Jim Jubak

Jubak's Journal2/6/2007 12:00 AM ET

Time running out on China's boom

A decade of roaring economic growth has come at the expense of workers and the environment. That model for growth can't last.

By Jim Jubak

China's economy grew 10.7% in 2006, the fourth consecutive year of double-digit growth and the highest growth rate since the 10.9% recorded in 1995.

And the Chinese economy did it last year without even breaking a sweat: Inflation, a sign of potential overheating, came in at a core rate of just 1.5%.

That's impressive enough, but if you take a slightly longer view, China's record is even more amazing. No major economy in the past 30 years has grown at the speed of China's, The New York Times noted in its story on China's latest economic performance, and no other country has been able to do it year after year for over a decade.

Make you even a little bit curious about how China did it? It should. The usual explanations you see -- that this growth rate is the result of unleashing market forces in a country of 1.3 billion hard-working, traditionally frugal and often intensely driven people -- do capture part of the story. But only part.

If you pop open the hood on China's growth engine, you'll see some surprising parts that explain what's happening better than the conventional wisdom -- and raise some troubling questions about the sustainability of this rate of growth.

China certainly is not about to slip backward into global economic insignificance again, but it appears that the current spate of growth has been built on nonrenewable human, environmental and capital resources. And when those resources have been mined for the easy gains, China's rate of growth will fall back to something like "normal."

With this column, I'm starting a three-part series on the sustainability of China's economic miracle. Today's installment takes a look at China's biggest resource: its workers.

A China-sized RIF

Givebacks. Downsizing. U.S. companies bleeding red ink demand wage and benefit cuts or just cut jobs wholesale. Motorola (MOT, news, msgs) and Pfizer (PFE, news, msgs) reacted recently to slumping sales and profits by cutting 3,500 and 10,000 jobs, respectively. In the developed world, those "techniques" have become standard management tools, and the more flamboyant wielders of those tools, such as "Chainsaw" Al Dunlap, have become famous or infamous.

But let's face it, Dunlap, who fired 10,000 at Scott Paper and 3,000 at Sunbeam in the 1990s, is a piker compared with the Chinese government. In the years immediately after the Asian financial crisis that began in 1997, the ostensibly communist government in Beijing laid off 25 million workers at state-owned companies. By 2003, the total was somewhere between 40 million and 60 million.

But the Chinese government didn't just downsize state-owned companies. It also smashed the "iron rice bowl" that once provided guaranteed work, housing, schooling, health care and retirement benefits for workers in the state sector.

What's more, the central government has tolerated an internal migrant worker system that assures Chinese industry of an even-larger army of even-lower-cost workers.

It works like this. A peasant looking for a better life can move to a city or an industrial zone and get a job. But they can't get a "hukou," the certificate of residence required to access public services such as schools, health care and unemployment benefits. These migrant workers live crammed in company dormitories, usually earning far below the official minimum wage and sometimes as little as $1 for a 12-hour day, doing the dirtiest and most dangerous work that no worker with a certificate of residence wants. And quite often, the company refuses to pay the migrant worker even those wages. Official Chinese government figures say that more than 70% of the country's migrant workers were owed pay by their employers last December.

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Estimates of the number of migrant workers in China range from 110 million to 120 million. With a population of 7.5 million registered residents, a city such as Guangzhou, the export capital of southern China, couldn't run without its 3.7 million migrant workers. Whole industries would come to a halt: Migrants make up 80% of all urban construction workers and 68% of workers in electronics manufacturing, according to UNESCO (the United Nations Educational, Scientific and Cultural Organization).

Why do migrant workers in China do it? Because if they scrimp and save, they can go back to their farms with enough capital to start a rabbit business or pay off debt after a bad year. They can save enough, they dream, to afford school fees for a child in the hope that he won't have to lead a peasant's life. And because, bad as the life of a migrant worker is, for the 150 million Chinese that live below the official poverty line -- most of whom are farmers in the west of the country -- it offers the only hope of escape.

Millions left behind

Let there be no doubt about it: China's economic boom has lifted millions of Chinese out of poverty -- about 300 million between 1978 and 2003, according to the World Bank. But it has left hundreds of millions of Chinese behind. According to official figures, China's richest 20% own 55% of the country's wealth. The Gini index, a measure of economic inequality, where 100 is the most unequal, gives China a score of 44, up from 28 in 1981 and 40 in 2003. That's better than Brazil at 59.1 but worse than the capitalist-dog United States at 40.8.

China's leaders clearly anticipated some growth in inequality when they opened the door to a market economy. Deng Xiaoping, the Chinese leader who more than anyone else set this boom in motion, famously said, "Let some people get rich first."

But I suspect that Deng, who died in 1997, would be deeply troubled by the extent of the inequality that has been unleashed -- and even more troubled by the clear resistance by the haves to share more of the pie with those who have been left behind.

As any student of givebacks in the U.S. economy knows that, at some point, the workers who sacrificed look at the success of the enterprise and say, "Hey, I want some of that." That's exactly what we're seeing right now in the airline industry. With oil costs down from the heights of 2006 and with planes flying closer to full because of cuts in industry capacity, companies that were bleeding red are now solidly in the black. (At least for the moment. This is the airline industry, after all, with its genetic aversion to profit.) If US Airways Group (USABQ, news, msgs) can launch a $10 billion bid for Delta Air Lines (DALRQ, news, msgs), pilots at the two airlines want payback for the cuts they took to keep the two airlines flying.

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