Sunday, February 15, 2009

Jawboning China to Consume, and Consume More

It's not going to work any time soon. China already has a good-sized middle class, but as a percentage of the population, it is small compared to Western Europe, the United States and Japan. To replace long-standing export markets with domestic consumption, its massive working class will need increased wages and security.

In 2007, labor laws were passed to move down that road:
China's legislature passed a sweeping new labor law Friday that strengthened protections for workers across its booming economy, rejecting pleas from foreign investors who argued the measure would reduce China's appeal as a low-wage, business-friendly industrial base.

The new labor contract law, enacted by the Standing Committee of the National People's Congress, requires employers to provide written contracts to their workers, restricts the use of temporary laborers and helps give more employees long-term job security.
Unfortunately, the world economy melted down. And now, predictably:
"The global economic crisis threatens to derail much of the progress made by China's workers over the last few years," said labour rights group China Labour Bulletin in a recent editorial.

The Dagongzhe Migrant Workers Rights Centre in the southern boomtown of Shenzhen has also voiced concerns at pervasive "tricks" used by employers to circumvent the new laws.

These include reduced overtime pay and using doctored contracts that were either blank, incomplete or written in English to confuse and limit possible legal liabilities.
"A lot of factories now are using the financial crisis as a means to protect their own interests," said Ivy Yu, a coordinator with the Dagongzhe Migrant Workers Rights Centre.

In recent weeks, Guangdong's prosecutor's office issued a controversial set of guidelines, saying it wouldn't prosecute key business personnel or technical staff for minor crimes, in a bid to help businesses during the downturn.
I expect China's stimulus package to support their GDP numbers through the next year. But the economic breakdown that revealed itself in 2007-2008 will persist through this stimulus package, in my opinion.

Two aspects of this breakdown are: 1) an increasingly broke and indebted consumer in the United States and parts of Western Europe, via stagnant wages through globalization, and 2) increased capacity, via globalization, in countries whose economies are structured to sell surplus capacity back to this consumer.

What's also interesting is that 'American' companies often benefited the most from this pattern of globalization - i.e. reduced wages and costs at the point of production, and increased financing fees to the indebted consumer at the point of consumption. The U.S. dollar as a reserve currency played a key role in all of this, enabling cheap credit on the American side of the equation.

The world will be waiting indefinitely if they expect China to dramatically increase consumption. China needs to keep people employed, and massive employment is still only offered in their low-wage industries. In a weak world economy, these industries will limit job security and keep wages as low as possible.

Related Posts:

Global Imbalances

G20: Avoiding the Bigger Issues

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