China is hot, but the world has discovered recently that the Chinese economic juggernaut has a soft underbelly. Her workers are growing increasingly restless as they realize they are not reaping the benefits of the country’s economic progress. The well-publicized suicides at Foxconn’s Shenzhen factories have drawn world attention, leading some in the west to wonder if the fun and convenience they derive from their iPhones and iPads are built on the blood, sweat and tears of migrant workers in China’s southern coastal cities.

US blogger Joel Johnson, who visited Foxconn’s Shenzhen factory site, attempts to offer a balanced account. He states “That 17 people have committed suicide at Foxconn is a tragedy. But in fact, the suicide rate at Foxconn’s Shenzhen plant remains below national averages for both rural and urban China, a bleak but unassailable fact that does much to exonerate the conditions at Foxconn and absolutely nothing to bring those 17 people back…….By many accounts, those unskilled laborers who get jobs at Foxconn are the luckiest. But eyes should absolutely remain on Foxconn, the eyes of media both foreign and domestic, of government inspectors and partner companies. The work may be humane, but rampant overtime is not. We should encourage workers’ rights just as much as we champion economic development. We’ve exported our manufacturing; let’s be sure to export trade unions, too.” I think this account is both inadequate and fails to understand the complexities and intricacies of what is taking place on the mainland. The suicides are not problems at Foxconn; they are problems in China.

As a warning to firms operating there China has announced wage increases that will stretch into the future. Firms from Hong Kong and elsewhere are naturally alarmed. Foxconn has announced that it will move part of its operations further inland apparently to save costs. Needless to say local governments in the hinterland will welcome the opportunity to create more jobs in their own towns. But is raising wages and championing worker rights the solution? Are poor pay and inhumane working conditions in the factory the real problem? There will be factories where pay and working conditions are poor and inhumane, and there will also be factories where this is not the case. There will be companies where workers feel exploited and there will be others where they find themselves lucky to be hired. Companies have to compete for workers and there is a limit on what they can achieve without causing adverse consequences. The manufacturing companies operating in the coastal regions, especially the export oriented ones, have to compete vigorously for workers. Treating them harshly is not likely to be a sensible hiring and retention strategy.

Population and Wage Changes

 

Wages in China are rising at present because China’s population growth is slowing. Whether wages will continue to rise depends on whether productivity can improve. Another outcome is for output growth to slacken and adapt to the reduced population growth if productivity fails to rise significantly. The latter will of course be an unfavorable development for China.

China’s population between ages 15-29 increased by an estimated 72.4 and 72.7 million during the respective periods 1970-1980 and 1980-1990 every 10 years. But it suddenly declined during the period 1990-2000 by an estimated 34.7 million. And it will decline again by an estimated 44 and 22 million in the future respective periods 2010-2020 and 2020-2030. This will pressure firms to either raise their productivity and pay higher wages for young workers or terminate their companies.

The process of population change is illustrated in Table 1 , which shows the change during each five year period from 1950 to 2050, broken down by age groups categorized on five year intervals. For example, in the top-left cell the population in the age group between 0-4 years old increased by 24.1 million over the period 1950-1955. The changes in population for different age groups and periods can be similarly read from Table 1. The first baby boom generation in the post-World War II and post-Civil War period occurred in 1945-1955. Births picked up dramatically especially in the post-Civil War period. The effect of the high birth rate will percolate over time through the various age groups. This is reflected by a diagonal movement through the cells towards the right lower corner of Table 1. I have used bright yellow and pale yellow to color this first array of diagonally arranged cells.

The upsurge of birth rates during 1945-1955 triggered another upsurge about 15 years later when the first baby boom generation married and started families. The consequence of this second surge is represented as another downward diagonal movement towards the lower right corner of Table 1, and is also colored bright yellow for easy viewing. The short gap of 15 years between the two diagonals reflects Mao’s initial hostility to birth control in the early years of the founding of the People’s Republic of China.

Housing Problems of Migrant Workers

In the 1970s, Mao grew concerned with the threat posed by too many people. He began to encourage a policy of ‘late, long and few’ and coined the slogan: ‘One is good, two is OK, and three is too many.’ In 1979, China in desperation adopted the one-child policy. As a consequence, births fell dramatically in the period 1975-1980 and its effects have percolated over time through the various age groups. A bright green color is used to track its negative effect on the change in population in Table 1.

