from INSIGHT BUSINESS published by USC's Center for Management Communication
www.marshallinsight.com © copyright 2006 by USC Marshall School of Business. All Rights Reserved.
by Eric Tang
ABSTRACT: Globalization creates a widening urban-rural/coastal-inland/rich-poor wealth gap that is adversely affecting China more than any other country. This socioeconomic gap has created a schism among the Chinese people unseen since the imperial age well over a century ago. This creates an unusual buildup of tension among the population that has many foreign investors worried about the stability of the market in the future. Capitalism continues to develop China as an emerging nation on the brink of economic maturity, yet it has shown that the country has a long way to bring economic parity for its entire people. According to the PBS program, Commanding Heights, “Globalization doesn’t cause world poverty, it just makes it visible.”
The problem results from the wealth gap; one privileged class versus an exploited one, serving the needs of the global market. China will see an indefinite schism among its population, with an entire urban upper middle class population residing in the coastal areas while the rural farmlands are neglected and underdeveloped. Township-village- enterprises, or TVEs initiated by the government points to an attempt to help raise the living standards and wages of rural laborers to those in the cities.
Labor economic conditions in rural areas
Today, traditional Chinese local trading networks lack the yielding power to retain lower class workers to remain in their current socioeconomic classes. Farmers leave the countryside to take jobs that have higher salaries in industrial and manufacturing areas. However, as laborers stray from local trading networks in their specified skilled areas, (ie. farming) they are subjected to the forces of global prices and foreign competition (ie. supply and demand). Global currency fluctuations and trade policies, neither of which would have any effect on how the farmers would sell their agricultural products to the local markets, becomes the driving forces of day to day transactions. The smaller the market size, the more pricing power and control the individuals would have.
Many firms investing and setting up operations in the local markets despite having a lack of real economic or political power in the world market/rapidly diversifying domestic economy, gain advantage by greater knowledge of local markets, local preferences, and the machinery of local politics. This results in the decrease of pricing power of the average buyer of goods or supplier or labor, destroying existing trade networks, which often are multi-generational. The destroyed networks that serve as the existing personal credit lines or credit references, lead to the need to go to lending companies to get mortgage or loans instead of personal contacts.
Due to the top leadership’s concern about possible over-population in the cities, from the very start of the reform two decades ago, the government implemented the policy of “Li Tu Bu Li Xiang,” the policy of “leaving-the-farm-but-not-the-farmland.” (“Globalization and Inequality”) What this means is that rural townships and villages are permitted to industrialize by converting some of the farmland to factories but farmers are discouraged from migrating to the cities. However, as a result, there has been a spectacular rise in what are known as the “township-and-village enterprises,” or TVEs, which are industrial entities located in rural areas. The presumption is that the rise of income in the rural areas reflects, to a large extent, the growth of the TVEs, but does not reflect the difference of the urban to rural laborer wage gap. Ultimately, this attempt by the state to reduce the coastal-inland wealth gap seems futile as an attempt to boost demographic statistics towards the government’s favor.
The necessary infrastructures are still lacking in these rural inland areas where many foreign firms are hesitant to invest in. In order for foreign capital to move into the underdeveloped countryside, the government must take the initiative to complete the TVEs and close the gap between the inland and coastal areas. With the possibility of commercializing the rural areas, the entire country could essentially be connected to the global market, providing even more services and opportunities. However, with the majority of the population residing in 1/5 of the country towards the coastal regions, there is still a long, drawn out process to develop the TVEs and provide the necessary infrastructures to support such ventures.
Benefits of TVEs
For overseas investors, TVEs provide a number of benefits:
Foreign investments have played an important role in TVE development. Foreign investors have brought in scarce foreign capital, relatively advanced technology and management skills, along with their marketing networks abroad to provide easy access to international markets. Compared with domestic buyers, there are less problems of inter-enterprise debts because exports also guarantee payments, which are due mostly upon delivery. The TVE total export value increased to $84.6 billion in 1997. TVE export growth has been largely contributed with dominant community ownership. The success of TVEs depend on unique opportunities by China’s market liberalization, especially with the relaxation of state monopolies over industries.
The protected industrial sector effectively opened to new entrants and large number of TVEs started up and took advantage of sharing the monopoly profits in the industrial sector. TVEs are under direct jurisdiction of township-village governments, or TVGs. The owner-management relationship allow community members as ownders to have incentives to monitor TVG officials and TVE management.
