Chinese Cheap Labor And Unemployment In Europe Countries - Research Paper Example

Chinese Cheap Labor And Unemployment In Europe Countries Introduction In the early years of globalization China preferred to remain a closed economy for many years. Despite pressures from the world community, China was not ready to open up its doors on liberalization policies. It was only under the premiership of Chairman Deng Xiaoping that China started taking a more open and liberal stance, quite at variance to the erstwhile egalitarian policies being advocated by Mao. Since early nineties, China started welcoming multinational corporations in a big way. Soon, China started attracting foreign capital and utilizing its cheap labor force with right combination of automation in collaboration with foreign partners started becoming a cheaper manufacturing hub. Many western and European production oriented companies started reducing their operations in their native countries thus resulting in job cuts. As this trend continues unabated, concerns of increasing unemployment figures are being expressed by analysts. Countries like US, UK and Germany are considered to be the ones from where multinational companies have moved their operations eastward. It is widely believed that opening of economic policies results in mutual benefits for the trading nations, but when it is felt that jobs are being taken away from one country and handed over to another country, then it gives rise to a peculiar social sector problem. United States of America recently saw a political campaign, during which outsourcing and increasing unemployment figures were big issues. Therefore, it becomes all the more necessary for the US government to get to the depth of the issue and try to figure out an acceptable solution. If we take a look at look at the figures of US trade with China during the last 10 years (during the period 1999-2008), we find that the trade deficit has indeed widened between in favor of China (US Census Bureau, 2009). Table-1: US Trade with China during 1999-2008 (millions of U.S. dollars) S No Year Export to China Import from China Deficit 1 1999 13,111.10 81,788.20 -68,677.10 2 2000 16,185.20 1,00,018.20 -83,833.00 3 2001 19,182.30 1,02,278.40 -83,096.10 4 2002 22,127.70 1,25,192.60 -1,03,064.90 5 2003 28,367.90 1,52,436.10 -1,24,068.20 6 2004 34,744.10 1,96,682.00 -1,61,937.90 7 2005 41,925.30 2,43,470.10 -2,01,544.80 8 2006 55,185.70 2,87,774.40 -2,32,588.70 9 2007 65,236.10 3,21,442.90 -2,56,206.80 10 2008 71,457.10 3,37,789.80 -2,66,332.70 Things become quite clear when we have a look at the graph depicting the trade deficit figures. It is therefore quite clear that while on the one hand the Chinese dominance is increasing by leaps and bounds in the US market, the US exports to China have not been able to match the import figures. In fact, today China has literally become a talking point at all international forum. Besides some of the issues involving human rights, Tibet, Taiwan etc. the rapid progress made by the country on the trade and industry front has provided a leading edge to China. Supplies of cheaper goods to countries around the world, hazardous paints in toys etc. are also being discussed as the shortcomings arising out of China in the recent past. While the US seems to be facing a number of problems in the form of outsourcing and job losses, China is steadily making a progress in its economic standards. This gives rise to questions like, is the growth of China at the cost of other nations progress? Is the Chinese cheap labor stealing jobs from their US counterparts? Liberalization and the Aftereffect During the early years of liberalization China’s fastest growing sectors were textiles, apparel, footwear, and toys. During the period between 1980 and 1998, this sector saw a growth of more than ten-fold from $4.3 billion to $53.5 billion (Lardy, 2003). But in recent years China seems to have become tech savvy as well. Now, the country is attracting the industries like consumer electronics, automobiles, computers and other information technology products from all across the world. Since the beginning of the far-reaching economic reforms of 1978, China’s economy has been growing at a breakneck pace of 9.5 percent a year (OECD, 2005). If it were now to grow at 8 percent per year, doubling every nine years, income per person in 2031 for China’s projected population of 1.45 billion would reach $38,000. It is worthwhile here to mention that at a more conservative 6 percent annual growth rate, the economy of China is expected to double every 12 years, overtaking the current U.S. income per person in 2040. Though these figures were projected when the recessionary trends were not in full swing, but it is equally pertinent to note here that the tremors of the recession are being felt more in US than in China. Therefore, alarm bells have started coming in from different quarters in the US, with demands to take appropriate steps towards balancing the growing levels of imbalance between the US and Chinese trade. OECD’s latest economic outlook also presents a bleaker future for the job market in the coming months. Taking note of the ‘most serious’ recession since the early 1980s, the economic outlook predicts that, “The number of unemployed in OECD countries is expected to rise by about 8 million people over the next two years” (OECD, 2008). With widespread