The third baby boom generation (the grandchildren of the first baby boomers) was born almost 20-25 years later, closely grouped in the five-year period 1985-1990. Their effect on population changes is highlighted in the third bright yellow diagonal of cells in Table 1.

The negative consequences of birth control and the one-child policy on the births of the next generation began to appear in 1990-2000. And their impact on population changes is highlighted by the pale green diagonal of cells in Table 1.

The opening of China in 1980 coincided with the rapid rise in population in the 15-24 bracket. These were the second generation baby boomers born in the 1960s. By the 1990s, the effect of the first generation born under the one child policy was felt for the first time in the labor market. There was a temporary relief in the years 2000-2005 as children born during 1985-1990 arrived in the labor force; these were the third generation baby boomers. But by 2005 onwards the second generation effect of the one-child policy was impacting on the labor market.

Table 1 summarizes in a visual manner the outcomes on population changes arising from the end of World War II and the Civil War, the shifts in population birth control policies, and also the effects of various economic and political movements, like the Great Leap Forward and the Cultural Revolution. The shifts in these policies will take several generations to work out, lasting over 100 years.

Looking forward, the Chinese working age population will fall off and grow older from this time onwards. Companies will no doubt be competing for workers but they will only be able to offer higher wages in the coming decades if their companies’ productivity continues to grow. Otherwise they will be forced to shut down operations or relocate.

The population in the age group 15-54 in the period 2010-2015 includes, broadly speaking, two generations born after World War II and the founding of the new China. The second generation includes those born between 1960 and1980 and the third includes those born 1990-2000. Many migrant workers of this third generation have parents who were also migrant workers, who moved to the coastal provinces and lived in factory dormitories. Some returned to their native homes, but many stayed on in the coastal towns and cities. Under the household registrations system (hukou) they remain outsiders in the areas they have settled. As migrants they are excluded from housing, education, health care and social services. The provision of these services is a major challenge for the state and has proven a politically divisive issue between city residents and migrants.

The situation is best illustrated by the housing challenge. Migrants live either in factory dormitories or take up residence in urban village enclaves (chengzhongcun). Physically these settlements resemble the shanty towns which have sprung up in most of the developing world, or the squatter areas that existed in Hong Kong in the 1950s. But in China’s coastal cities they are the product of cities expanding into the surrounding countryside. The original villages were engulfed by highways, shopping malls, residential and office high rises, and factory complexes.

Lack of Clarity of Property Rights in Urban Villages

Ever since 1949, landed property in the villages has been given separate recognition from the system of state ownership operating in the urban areas. Village landed property was collectively owned by the villagers, whose rural hukou status entitled them to own land and collect rent. These neighborhoods attracted hundreds of thousands of migrants who rented work and living spaces from villagers. These were migrants who were searching for opportunities and did not live in factory dormitories; others had left factory employment but had chosen to stay in these villages. The villagers, having lost their livelihood as peasants when the city encroached upon and surrounded their villages, were soon profiting enormously from rents received from the migrants crowding into the only space available to them.

As the villagers progressed from cultivating crops to cultivating real estate for migrants enclaves of alternative landed property ownership rights outside the state system were created, but within the expanded urban area. Ownership and user rights to land and property under the system of collective ownership in these village enclaves are even more poorly delineated and defined; often impacted by the twists and turns of state policies. New developments in these village enclaves were often opportunistic and short term given the various uncertainties surrounding their future. Many villages soon descended into slums. But it was difficult for the state to regain control. Officially Guangzhou had 138 such enclaves; an estimate in 2002 gave a total area of 87.5 square kilometers, or 22.67% of the municipal area of Guangzhou.

In many parts of the developing world two approaches have been proposed to transform such slums. Hernando de Soto’s study of shanty towns in Lima, Peru proposed giving away landed property to the squatters through a privatization scheme that converted squatter rights into private property rights at no charge. Many other states have chosen to raze shanty towns through force to make way for either state or private developments at enormous social and political costs. The experiences of Singapore and Hong Kong were more civilized, but had mixed successes and many undesirable long term consequences. China’s system of collective ownership rights make both approaches difficult not only politically, but also legally as both villagers and migrants are not squatters occupying land illegally. In China’s urban villages, the interests of villagers and migrants are intertwined in complex and various ways complicating urban and housing redevelopment. A redefinition of ownership rights, with adequate compensation, might have to be undertaken at some stage, but the challenges of negotiating a new contractual arrangement will be far from trivial even if we set aside ideological resistance.

