Zhang Jun: low wages threaten China's ecoomic transition, govt needs to subsidize familes
Fudan University's Dean of Econ is suspicious about U.S. "reshoring" or "nearshoring," and says China doesn't have to worry too much about manufacturing or technology.
Pekingnology has shared insights from him before, and today is sharing his recent speech at the 2023 NetEase Annual Economist Conference Summer Forum, jointly organized by the China Enterprise Reform and Development Society, NetEase Finance, and NetEase Finance Think Tank.
The text is sourced from his Wechat blog. All emphasis is mine.
Zhang Jun: Chinese Households Facing Long-Term Low Wage Problem; Wages Not Linked to Nominal GDP Growth
During the period from the late 1980s to 2008, China's economic growth model exhibited characteristics of the East Asian model while also possessing its own uniqueness. It mainly relied on external circulation, which involved an export-oriented development strategy, to drive the internal circulation and achieve rapid industrialization and economic catch-up. Particularly through joint ventures, the two circulations were integrated and interconnected, enabling participation in the global production chain through the external circulation and continuously enhancing the capabilities of the internal circulation. This facilitated the development of domestic supply chains and overall upgrades in manufacturing capacity, equipment, and R&D capabilities.
After entering the mid-1990s, during the implementation of this “dual circulation” strategy, local governments gradually evolved into the main drivers of the economic catch-up strategy. Governments carried out large-scale public capital expenditures to stimulate economic growth, relying on land leasing for financing. This model became more prominent after the implementation of policies to expand domestic demand following 2008. However, by around 2010, some core data indicated that the effectiveness of this model began to significantly decline. China aspired to achieve a transformation in its economic model, but over the past decade, China has been entangled and wavering between the old and new economic models.
The transition of economic models is the biggest challenge faced after the success of East Asian economies, and not all economies can achieve successful transformation. South Korea's economic development model was highly successful, but by the 1980s, it had reached a turning point. In the mid-1980s, workers in many large Korean corporations went on strike due to low wages. To address labor-management disputes, South Korea began introducing indexation of wage growth, linking it to nominal GDP growth rates. This marked an important turning point for South Korea to depart from the catch-up model, as the new model required policies that emphasized income and consumption growth of households, ensuring a balanced relationship between consumption growth and economic growth.
There is a significant blind spot in the discussions within the Chinese economic academic community, as all the discussions revolve around the development of enterprises and industries, with no focus on families, and very little attention given to wage issues. Even when discussing technological advancements in enterprises, there is a lack of research on how these advancements are shared with labor in terms of returns. In reality, China has not yet developed an effective policy framework for determining (fair) wages, and the mechanism for collective bargaining is virtually nonexistent. China needs a reasonable (fair) wage formation mechanism that can better synchronize with GDP growth, which is an important characteristic of future economic model.
China should reflect on why there is currently a weakening of consumer purchasing power. Even in the face of the impact of the pandemic, all the policy assistance have been provided to businesses, with little consideration for households. Within the budget-expenditure structure of both the central and local governments, there are few projects aimed at providing subsidies and welfare support to families.
Chinese households have long faced the issue of low wages, as wages are not linked to nominal GDP growth. Additionally, the government provides minimal support for families, with few welfare programs beyond basic social security. Looking at the future trends of China's economic development, the proportion of government expenditure allocated to family support must be significantly increased.
China has reached a point where economic development policies need to be considered from a more balanced perspective in order to address the transition from the catch-up model to a post-catch-up era. It is crucial to design and implement reforms for economic rebalancing as soon as possible, transitioning towards a new economic model instead of being stuck in a swing between the old and the new.
Chinese People Have High Savings Precisely Because of Limited Financial Resources: Proposal to Implement Measures like Universal Publicly-Funded Childcare
Currently, China has the highest savings rate in the world, but it doesn't mean that the Chinese people are wealthy. A high savings rate actually indicates that we are not that wealthy. Due to relatively low incomes and a higher estimation of future expenses, individuals allocate a portion of their income as precautionary savings. In reality, many households are overly cautious and tend to overestimate future financial pressures. Therefore, they set aside a significant portion of their relatively low income to prepare for future expenses and uncertainties. This naturally affects current consumption expenditures. If China doesn't fundamentally change this situation, this will continue to persist.
Currently, both the central and regional governments in China allocate insufficient funds for family welfare. I have previously written an article stating that the country needs to spend more on families in order for them to consume more. In many cases, families bear almost all of the costs themselves, which is uncommon in the world. China is already the world's second-largest economy, with an annual economic growth of 5% to 6%. It is entirely possible for the government's budget expenditure to start tilting towards families. The question is how to ensure that families can simultaneously benefit from GDP growth. On a micro level, it involves establishing mechanisms for (more equitable) income sharing. It is now time to seriously study these matters.
Secondly, at the national expenditure level, how can we allocate more and more funds for family welfare and provide certain things for free to the general public? For example, can the costs of giving birth and raising children be covered by the government? Can the expenses from birth to primary school be shouldered by the government? Our current spending on such welfare aspects is still too insufficient.