fears of increase in unemployment figures, job losses, the youth segment is bound to become restive and if the youthful energy is not channelized to constructive areas, there are always apprehensions of a deterioration is law and order situation as well. This gives rise to the question as to how serious is the situation arising out of the movement of key operations by multinational enterprises from US towards China. Companies on their part have been trying their level best to suggest that the outsourcing phenomenon will not hamper the job prospects in the existing market and the youth from US universities will continue to get better job prospects. But, the rising trade imbalance between the US and China and many instances of job cutting by companies are not allowing this issue to settle down. The recessionary trends, starting off from the mortgage crisis, have now spread to almost all sectors in the industry. While on the one hand, banks are now going bust; other sectors too are feeling the pinch, because of reduction in sales. The job losses as a result of recession are also contributing towards the insecurity in the job market. Growing influence of China in world affairs, despite its poor human rights record, is a source of worry for the western nations in particular, because they’ve been vociferous supporters of human rights and trying to corner China on the excesses being committed. The incidents of Tiananmen square, the brute force being used against Tibetan people, using repressive measures against the Falun-Gong sect are some of the glaring instances, which have found mention in the mainstream media around the world. But the fact that China was able to showcase its prowess in the Beijing Olympic games held in 2008 is an indication to the fact that China has attained good progress all these years. The flight of a number of US companies to the mainland China has certainly contributed towards the growth of China. While on the one hand a number of Chinese people got employment in these companies, the Chinese economy too got a helping hand from this growth. It is worth considering as to what would have been the state of affairs back home, if all these companies would have opted to continue their major operations from US itself. But it is also worth pondering that the companies would be able to operate and progress if they can attain the breakeven point within reasonable amount of time. The availability of market within easy reach for the products, cost of production and transportation etc. too play a crucial role in deciding about the future of a company. Li-Hua and Khalil (2006) point out that the Chinese economy has been a blend of market economy and command economy. The Chinese government has defined such an economy as “socialist market economy with Chinese characteristics”, which helps the Chinese government in controlling to some extent the operations of industrial sector as well. The trend of outsourcing, particularly in the burgeoning IT sector i.e. sending across a range of jobs across the countries and continents seems to have become an industry in itself. India and china are the two main beneficiaries of this trend. Today, in view of the competition, profit margins have become quite thin, which sometimes forces the management towards taking cost-cutting initiatives, that includes outsourcing, retrenchments, relocation of employees, pressure on employee benefits etc. Though the unemployment figures have never been zero and there was always a demand and supply gap. It would therefore be quite interesting to learn about the unemployment figures of US during the last about 10 years. As per the Bureau of Labor Statistics, US Department of Labor, the unemployment rate had risen to an alarming figure of about 8.5 percent in March 2009, while it was just about 4.2 percent in 1999. What further aggravates the problem is the projection from institutions like OECD, that this figure is bound to cross 10 percent by the year 2010. The recent OECD report further comes out with the finding that the incomes in an average US household are also being depressed by the deterioration in the Labor market condition (OECD, 2009). This has resulted in falling of overall wealth with declines in housing and equity prices. Therefore, decline in the employment figures results in cascading effects on the overall economic scenario. There was a time, in not so distant past when countries like US, UK and Germany used to be favourite places for skilled workforce to have decent jobs, higher salaries and an assured career. But now, the situation has become somewhat different. Though, the attraction is still there, but now such a job market exists outside these nations as well. As for the rates of unemployment in US over the past decade the official figures indicate that till about 2001, the unemployment rate was on a decline but after increasing for about a year and half, the rate was on a declining trend till about 2008. It was after 2008 that the unemployment rates started shooting up (Fig-2). Fig-2: The rates of unemployment in US over the period 1999-2009 S No Year Unemployment Rate (In January) 1 1999 4.30 2 2000 4.00 3 2001 4.20 4 2002 5.70 5 2003 5.80 6 2004 5.70 7 2005 5.20 8 2006 4.70 9 2007 4.60 10 2008 4.90 11 2009 7.60 But these figures appear to be in contrast to the generally held notion that the increasing affluence of China is