivity; what incentives do governments offer, other than tax discrimination, subsidies for the inefficient, and regulation backed by the monopoly on force?
The best example of government killing productivity is France. If Sarkozy does not get his reforms on labor productivity implemented, within one more generation fully half of all French workers will be at an income level below the poverty line in the United States. The one good thing that a government can do to increase productivity–and so raise workers’ wages–is to stop manipulating the markets on behalf of ‘worthy social goals.’
OT: Is there any truth to this Market Watch article?
Last week, China’s top planner Zhang Ping said the government has been forced to act to stave off massive unemployment and social unrest. The data coming out for November are expected to show an accelerated slowdown. One economist predicted that 1 in 5 migrant workers could lose their jobs.
As China’s quasi-market economy faces potentially the worst decline in two decades, the capacity of business to cope with a cyclical downturn is being brought sharply into focus.
Going missing increasingly appears the favorite exit strategy for private business chiefs after a wave of closures.
Across China, thousands of business owners have literally disappeared overnight, leaving behind ghost-like factories and legions of unemployed migrant workers. This chaotic unraveling looks to be more than just a reaction to a down cycle.
One entrepreneur explained to me last week that many normally law-abiding business owners conclude their only option is to take flight rather than take their chances with China’s opaque and uncertain legal system and the potentially large costs involved contemplating bankruptcy.
In Guangdong this year, the introduction of new rules on employment protection, medical benefits and wage rates have certainly made any restructuring more costly. Hong Kong factory owners will feel the brunt as the biggest investors in Guangdong.
Additional problems according to anecdotal reports are that authorities often respond to signs a business is in trouble with an aggressive tax collection policy, adding further strain to businesses.
I agree that it is not going to be easy to boost consumption by boosting wages, but I worry that there will be significant pressure from businesses to do the opposite – freeze wage increases – especially since President Hu made that rather worrying comment yesterday that China is losing its competitive edge.
Duoist, I think income distribution issues are not exclusively a consequence of productivity gains but also a political decision. It may be true that France has intervened excessively in the labor markets, but so has China, except on the side of constraining wage increases. They have made unionization difficult, for example, and allow companies to offload social costs, including environmental degradation. By keeping interest rates very low (negative in real terms) they have also facilitated businesses over households by reducing the income of household savers.
Tyaresun, I think these kinds of stories have been pretty widely covered in the local press.
graphs for incentives in China houneng Group