To encourage households to have more willingness and capacity to consume, the government needs to allocate more resources towards families. In the past, in pursuit of economic growth, China invested more in infrastructure to improve the country's foundation and in businesses to improve their equipment and competitiveness. However, more similar investments now yield little return. China's economy relies on three main entities: the government, businesses, and households. It is evident that households are the weak point, and systematic policy changes are required. This change can be seen as a transformation of the entire economic model in order to fundamentally address the issues of excessive precautionary savings and inadequate consumption by households.
Otherwise, due to uncertainties about the future and estimations of future expenses, households will continue to engage in precautionary savings. Therefore, it is important to consider how to share a portion of the expenditure costs with the government and households, and in some cases, have the government bear the costs entirely. We should strategically address this issue, such as having the government take on a larger share of expenses related to childbirth, childcare, education, healthcare, and elderly care, in order to alleviate the financial burden on households. Only by doing so can we continuously promote the consumption and welfare levels of households, which ultimately contributes to maintaining long-term economic development momentum.
The cost of childcare should be totally borne by the government, as China's annual fixed asset investment has reached sixty to seventy trillions of yuan, which was necessary in the past but not as much now. Of course, this is a systemic issue that requires a change in the direction of the national budget's income and expenditure. It needs to be carefully studied. In China's current budget expenditure items, there haven't been significant changes for decades. Most of the expenditures are investment-oriented and construction-focused, while consumer-oriented projects and welfare expenditure are insufficient.
I believe it is necessary to seriously consider significantly increasing budgetary expenditures on consumer-oriented projects. In terms of incremental changes, more money should be allocated to the family level. I'm not suggesting that China currently has no expenditures at the household level, but rather that our fiscal expenditure system needs a structural transformation. Without such a change, it will be difficult for us to break free from the cycle of high savings and low consumption.
I Don't Believe the US Has Much Manufacturing Industry Left, and Even if It Reshored, It Won't Bring Substantial Changes
Globally speaking, China's manufacturing industry has achieved a considerable level of success, with a highly comprehensive and developed supply chain system. It’s only that within the entire chain, there may still be a lack of the top 3% to 5% of the chain, particularly in terms of certain core and critical technology and products. China still heavily relies on a few developed countries' enterprises in this aspect.
In the late 1980s, China shifted towards developing an outward-oriented economy and made significant efforts to attract foreign investment and establish joint ventures. The processing and export industries experienced rapid expansion, which gradually spurred the transformation of local enterprises. In other words, during the process of attracting foreign investment, the industrialization and technological capabilities of domestic companies began to improve gradually due to the technology spillover from joint ventures. Eventually, these local companies developed into suppliers for foreign enterprises, leading to the continuous expansion of China's supply chain, covering a wider range of sectors and industries. Harvard University's Growth Lab has compiled Country & Product Complexity Rankings. In 2000, China ranked 42nd globally, but last year it reached 16th place, while the United States ranked 11th. This indicates that over the past decade, China has reduced the technology gap with the United States by more than half.
However, China is still an upper-middle-income country. While it has a large quantity of human capital, its level is not as high as that of developed countries. As a result, there is still a gap between China and developed countries in various aspects, including technological development. Nevertheless, our direction is correct, and in the future, the gap will continue to narrow.
Precisely because of this, developed countries are actually more concerned than China about their dependency on offshore supply chains. Excessive dependence on China's supply chain is viewed as a significant risk for them. They are now striving to "de-risk," but this is not an easy task. Finding alternative sources for supply chains not only incurs substantial adjustment costs but also, at best, resolves the dependence on China for a few specific technology and products without fully disengaging from China comprehensively.
Therefore, while some developed countries are aware of the severity of the issue, I do not believe they can completely free themselves from dependency on China's manufacturing industry. Conversely, although we may not possess a few core technologies or products, through continuous research and technological advancements, the problem of technological autonomy can eventually be resolved.
Regarding the reshoring of manufacturing to the United States, I don't believe the US has much manufacturing industry left. Firstly, in terms of scale, the US manufacturing industry is not even in the same league as China. Even if some manufacturing were to reshore to the US, it wouldn't bring about substantial changes to the country's structural problems. It is true that some companies have reshored, such as a few manufacturing enterprises relocating from Asia to the neighboring Latin American region. Currently, the US proposes not necessarily being fully "onshore" but rather "nearshore." The US considers that there are risks in crossing the Pacific, particularly when faced with unforeseen circumstances like pandemics, which entail significant uncertainties.
Will reshoring manufacturing to the United States solve the economic and structural issues it currently faces? Can the workers from the "Rust Belt" easily return to employment in these factories? I think it's highly unlikely. For the United States, placing manufacturing in Mexico may be perceived as a safer option, but having an idea doesn't necessarily mean it can be implemented. How many of these supply chains that were previously in China can be relocated nearshore in the United States in the future? It's not that easy. For developed countries, breaking free from dependence on China's supply chain poses significant long-term inflationary pressures. Finding alternatives elsewhere would entail substantial adjustment costs, and there are hardly any places that can match China's supply chain scale, making it impossible to achieve manufacturing costs at China's level. If costs remain high, it could slow down the US economy, and even the entire Western developed world's economic growth, resulting in a highly unfavorable situation. Recently, Professor Nouriel Roubini from New York University has also expressed concerns about the potential consequences of such a scenario.