resulting in decreasing employability for US citizens. The outsourcing of IT jobs, flight of manufacturing facilities to China has not increased in the year 2008 only. This trend has been continuing for more than a decade now. Does this imply that the noises being made about the stealing of jobs by China are without basis? Does that imply that the advancement in living standards of Chinese people doesn’t have anything in common with their US counterparts’ diminishing living standards? Well, the answer may not that straight and simple. Globalization actually means networking of economies, which in turn implies networking of the governments and their people. Therefore, some impact on one side of the network is bound to find a ripple effect on other corners as well. With the advancement in ICT, global distances have tended to become smaller while the world is gradually being seen as a global village. Bracken (2004) underlines that it was since early 1990s when the term ‘Globalization’ became a catch phrase as it started entering into all walks of life even in developing economies. Therefore, while the recession has hit the western nations the hardest, there are clear indications that the ripple effects are being felt elsewhere as well. China is certainly not immune to these adverse effects; therefore it will be interesting to see will the impacts of recession be as adverse in case of China as in case of the US. Studies undertaken by OECD find out that the real GDP has indeed slowed down in China and in the coming years situation will be further deteriorating. But at the same time OECD studies suggest that the private wealth in the hands of the citizens is not going to be affected much, because unlike the western countries or OECD nations, where most of the equity is in private hands, in China majority stake is still held by the government or government controlled institutions (OECD, 2009a). Therefore the overall adverse effects on wealth have been limited, which in turn implies that the financial condition is not as tight in China as in US. Similarly, even under these adverse economic circumstances, McKinsey projects that China will have more numbers of rich by 2015 and the country will become the fourth largest country with wealthy households after the US, Japan and the UK. With more than 4 million wealthy households in China it will be interesting to see the geopolitical scene at that time (McKinsey, 2009). After adopting the liberalization policies, China has indeed adopted reformist posture by offloading stakes in a number of state owned enterprises (SOEs), but there are still a large number of SOEs being controlled directly by the Chinese government. While talking about the job losses in China ever since the adoption of globalization policies, Garnaut et al. (2005) state that a total of about 43.8 million people lost their jobs in the SOE sector during the period 1995-2003. This was the time when many MNEs from US started reaching out to the mainland China with proposals for setting up manufacturing facilities. Then is little surprising that how come so many people were rendered jobless during the period. The answer is provided by Huang and Yao (2006), when they stated that though privatization is easily pointed out as the reason for job losses, but this is not the actual reason. While admitting that SOEs indeed had resorted to over-employment under the strictly communist party regime, but gradually the realization also dawned upon the Chinese government that in order to compete with the private sector, they need to trim the workforce from the SOE sector. Therefore Huang and Yao (2006) point out the two pronged theory of the government led to job losses during the period. First, China implemented massive structural adjustment in its industrial sector in the mid-1990s, trimming off excessive capacities in industries that over-supplied their products (such as textile) and mining cities that ran out of resources. This led to reduction of employment in the SOE sector. Second, facing growing competition from private firms, SOEs began to implement a policy called jianyuan zengxiao (cutting the number of employees, improving efficiency) in the mid-1990s, resulting in massive lay-offs. If we go by this rate than with the privatization of over 50 percent of SOEs in China, the situation would have been worse. Because if millions of people start losing their jobs in this manner, they are bound to react and it would soon result into problems for the government on the political as well as social front. But, this did not happen in case of China, because most of the employees having lost their jobs from SOEs were re-employed by the multinational enterprises from USA who established their bases in China during that period. Therefore, it could be considered smart move by the Chinese government and the entrepreneurs. Fig-3 indicates the overall employment situation during 1995-2001 in China (Huang and Yao, 2006) Analyzing the figure-3, it becomes quite clear that, while China started offloading the employees from its SOEs around 1996, the private firms started hiring in a big way, thus compensating for any deficit in the total number of gainfully employed workers in China. This in fact, resulted in avoiding any major shake-up in the society; there was not much social unrest. But, unlike the situation, which happened in China, the US is