For migrant workers who live in factory dormitories, their housing arrangement fails to address the aspirations of the third generation of workers, many of whom no longer see returning to their or their parents’ rural hometowns as their preferred future. Some of these third generation workers have grown up in the urban villages where their parents have lived since they arrived. For them becoming recognized by the state as being not mere migrant workers, but proper residents, is a more pressing concern. These young men and women wish to have a life to live, a community to call their own, a family to raise, and a bright future to look forward to in a nation that has hosted the Olympics, the World Expo, the Asian Games, and has been hailed by the rest of the globe as the country that will own the new century.

Reflecting on the aspirations of China’s workers in the coastal cities, I am reminded of a book I studied as a student at the University of Chicago, and of my first ever cruise last summer.

Time on the Cross (1974) was a study of antebellum slavery in America by Robert Fogel (Nobel Laureate in Economic Sciences, 1993) and Stanley Engerman. What struck me most was their finding that slave owners encouraged their slaves to marry. Slaves who were single would live in dormitory-like structures. Those who were married were provided with a small house, furniture, clothing, a small plot of land to grow crops, and some small animals to keep. Slave owners discovered that slaves were less likely to run away if they were married and were also better motivated. However, slave owners were naturally inclined to  care for their slaves in ways that companies may not be towards  their employees. Slaves were assets and their children also grew up to be slaves.

On the cruise ship last summer I discovered there was over 1200 staff sourced from many different parts of the world. I was told that they worked on fixed term contracts for several months and many would renew their contracts on expiration. Most significantly I found that over 30% of the crew brought their spouses on board, and that they also formed part of the staff. I was told that staff morale was much better under an arrangement that united families. As I learned about the ship’s management and the experience of the employees, I wondered why factories in coastal China operate dormitories since they are not at sea.

Migrant Workers Reluctant to Return to Rural Areas

Migrant workers in China’s coastal cities cannot have access to affordable housing. Without an urban hukou they were discriminated against by the state that treated them as outsiders. Under the old socialist system, large state-owned enterprises were sometimes responsible for providing housing, education, health-care and social services to workers. The state was not obliged to provide such services directly at both the national or local level. But the introduction of a market economy compelled the state to change, however reluctantly. Migrant workers were of course entirely left out in the cold. Foreign invested enterprises, like Foxconn, that relied on migrant workers soon found themselves in the position of providing services that should otherwise be provided either by the state or through the market. Housing was one of those services they were obliged to supply.

Providing dormitories for young unmarried workers from rural areas worked so long as there was no aspiration to settle down. But as the aspirations of the new generations of migrant workers change, and as returning home ceases to be a preferred choice, then dormitories fail to satisfy their demands for a home. Housing, provided by the state and through the market, becomes necessary. Importantly, the state has no choice but to recognize migrant workers as having rights that have been previously denied them. Introducing a new policy will not be easy given the large numbers of migrant workers in many coastal cities. Building affordable housing will be politically divisive. The interest of urban residents and urban villagers may well be compromised, especially if the resources are drawn locally. Devising a fair and just manner of allocating subsidized housing in a situation of excess demand will be challenging even in the absence of corruption.

I doubt that worker unrest and morale in China’s coastal cities can be addressed through raising wages alone. If pushed to excess firms will leave and economic growth will be negatively impacted. State and local governments must reconstitute their relationship with urban residents, urban villagers, and migrant workers. Housing is the immediate ‘relationship’ the nation will have to address in the next five years. This is only the beginning and there will be other challenges in education, health care, and retirement protection. If these issues are successfully addressed the Chinese population will begin to lower its propensity to save and power the economy through consumption growth.

References

Joel Johnson “1 Million Workers. 90 Million iPhones. 17 Suicides. Who’s to Blame?” February 28, 2011, http:\\www.wired.com\magazine\19-03\

 

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