Industrialization in China –Rural Enterprises, Migration, and Informality

 Seminar on Growth, Transformation, and Job CreationFEBRUARY 9-11, 2011, MAPUTO, MOZAMBIQUE

Albert Park, Professor of Economics, University of Oxford

Industrialization in China

Industrialization and balanced growth

Rural enterprise development Comparison with Taiwan

Opening to the outside world Migration and urbanization Labor regulation and labor market

informality Conclusions: lessons for Mozambique

Industrialization and balanced growth

Agriculture contributes to industrial growth Keeps food prices and industrial wages low Agricultural growth increases demand for industrial

goods through rising income and demand for inputs

Savings from rural income can help finance industrial investment

Higher agricultural productivity releases labor for industry

Implication: investments in agriculture and improved incentives/higher prices can fuel industrial growth

Growth of rural enterprises

1975 1980 1985 1990 1995 2000 2005 20100

0.05

0.1

0.15

0.2

0.25

0.3

1975 1980 1985 1990 1995 2000 2005 20100

20

40

60

80

100

120

140

160

180

200

Millions of workers Share of national employment

By the mid-1990s, rural enterprises accounted for 20 percent of national employment ,28 percent of industrial output, and 48 percent of exports

Unexpected Rise of TVEs in China

“All sorts of small enterprises boomed in the countryside, as if a strange army appeared suddenly from nowhere.” Their emergence “was not something I had thought about. Nor had the other comrades. This surprised us.”

--Deng Xiaoping in 1987

Explanations for the success of rural enterprises in China

Initial reforms in agriculture raised prices, improved incentives, and increased rural incomes Gradual market liberalization eased tradeoff between

agricultural prices and urban wages Free entry into new market niches, with little

regulation or taxation Relatively undistorted output and input prices Well-educated labor force Active leadership by local government leaders

Collective ownership (township and village enterprises, or TVEs) until the mid-1990s, followed by widespread privatization

Other lessons from China’s rural enterprises

“Rural” industry heavily concentrated in coastal areas, peri-urban areas Many failed government efforts to

replicate success of TVEs in interior regions

High administrative decentralization led to excessive dispersion of industrial activity

More recently, enterprises have become more spatially concentrated in peri-urban locations, often in industrial clusters

The Case of Taiwan

Initially, the government was skeptical that Taiwanese firms could produce goods of sufficient quality to export One survey in the early 1950s found that

only 241 of 400 factories and 337 of 600 products passed minimum quality standards

Led to early protectionist period (1953-62), focus on domestic market

Employment share of SMEs in Taiwan

SME share of manufacturing consistently high, also key to service sector

Keys to Successful Development of SMEs in Taiwan

Rapid growth of rural incomes and domestic demand in early stages (with protectionism)

Non-distortionary macroeconomic policies encouraged labor-intensive production

Well-educated labor force Active government role in developing

new technologies in agriculture and industry

Major infrastructure projects facilitated growth with equity (unlike China)

China’s Opening to the Outside World

Since 1979 when Deng normalized diplomatic relations, China has been committed to opening its economy to the world 1979 Foreign Direct Investment law Permissive emigration policies Gradual trade liberalization WTO accession agreements unprecedented in

opening domestic markets to foreign competition This approach was courageous, it prioritized

gains from globalization (esp. technology transfer) over risks from foreign competition

Key Elements of China’s Joint Venture Law (1979)

Income tax rate of 15 percent No income tax-first 2 profitable years 50 percent less income tax-years 3-5 More tax benefits for large investments

(over $5 million) Imported inputs (and some consumption

goods) exempt from duties No export duties Free remittance (after tax)

Attracting FDI through Special Economic Zones

4 Special Economic Zones, 1981-85 16 Open Coastal Cities, 1984 288 Open Coastal Cities, 1988

Limited early success…. ….until the 1990s

Key Features of China’s Special Economic Zones

Strong infrastructure Preferential policies, including

taxation, land rights, less regulation Focus on exports, joint ventures Provincial-level authority in economic

administration

Foreign Direct Investment in China

1985 1990 1995 2000 2005 20100

10

20

30

40

50

60

70

80

90

100

Reasons for Limited Early Success in Attracting FDI

Red tape, legal environment, price distortions for inputs, overvaluation, political risk

Early FDI mostly in tourist and property sectors, not export-oriented

Difficulty attracting high tech firms (2/3 simple labor-assembly)

Eventual success attributable to persistence, willingness to experiment, patience

Migration in China

Estimated 130-150 million rural migrants in urban areas today In 2003, migrants accounted for 21% of

rural workforce, 29% of rural income. 43% of rural population lives in a family with at least one migrant

Barriers to migration have eased over time, but migrants still receive unequal treatment and most work in the informal sector

Rapid growth of rural migration

38.949.4 52.0

61.3

78.584.0

98.3 102.6

0

20

40

60

80

100

120

1997 1998 1999 2000 2001 2002 2003 2004

Nu

mb

er o

f ru

ral m

igra

nt

wo

rker

s(m

illio

ns)

Migration has fueled rapid urbanization in China

Real wages of migrants have risen steadily

1221

1140

953889

821

756

703

666644

600

800

1000

1200

1400

1600

2001 2002 2003 2004 2005 2006 2007 2008 2009

NBS RCRE PBC

NBS=National Bureau of StatisticsRCRE=Research Center for Rural Economy (Ministry of Agriculture)PBC=People’s Bank of China

Informalization of the Urban Labor Market

1978

1985

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

PublicNon-publicSelf-employedUnregistered

China’s Labor Regulations

1994 Labor Law Established basic conditions for employer-worker

relations, including minimum wage, overtime pay, labor contract, social insurance provision, etc.

2008 Labor Contract Law Provided greater employment security. After 2 fixed-term

contracts, or 10 years of employment, contract must be open-ended

Increased severance pay (one month’s pay for each year of service)

Internationally, law considered highly protective of workers

U-shaped pattern of informality (CULS, 2001, 2005, and 2010)

After long period of steadily increasing informality, notable reduction in Informality since 2005.

Labor regulation and employment

Flexible labor regulation likely contributed to employment gains during the period of labor-intensive manufacturing

New regulations arose when labor became scarce and China began shifting to higher value added products

Stricter labor regulations reflect rising societal aspirations but could constrain employment in the future

Conclusions

China’s experience included failures as well as successes, but pragmatic approach was consistent Gradualist reforms Experimentation Strong motivation of local leaders

Industrial development success factors Agricultural growth External openness and outward orientation Investments in human capital Undistorted output and input prices Active government leadership Appropriate labor regulations for different development stages

Crossing the River by Groping the Stones (Deng Xiaoping)