BEIJING’S pre-Christmas announcement of its readjusted 2004
gross domestic product (GDP) made an international stir and sent
economists scampering to their calculating tables so they can
revise their predictions concerning when China may overtake the
US as the world’s biggest economy. There is a 17 percent
difference between the Chinese government’s previous report about
its gross national income of $1.65 trillion and the recomputed
figure, which amounted to $2 trillion. The new calculation carries a
significant implication: it means that China is a much bigger
economy than we thought. It means that it already climbed to the
fourth slot in the world’s ranking of largest economy all this time,
which are two notches higher from previous position of number six.
There is no doubt that this advance in the pack is impressive.
Official statistics illustrate two decades of very strong annual
growth rate of real GDP, which has averaged around 9.2 percent.
Since 2001 it is the world’s number two in purchasing power parity
(PPP). Many countries envy its record of economic progress.
However, this record-growth produces a big misconception that it is
a big winner of globalization. Although there is truth to the claim
that on-going market reforms and China’s opening to the global
economy gave millions of Chinese people an increased standard of
living, many new and critical documents are also arguing that there
are more Chinese people that are suffering because of its rapid
transition to market-based economy.
For the majority of the Chinese people the more meaningful and
important question is not "when will China become the world’s
number one?“Rather, they are asking,”When will the benefits of
China’s rise to superpower status start to affect our lives
positively?" True enough, being number one - as in the case of the
US for a long time - does not necessarily guarantee an end to
poverty for marginalized people and the likelihood of better
opportunities and access to resources. New studies on the
relationship between poverty reduction and inequality show that
there is no necessary connection between free trade and poverty
reduction. (1) In fact, a close study of China’s case as a catch-up
economy since reform started in 1978 shows that greater
openness to external trade was not the driving force behind its
success.
In the recent 6th World Trade Organization Ministerial Conference
in Hong Kong, which was held from December 13 to 18, the
spotlight was on China. Its economic performance after WTO
accession is probably one of the most highly watched
developments since it will support or smash notions about free
trade and economic liberalization as necessary preconditions for
economic development. Although China displayed a not-so
energetic host posture and is still finishing its transition stage that
will end in 2013, its fulfillment of its WTO obligations concerns
many.
CHINA’S ACCESSION TO THE WTO
China joined the WTO in December 2001. Since then, it amended
more than 2,500 of its national laws and regulations and abolished
more than 800 others to fulfill WTO rules. (2) Until now, there is no
accurate general calculation about the implications of these
changes on people’s livelihood. Some of the estimated negative
impacts are minimal or negative employment growth in the sectors
such as agriculture, automobiles, machinery and instruments. On
the other hand employment gain occurred in industries such as
plant-based fibers, livestock and meat, clothing, light manufacturing
and electronics. (3) What is clear, however, is that membership to
the multilateral trade body further deepened the Chinese
economy’s dependency on external trade and foreign investment.
Prior to its integration into the international trade regime, WTO
supporters within the Chinese government argued that accession
would help China further expand its market, accelerate the
restructuring of its industries and improve its legal system. The
Chinese Ministry of Commerce report in the second quarter of 2005
shows that the total volume of international trade in 2004 has
exceeded one trillion US dollars and that China is now the third
biggest trader worldwide. The report also shows that foreign
investment reached US$53.51 billion that year while the estimate
for 2005 is that it will exceed US$60 billion. The fourth quarter
report for 2005 shows that four hundred and fifty of the world’s top
500 companies have invested in China. (4)
China became the favorite destination of foreign direct investments
(FDI) because of the attractive benefits it offers. China has a very
friendly business environment that includes adjusted tax rates for
FDI, which is half the rate that state-owned enterprises normally
pay. It gives good conditions for guaranteed profits for transnational
corporations (TNCs) such as low rent, cheap natural resources and
lax rules for its exploitation, low wages for workers, absence of
independent trade unions, no-strike laws and many others.
The international business community was happy to note during
the WTO ministerial in Hong Kong that Beijing complied well with
its commitments to the WTO. China cut its overall agricultural
tariffs from 54 percent in 2001 to 15.3 percent in 2005 and this will
be further reduced to 15.2 percent in 2006. No single member has
made such a huge cut in such a short period of time in the WTO
history. The average agricultural tariff worldwide is now 62 per cent.
The future of the agricultural sector was one of the most important
concerns during the talks in Hong Kong. The dominant view among
economists within China is that agriculture is comparatively
unimportant relative to other promising and more beneficial sectors
since China is not a major exporter of agricultural products. The
agricultural sector only contributes 15 percent to China’s GDP.