Psychology of laborers
Foreign firms flood into the regions because of the constant mobile labor force, often willing to travel from the countryside to the cities, lining up for any types of work. This translates to a resistance for many companies to trained laborers. Supervisors hire many cheap laborers to do constant construction and services to avoid the costs of technology and professional workers. This results in a never ending replenishing source of laborers for small businesses and corporations. By some estimates, almost 200 million underemployed workers in rural areas could move into industry. This surplus labor may take at least two decades to absorb, helping to hold down wages for low-skilled workers (who currently earn less than 50 cents an hour). (“The Halo Effect”)
More often or not, with a population exceeding 1.3 billion, the value of each worker’s production has diminished continuously over the years. In 2003, the country generated 11.67 trillion yuan, or 1.41 trillion US dollars, in gross domestic product (GDP). Calculated on a per capita basis, that exceeded 1,000 US dollars even though the Chinese population had grown to nearly 1.3 billion. (“Chinese Policy”) A Stanford University study showed that as people grew jaded about the value of their life, there was an increase in hedonism within the test group of people. With no positive outlook on their futures, the Chinese people decide to do whatever it takes to earn the extra dollar, to view their lives in the short term, and just go about doing their own business. Combined with resource pressures in rural China and increased freedom of movement, economic inequity has engendered wide-scale migration from rural to urban areas and from poorer to wealthier provinces.
(“Globalization and Inequality”) In major cities, this “floating population” is estimated to constitute 10 to 33 percent of the population. (“ China Confronts”)
The reason for this pessimism? The flourishing and rapid development of China is based on the previous two generations, while this generation (ie. Teenagers and young adults) have been reaping the benefits as a result from their elders’ hard work and struggles in the past few decades. The growing sentiment among this generation is that many seem to be developing hedonistic characteristics. Anyone who walks around metropolitan areas in China would observe the increasing amount of children/teenagers possessing advanced cellular phones, personal electronic devices, digital cameras, etc. The children of this generation have adopted western influences including fashion and entertainment, possibly ignoring the principles that the previous generations have upheld in order to succeed during the struggling economic times.
Solution? The government needs to reform the education system to learn more about globalization along with expanding infrastructure developments with TVEs developed in all rural areas of China. Where there are winners in the global market, there are certainly people who are hurt from this movement. For the past 10 years, China has seen a growth rate that rivals any emerging, developing nation and there is no end in the economic prosperity. However, with no economic shocks or depressions in sight for the near future, the concern is that the current generation will not be able to understand and survive under harsh, recessionary times. The education provides many college students the knowledge to understand the capitalistic nature of globalization and to prepare for uneventful recessions. Western countries could provide the type of education, with governments cooperating in allowing students to have the education needed in today’s competitive economic environment. Chinese administrators should expand TVEs to a country-wide reform system, by upgrading facilities and infrastructures to have these rural enterprises start up and become successful.
Chinese administrators have been concerned about the alarming numbers that show the decline of diligence and earnest hard work among this generation. The emerging Chinese market shows a cause and effect model in part because there is a lack of hardship among these young adults who live in the cities. With commercialization and foreign products flooding the cities, the next generation faces questions about their ability to handle economic hardship and recessions in the near future. Continuing the lavish life style and higher standard of living, the perception of the hard working, thrift Chinese characteristic seems to be pushed aside with the globalization movement. With the countryside remaining the same for the past 50 years and the huge upswing in the developed cities, the global divide and wealth gap ever increases. The solution of developing TVEs on a countrywide basis in the rural areas may seem feasible with foreign capital investment contributing a portion to this
development cause.
Developing TVEs countrywide
TVEs will contribute to growth and exports to China, with rural development and the increase of employment rates and the potential for training skilled laborers for future potential industrial work. The unique community ownership, the management which responds to market forces and the outward-orientation all appear to contribute to the production efficiency of these enterprises. China’s TVEs successfully combine public ownership of industry with management which responds to market based incentives.
In 1999, TVEs accounted for 61 percent of total industrial output with an annual average growth rate over a ten period exceeded 19 percent.(“Township and Village Enterprises in China”) The system employs millions of people; its publicly owned characteresistics give property rights to the local residents but the ownership rights belong to the state, along with the revenues generated. With entrepreneurs managing the TVEs, there is potential for private foreign investment to fund business concepts and develop infrastructure projects that are aside from TVEs. TVEs take advantage of China’s endowments of cheap labor: this includes the product of labor or resource-intensive products such as clothing, textiles, food processing and toys. As China’s economy develops and nears the maturity cycle, TVEs will shift its focused to technical and skilled labor employment, with unskilled labor and production outsourced to other emerging markets. By enforcing a countrywide system of TVEs, the rural countryside will be developed in time for the next economic phase in China’s development, thus pushing the entire population forward, instead of expanding the schism between the urban coastal and rural inland populations.
Problems and responsibilities of firms investing in China
By 1998, no less than two-thirds of foreign invested companies in China were running at a loss. (“The Halo Effect”) This result was established by the Chinese tax authorities which had investigated the corporation tax declarations of 100,922 such companies, of which just 34,683 were making a profit. Significantly, the trend was negative: with the number of companies making a profit down 2,024 on the previous year. The total profit of those companies achieving a surplus was US$14.9 billion, an increase of 6.36 per cent on the previous year. According to the interpretation of the tax authorities, there were three main reasons for this widespread loss-making - plant size being too small, presenting little opportunity to exploit economies of scale; bad planning; and competition being too strong. The six main difficulties faced by these companies were, in order of priority: availability and education of workers; problems with the distribution network; infrastructure problems; product quality; supply of raw materials; and servicing and maintenance of machinery.