reeling under severe pressure, because the numbers of job losses are not being adequately compensated from anywhere. There are some companies who prefer to take along some of their employees with them when they move to China with their operations, but the numbers of such employees are few and far between. The major beneficiaries are of course the Chinese people. While coming out with the figures about Labor and Social Security Development in 2007, the National Bureau of Statistics of China points out that at the end of the year1, ‘the new employment in urban areas was 12.04 million persons with 5.15 million laid-off and unemployed workers finding new jobs”. Over the years a large number of American companies have shifted their operations to China. CNN has come out with a list of about 800 companies which are exporting America to China2. This is a very comprehensive list including the names of renowned companies like 3Com, 3M, Accenture, Adobe Systems, AT&T, Bank of America, Bechtel, Cisco Systems, Citigroup etc. The list is indeed quite exhaustive one. The report contends that these companies are ‘either sending American jobs overseas, or choosing to employ cheap overseas labor, instead of American workers.’ This is bound to agitate the minds of those expecting to get decent jobs in the industry. If the companies gradually start pulling out of America and instead manufacture their goods and services in China, which are subsequently pumped into the US market, for the ‘domestic consumers’. Theoretically this involves lot of logistics, thus implying more costly proposition for these companies. But, the ground reality is something else. These companies, after shifting their bases to China, are supposed to invest huge amounts in transporting costs for shifting the finished goods back to America. And even under such an arrangement these companies are making more profits then they were making in US. Citing the reports of U.S. Bureau of Economic Analysis, Wiseman (2006) came out with a report which pointed out that, “U.S. corporate profits in China passed $2 billion the first six months of 2006, up more than 50% from the first half of the year 2005’. What is amazing is, these U.S. companies were able to earn profits in just about one year, which they could earn during the entire 1990s while carrying out their operations in America. One big difference is of course the difference in the prevailing levels of salaries in America and China. But at the same time, it would be pertinent to point out that the cost of living is also quite different in these two countries. The cost of living in an American like New York is far more than that prevailing in Beijing or the more industrialized city of Shanghai. The average salaries in China would therefore be far less as compared to those prevailing in US. But, it is equally relevant to note here that the cost factor is not the only factor alluring the US companies, they are also on the lookout for a much bigger market for their products and services. Cruey (2007) pointed out that a number of western companies are moving into China with an eye on the billion strong population in China, the world’s largest market. In addition, the neighboring India is another huge market, billion strong market, which happens to be nearer from China than from US. Therefore the companies seem to have more than one reason to venture out of America. Cruey (2007) also points out that in the recent past Chinese government has made their rules stronger enough to see that foreign companies do not enter into China with the sole aim of exploiting the cheap labor, instead these companies must also be seen producing goods and services for Chinese market and consumers. Well, things might not be the same in the near future, as some reports are pointing out. Mehta (2008) points out that the rising cost of transporting finished goods and services back to America is proving to be big deterrent for such a business proposition. It has been pointed out in the repot that in the last two years, the cost of transporting outsourced goods from China to America has doubled on account of increase in oil prices and labor costs. Considering the law of demand and supply it appears quite natural that once the demand for manpower increases, the cost of labor is bound to rise as well. So the rising costs of labor in China are also contributing to the increase in cost of production for US companies. In addition, some companies are also finding it difficult to have skilled manpower i.e. ‘shortage of technical and managerial talent’ is another factor which seems to be working against the continuous flight of operations from America to China (Mehta, 2008). But, despite these hiccups, the ground reality doesn’t seem to change much in favor of the unemployed youth in America in the near future, because the recession seems to have become a big factor now for the companies in order to survive their operations. Impressive GDP growth, improvement in economic indicators, increasing income levels of an average Chinese are some of the factors determining the consumer habits in China. Analysts have expressed their opinions that such indicators are bound to help in sustaining the industrial production and profitability aspects of a company. Under such circumstances, when the companies were finding it difficult to sustain in America, they preferred to go out and