Thursday, January 8, 2009

Social Instability in the Middle Kingdom

In China, labor unrest has reached levels unwitnessed in the past decade, and even state-run news publications are forecasting a very difficult 2009.

This is all much different than the early predictions last Autumn that China's economy was "decoupled" from the global crisis -- China was thought to escape relatively unscathed. Even I thought as much up until October, when the unemployment numbers really took a turn for the worse in the export hubs of the coastal cities. In December, the IMF and various economists predicted 5% growth for China's GDP in 2009. 

An article written today by Chinese observer John Pomfret asks an important question, "Is the worsening economic climate in China going to have severe social consequences?" The stories of massive worker layoffs have piled up. In dire economic circumstances, there is always a possibility that a tipping point could be reached and the employment could overwhelm a government's ability to handle it. 

But Pomfret tries to extend this issue further, arguing that China's stability is at risk because of its centralized political system:

"The prevailing narrative about China in the United States is that the Communist Party is secure in power and that while the economic downturn will cause trouble, the party will probably muddle through... [However,] China is not the United States and... its political system is inherently unstable."

Pomfret is claiming that the protests are really about Chinese people's dissatisfaction with their political system. He is wrong. 

The unrest is comprised of thousands of people outside of their (shutdown) factories and places of employment demanding backpay or protesting their termination without fair warning. The same thing would happen in the US if employers began laying off workers without pay or warning. (In fact, this did happen on a smaller scale in Chicago in November.) The political system is irrelevant in the minds of these protesters. They have little or no money and do not know where they will go next -- wouldn't you feel wronged as well?

So is Chinese unrest about political freedoms? No. (It's the economy, stupid.) 

However, this does not alter the reality that China's social stability may still be at risk. Not because it is a one-party state but because it has hundreds of millions of workers. Every labor problem that other nations (save India) must deal with during this global recession is magnified in China. The US has "massive layoffs" of 30,000 workers; China closed up to 60,000 factories in 2008 alone. The magnitude of unrest -- along with most everything else -- is far greater in China.

So what should the Chinese Communist Party (CCP) do? They've announced and began implementing a $586 billion stimulus package. Unfortunately, the labor unrest is rooted in something that cannot be fixed in the short-term with an injection of money: a massive export sector. To be sure, China's growth is primarily led by domestic spending, not exports. But between 20-30% of China's GDP is still coming from its export sector. That is a significant portion of the economy still sensitive to the ebb and flow of the global markets. Hence, a global recession begets massive unemployment.

The real solution to avoiding labor unrest lies in a Chinese economy composed of workers insusceptible to export shifts. In the long-term, the CCP is aiming toward an economy driven by more domestic consumption. Its next five-year plan is focused on tapping into the productive and consumptive powers of the 800 million poor, rural Chinese. They envision a gigantic middle class fueling the next century of China's economic rise. 

But such a great transition in economic structure is a slow process (even in China's lightspeed terms) -- at least another decade. In the meantime, China is going to be susceptible to social unrest via its labor force. If only they can weather the current crisis...

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