May 1 thoughts – Raising employment and conquering poverty – China’s example for us

May 1 is often celebrated with parades and labor rejoicing in many countries. These provide symbolic, if plastic, events extolling the achievements and aspirations of labor. In the past, where communist governments ruled, the day was a parade of state power in the name of labor. In our country, May 1 is a day when the aspirations of labor and government’s support of it are publicly reiterated.

“China’s economic growth.” No country in our time has grown as fast and conquered poverty as steadily as China. Such success is not explained fully by the form of its government. Many dictatorships have floundered economically for many other reasons.

Communism as a threat to world economic systems fell apart in the 1990s with the end of the Cold War. But in China, the communist economic system underwent a transformation in the late 1970s as the result of a leadership power struggle where the emergent leader with radically different ideas won.

Deng Hsiao Peng, who led China in the late 1970s through the 1980s, revised rural economic incentives: agricultural households and villages were allowed to sell their output and keep part of those sales for themselves. This measure radically deviated from the rigid rules of the old system under Mao Zedong. The reforms became an immediate success and further experimentation was extended to industry.

China’s magical growth thus emerged because its leadership discovered and learned from the “market.” It found the way to use it as the solution to its economic problems. In so doing, it also learned to adopt capitalistic practices to support the market.

“The market and government.” Thus, China had begun to relax from the rigid tenets of communist doctrines at least one generation before the fall of communism. To move away from the precepts of the state enterprise system under communism, China adopted special economic zones in the manner of free economic activity that was copied from Hong Kong.

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The special zones had open access to world raw materials and inputs at international prices. They attracted foreign enterprises to set up. In several simultaneous economic zone experiments, China opened to the world – to foreign capital, to foreign technology and to foreign ways of doing things. Thus, China made available its multitudinous labor force for employment to foreign enterprises in its own homeland.

China allowed the entry of foreign direct investments to manufacture goods for the global market. Even as these establishments were making products for sale in world trade, they could also produce for local demand. In a sense, as it turned itself loose from a closed economy, industrial protection for the domestic market became indistinguishable with the efforts to attract foreign capital and become world class.

“Allowing wages to rise naturally.” The first trick of the Chinese reform solution was not to work at the “raise the wage route by government order”. In fact, through exchange rate policies and other related actions in agriculture, China tried to keep wages low. Employers contracted work with their industrial workers, through some form of bargaining with foreign direct investors.

But the most important action that China undertook, while holding wages at “market” level, was to attract foreign direct investments. By doing so, China not only acquired zero cost capital but allowed itself to observe new managerial techniques being deployed at home as these FDIs operated. With Chinese workers working in all range of enterprise activities, the native workers learned to adopt to foreign techniques quickly. It was in-service training experience in action. The opening of new industrial ventures stimulated employment of labor at all levels of skills and at different levels of wages depending on the skills.

The massive inflow of FDIs into China affected most sectors of manufacturing. China did not micromanage the choice of industries. The state planners focused more only on industries that it deemed were critical for the country’s needs – the public utilities, infrastructure, and – as important – assuring that the price of food was stable. Of course, they also focused on the growth of its defense industries. The resulting expansion of technological capacity improved domestic industries overall.

Thus, China took care of its agriculture, especially the cultivation of rice, wheat and corn. This was to assure sufficient food supply, supplemented by imports when needed.

In time, critical state industries were able to modernize, opening up to the acquisition of modern technology and even allowing partnerships with FDIs. The manufacturing capacity of China expanded through the route of learning from the experience with FDIs and the lessons acquired from exposure to them. Domestic entrepreneurs grew in numbers, initially as “state enterprise managers” but more and more as decision-makers in a fully modernizing large economy.

The inflow of FDI into China came from all countries in the world: American, European (all the major industrial European powers), Japanese, Taiwanese, HongKong and even Southeast Asian.

Thus, as time went on, the excess labor at low wage progressively got smaller and smaller. The outcome could be seen by the rise in productivity and the corresponding improvement of the wages earned by workers through their various roles as employees. By working in companies with expanding markets under competitive conditions, labor raised its productivity and efficiency.

The matter is a simple demonstration of the law of supply and demand!

“What we can learn from China.” Can we learn from China’s example? Of course, we have many lessons to draw from.

The foremost takeaway is that, minimum wage legislation is hardly essential to generate employment growth. In our case, the raise the minimum wage route has become a mental block toward crafting proper employment policies. It has distracted and even deflected the attraction of domestic and foreign investments to expand in the country.

The other lesson is that – a country lacking in enterprise, in competitive industries, and in capital especially – can grow quickly by encouraging the entry of FDIs. Labor unions and labor leaders should support measures to improve the liberalization of the economy, by removing many barriers toward trade and industry.

This includes, of course, the attraction of FDIs. But to do this properly, they should work toward removing all those barriers that hinder their entry. This includes the provisions for the amendment of the economic provisions restricting the entry of FDIs into the country. Labor needs to be more active in seeking the removal of these restrictive policies. –Gerardo P. Sicat (The Philippine Star)

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/