However, the number of people that depends on agriculture for
survival and development is still huge.
Huge adjustments were also made on import tariffs, financial
services and government procurement. Import tariffs for 2005 were
cut to an average of 9.4 percent from 15.3 percent in early 2001.
Tariffs on information-technology products, including computers
and telecommunications gear, have fallen to zero from 13.3 percent
over the same period. (5) Since December 2004, foreign banks
were allowed local currency operations in 18 Chinese cities.
Beijing agreed to begin talks on joining the WTO Government
Procurement Agreement during the second half of 2005. When
such agreement is fully reached, it will grant foreign companies
nondiscriminatory access to government purchases. At the
moment, Chinese government agencies are required to purchase
equipment and technology only from Chinese-owned companies
unless there is no existing commercially viable alternative.
BEHIND THE STATISTICS
It is not a secret anymore that 250 million Chinese people live on
less than $1 per day. Another 700 million or 47 percent of the
population, live on less than $2 a day. The work conditions of
Chinese laborers - the people who provide the world with every
affordable consumer products from T-shirts and bras to home
appliances and computers - are far from pleasant. They often work
between 60 to 70 hours weekly.
In sparkling modern cities like Shenzhen in Guangdong province,
modernity has two sides: one is the US-educated corporate
executives and technical experts who work in impressive high-
rises, the other is the millions who sweat in mindless, repetitive
factory work in the “special economic zones”. Those who belong to
the second category receive as little as $100 per month. Most
complain about the tasteless food in their cafeterias and cramped
dormitories where 10 to 20 workers share a small room. The
majority of them are migrant workers from rural areas who lack
access to many basic social benefits, have few possibilities for
upward mobility and have no security of employment. This vast
“floating population” is driven to the cities by the hopeless
situations in their villages and the increasing gap between life in the
cities and the countryside.
Economic growth has been uneven and unfair to those in the
agricultural sectors. Agricultural wages are stagnant despite
China’s phenomenal economic rise. Unemployment in the rural
areas is now in an alarming state - the government estimate is that
the unemployed and underemployed rural labor now number around
100-120 million. (6)
The pattern of migration to urban areas is comparable to Japan’s
experience during the period of post-war industrialization. In 1947,
700 million people or 50 percent of Japan’s workforce used to be
involved in agriculture. This was reduced to less than three percent
by 2002. (7) China’s case is more rapid and more dramatic,
entailing bigger demands for adjustments and posing bigger
problems to the expanding cities than Japan. Three hundred million
Chinese are expected to migrate from the rural areas into the cities
before 2020. This is one of the largest migrations in human history.
China’s problems about its “surplus labor” present many daunting
challenges as it transforms itself into a knowledge and service-
based economy. It is not easy to create productive employment for
its 744 million-strong labor force. China needs to create 300
million new jobs within the next decade to absorb or re-employ
those who lost their jobs in the agricultural sector as well as former
state-owned enterprises (SOEs) and provide work for the new
members of the labor force. (8)
The lack of jobs and poor conditions in the rural areas are bound to
result in the loss of the already limited agricultural land to
development as well as diminished income because of excessive
taxation. The central government is saying that some policy
measures to improve the situation in the country side are starting
to be implemented and are in fact generating positive results.
However, the general development in the rural areas is still lagging
behind the urban areas by ten years. The state of the environment
is also deteriorating and this is increasingly affecting people’s
health and livelihoods. Protests and rioting triggered by generally
felt injustice and environmental problems are now an almost daily
occurrence in the countryside.
A recent World Bank study notes that China’s farmers were
already suffering declining income in the years before WTO entry.
But the linking of China’s fortunes to foreign markets has
aggravated the trend, particularly as China removes tariffs that once
protected local farmers from imports.
From 1995 to 2001 the number of workers in state enterprises was
reduced by 40 percent (46 million), while workers in collectively
owned urban enterprises decreased by 60 percent (18.6 million).
Laid-off state workers (registered) are around 34 million. Many of
these laid-off workers only received partial payment when their
SOEs closed down. At the local level, problems are now arising
due to the uncertain future of 23 million town and village enterprises
(TVEs), which employ around 135 million people. The TVEs, which
served as the driving force of the local economy in the 1980s, are
now saddled with rising costs and competition from foreign firms.
Overall urban and rural unemployment rate in China is estimated at
approximately 30 percent.
China’s courtship of foreign investment dramatically affected SOEs.