make China their new home. Over the years this has certainly helped China in containing the unemployment rates. The unemployment figures from the US-China business council3 indicate that as compared to wide variations in the unemployment rates in America, this figure has seen marginal increase in the last 10 years in China (Fig-4). Fig-4: The Unemployment Rates in China (1999-2008) (Source-USCBC) Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Unemployment rate 3.1 3.1 3.6 4 4.3 4.2 4.2 4.1 4 4.2 Conclusion It is therefore quite apparent that while America is reeling under the twin crisis of recession as well as shooting unemployment rate, China seems to be having the impact of both these crisis under control. With promises of many more jobs in the coming years, the unemployment rate is bound to remain under control. Therefore, there seems to be some amount of truth in the fact that China is indeed progressing at the cost of some other nations like America, from where the companies are making a beeline to enter into the Chinese domain. Considering a situation where the SOEs of China had not resorted to job cuts and not thrown out a sizeable number of its erstwhile workers in the job market, the figures of unemployment would have been far less than the existing 4.2 percent. This would have meant that almost Chinese would have been employed, but in that case the state owned enterprises of China would have been reeling under losses and inefficiency. But, under the present situation, China has not only improved the condition of its large number of state owned enterprises, but it has also gained many more jobs for its people from a large number of American companies. In this proposition, while the American companies too are in a profitable position, the only loser seems to be the American unemployed youth. References: 1. Bracken, Paul (2004), ‘The Multinational Corporation Today’. Yale SOM Working Paper No. OB-06, PM-05, OL-19, Yale School of Management, available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=514422#PaperDownload (April 21, 2009) 2. Bureau of Labor Statistics (2009). Labor Force Statistics from the Current Population Survey. United States Department of Labor. Available online at http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=LNS14000000 (April 22, 2009) 3. CNN (n.d.). Exporting America. Available online at http://edition.cnn.com/CNN/Programs/lou.dobbs.tonight/popups/exporting.america/frameset.exclude.html (April 22, 2009) 4. Cruey, Greg (2007). ‘Why US Companies go to China. Available online at http://www.chinaventurenews.com/50226711/china_trade_101_why_us_companies_go_to_china.php (April 22, 2009) 5. Garnaut, Ross, Ligang Song, Stoyan Tenev, and Yang Yao (2005): China's Ownership Transformation: Process, Outcomes, Prospects, The International Finance Corporation, Washington, D.C. Quoted in Huang, Lingwen and Yao, Yang (2006). Impacts of Privatization on Employment: Evidence from China. China Center for Economic Research, Peking University, Beijing, China. 6. Huang, Lingwen and Yao, Yang (2006). Impacts of Privatization on Employment: Evidence from China. China Center for Economic Research, Peking University, Beijing, China. 7. Li-Hua, Richard and Khalil, Tarek M (2006). Technology management in China: a global perspective and challenging issues. Journal of Technology Management in China. Vol. 1 No. 1. 8. Lardy (2003) Nicholas R. Trade Liberalization and Its Role in Chinese Economic Growth, Institute for International Economics, Washington, D.C. 9. Mehta, Stephanie N. (2008). ‘Made (again) in America’. CNN Money. Available online at http://money.cnn.com/2008/09/11/news/international/China.fortune/index.htm?postversion=2008091112 (April 22, 2009) 10. McKinsey (2009). More rich in China by 2015. Available online at http://en.ccer.edu.cn/readNews.asp?NewsID=6657 (April 22, 2009) 11. NBS (2008). ‘Statistical Communiqué on Labor and Social Security Development in 2007’. National Bureau of Statistics. Ministry of Human Resources and Social Security (MOHRSS). Available online at http://www.stats.gov.cn/english/newsandcomingevents/t20080523_402482161.htm (April 22, 2009) 12. OECD (2005). Economic Survey of China 2005: Key challenges for the Chinese economy. Available online at http://www.oecd.org/document/7/0,3343,en_2649_34573_35343687_1_1_1_1,00.html (April 21, 2009) 13. OECD (2008). Economic Outlook forecasts sharp rise in unemployment as recession takes hold across OECD. Available online at http://www.oecd.org/document/35/0,3343,en_2649_33733_41721827_1_1_1_1,00.html (April 21, 2009) 14. OECD (2009). Interim Economic Outlook, March 2009: Country Note - United States. Available online at http://www.oecd.org/infobycountry/0,3380,en_2649_33733_1_70867_119660_1_1,00.html (April 21, 2009) 15. OECD (2009a). Interim Economic Outlook, Mars 2009: Country Note – China. March 2009. Available online at http://www.oecd.org/infobycountry/0,3380,en_2649_33733_1_70342_119660_1_1,00.html (April 22, 2009). 16. USCBC (2009). China's Economic Statistics-General Economic and Financial Indicators, 1999-2008. The US-China Business Council. Available online at http://www.uschina.org/statistics/economy.html (April 22, 2009) 17. Wiseman, Paul (2006). U.S. companies' profits take off in China. USA Today. Available online at http://www.usatoday.com/money/world/2006-10-25-china-profits-usat_x.htm (April 22, 2009) Read More