Further difficulties arose over: market potential proving lower than initially expected; insufficient productivity and labor morale; and the differing goals of the collaborating partners - indeed this latter factor (according to 59 per cent) along with false expectations (63 per cent) was/were the main reason(s) for ventures to fail. (“The Halo Effect”)
Interestingly, with experience, the companies were able to reduce the impact of the problems, with the one exception of "differing goals of the collaborating partners" increasing in difficulty over time. A further important finding established that neither the investment incentives, such as those available in the Special Economic Zones, nor various government restrictions on location play an important role concerning a company's decision for or against a particular location. Increasing competition was seen as the biggest risk potential for 1998, according to more than 50 percent of respondents.
What was clear was that joint-ventures, as a company form, were/are rapidly declining in popularity, with the majority of investors now intending to establish wholly-owned subsidiaries. More than half of the foreign joint-venture companies were dissatisfied with their Chinese partners; the reasons given were that joint venture partners e.g. "lack a spirit of co-operation and support", "intend the milking of their foreign partners", or that nepotism, corruption, incompetence and interference in business are directing the company away from originally agreed targets.
Government problems
The scenario stated earlier creates a problem of a “revolution of rising expectations.” Understanding that China is a still a Communist socialist state reminds everyone that the government is still ruling with an iron fist. The last event on the government’s agenda is to quell social unrest and rioting. With the economy steam rolling year by year, the expectation of social unrest grows as this economic bubble sits on its own impending doom to burst. As the government allows for an increase in farm wages, an outcry for more freedoms and aid from the government to close the socioeconomic gap will be seen pouring throughout the countryside. The problem facing the government is whether action or inaction will cause further problems. Enacting policies will only ask for more demands from the individuals dissatisfied with the government, as seen throughout history during revolutions. (“Revolutions of Rising Expectations”) Delaying any response to the current
situation would place a lot of world and global pressure on China to enact a policy, especially since globalization has linked every market together.
Solutions
Jeremy Bentham’s utilitarianism doctrine states that the solution should be “the greatest good for the greatest amount (of people).” The Chinese government should adopt policies to ease the problems of the migrant labor population by constructing temporary housing and providing stipends while the laborers seek employment. To reduce the massive migrant population, farmer subsidies and incentives should be implemented to ease the wage difference between farmers and urban laborers. The money raised to provide subsidies and infrastructure improvements will have to come from government expenditures and investments. Private venture capital funding and foreign investment may raise enough capital to support such actions for the government to initiate. This process will take the latter part of the 21 st century as the transformation of an entire rural population will undoubtedly take a huge effort by the Chinese government to carry out policies to aid this movement. Next, it is the responsibility of companies to adopt a code of conduct and educate the employees and laborers to understand the corporate culture. This will translate into a bond between foreign company management and the work force lacking in many joint ventures and firms. This bond will establish a management-employee relationship that is lacking and see foreign Chinese employees as substitutable and expendable. Companies have begun to develop into self sufficient towns to contribute to the community, providing, dorms, restaurants, malls, hospitals, and other facilities.
The Chinese government should be able to stabilize the work force by expanding the TVE program to cover all rural areas in China and expand the labor workforce to keep unemployment low. Globalization of the economy demands the rule of law; the communications revolution enhances the transparency of political institutions, and global economics. Yet the trend toward enhanced state capacity, in a highly decentralized form, is countered by decades of corruption which continues to undermine the legitimacy and efficacy of local authority and implementation of international agreements; a raft of economic and social welfare issues that genuinely could threaten the stability of the central government; and a leadership which is reluctant to expand the arena for public participation , for the fear that ultimately its own legitimacy will be undermined.
Thus, the potential for China to be an effective, responsible, and committed participant in international regimes exists and is likely to grow. However, the process will be a tortuous one that will proceed in fits and starts, with political factors involved in expanding the TVE program to the entire rural inland areas. Monetary investment will be mainly funded by the state government while foreign investment capital can provide partial funding to develop the program on a country wide basis.
Works Cited
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“Chinese policy to concentrate on helping rural workers, urban poor.” BBC Monitoring Asia Pacific-Political. BBC. 6 Oct. 2004. Transcript.
Elizabeth Project on World Security, Rockefeller Brothers Fund. “ China Confronts the Challenge of Globalization—Implications for Domestic Cohesion and International Cooperation.” N.P.: n.p.: 1998.
Fu, Xiaolan. “Township and Village Enterprises in China.” Working paper. Lancaster University Management School.
“Halo effect: How china’s expansion will effect growth and jobs elsewhere.” The Economist 2 Oct. 2004: n. pag.
Landsberger, Henry A. “Revolution of Rising Expectations—Traditional Life Ways? A Study of Income Aspirations in a Developing Country.” Economic Development and Cultural Change 21 (1973): 212-26.
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