According to Hart-Landsberg and Burkett in their book "China and
Socialism" (9) the loss of profitability of state enterprises is
connected with the increased reliance to foreign investors. Since
state enterprises pay relatively high taxes (compared to foreign
investors) as well as employment, investment and employee-
welfare responsibilities (pension, housing, health care) they
became increasingly uncompetitive compared to private
enterprises. The decrease in the SOEs profitability, coupled with
management problems as well as corruption, resulted to their
indebtedness. As their overdue debts increased in volume, the
government opted to privatise them as a way to unload the
government burden. Privatisation encouraged greater dependency
on foreign investors, who started purchasing the ailing state
enterprises. The state enterprises’ share of industrial output fell
from 64 percent in 1995 to 30 percent in 2002. The SOEs are now
operating at a loss of about one percent of GDP each year. (10)
Exports took a leading role and to continue the rapid growth, the
economy relied more and more on foreign enterprises especially in
high-tech industries. The increasing centrality of exports and
foreign investments rationalized the economy’s dependency to
global trade and investment agreements and, above all, the WTO.
China’s rapid growth was indeed achieved with many social and
environmental trade-offs. It now symbolizes the many wrongs that
come with corporate-driven form of economic globalization.
Privatization and the increasing power of local elites and foreign
enterprises in China are magnifying the already huge division
between the winners and losers of such growth. The UNDP’s
Human Development Report for 2005 illustrated an alarming
increase in the country’s income disparity. China’s Gini coefficient
(a measure of equality/inequality: 0 means everyone has the same
income; 1 means one person has all the income) hit 0.465 in 2004,
and it is estimated to approach up to 0.47 in 2005. (11)
LEADERSHIP OF THE DEVELOPING COUNTRIES?
While China’s rise is giving expectations that it will become the
“new empire”, the world’s fastest and largest developing country
seems to harbor no intention of establishing itself as the advocate
of the world’s poor. The other big players, India and Brazil, have
shown more interest in playing that role. During the process of
negotiations prior to the Hong Kong WTO meeting, China did not
put any important proposals on the table.
China’s entry to the WTO probably extended the level of
transparency in China on issues that are of prime interest to
corporations, which includes contracts, regulation of foreign
investments, intellectual property rights and other concerns.
However, the full exercise of corporate responsibility within China is
still far from ideal, and the reality of greater crackdowns on
independent organizing efforts by Chinese workers remains.
The rise of China contradicts the earlier commonly held view in the
West, particularly in Europe, that there is a decline in the nation-
state development framework. Less than a decade ago, many
adhered to the idea that the future belongs to unions of nation-
states, along the model of the European Union and ASEAN. The
current trend, which is showing the rise of countries such as China
and India, seems to indicate the ascendancy of a new kind of
mega-nation-state. It will be very important to see how China as a
new power will interact with the US, the EU, Japan and even
Russia. China is now convincing the rest of the developing
countries and the old powers that its rise is peaceful, and it is
mainly, but not exclusively, increasing its influence through
economic relations. How these relationships develop will be crucial
to follow.
NOTES
1. Martin Ravallion, "Looking Beyond Averages in the Trade and
Poverty Debate", paper for WIDER Workshop: The Impact of
Globalisation on the World’s Poor, October 2004.
2. “China Tackling Challenges in WTO Transition”, Xinhua News,
December 11, 2004.
3. Ianchovina, Elena, W. Martin, "Economic Impacts of China’s
Accession to the World Trade Organization, World Bank Working
Paper, the World Bank, May 2003.
4. Asia Times online news, December 20, 2005.
5. Murray Hiebert, “Good Marks for China’s WTO Obligations”,
Wall Street Journal, November 28, 2005.
6. See Dale Wen’s “China Copes with Globalization”, a report
published by the International Forum on Globalization, 2004.
7. Ezra Vogel, "The Emperor is Far Away: Understanding the
Challenges Faced by the New Leader", Harvard International
Review, China: Vol.25 (2).2003.
8. Douglas Shihua Zheng, "China’s Employment Challenges and
Strategies after the WTO Accession", World Bank Policy
Research Working Paper 3522, February 2005.
9. Martin Hart-Landsberg and David Burkett, China and Socialism:
Market Reforms and Class Struggle, Monthly Review Press, 2005.
10. Shariff Shuja, “The Limits of Chinese Economic Reform”,
Jamestown Foundation China Brief, Vol.5 Issue 17, 2005.
11. China Economic Net, September 21, 2005.
http://en.ce.cn/Insight/200509.shtml