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Macro Review: When the Old Job Creator Stops Working

11-24 19:11 Caijing Magazine

The export sector's role in creating jobs is coming to an end. Stronger domestic consumption could be the savior for job seekers.

 

By staff reporter Zhang Hong

From Caijing’s online edition

 

The slowest rate of growth of China’s economy in a decade is not necessarily a big worry, as 8 percent – the figure predicted by most economists for 2009 is still the envy of many. The real source of anxiety comes from the prospect of job loss.

 

Through export-led growth, China has managed to generate massive increases in employment. In the 10 years leading up to 2007, some 9 million urban jobs were created annually. Research published by the U.S. National Bureau of Statistics indicates that export growth has been responsible for one-third of jobs created in China between 1997 and 2002.

 

According to estimates by Caijing's Chief Economist, Shen Minggao, export-focused companies employed nearly 18 million people in 2007. Furthermore, for each percentage point increase in exports in local currency termsemployment increased by 0.3 percent, or 230,000 jobs.

 

However, the job-creating power of the export sector has been weakening. A survey among export factories found that their employment growth had slowed to 11 percent in 2007, down from 28 percent in 2005.

 

The reason is that the proportion of heavy industry in the export sector has been increasing compared to that of light, labor-intensive industry. In fact, it more than doubled light industry in the last 15 years, growing at a rate between 40 and 50 percent. Furthermore productivity has increased as private firms, who typically are more effective at cost savings and maximizing labor efficiency, than state-owned enterprises, have increased their share of the export market.

 

Now that export growth has slowed significantly, there is a real risk of large layoffs. If we assume that export growth for 2008 will be 11 percent, as it was for the first three quarters this year, and that factories had planned for 20 percent export growth, the 9 percent gap could result in a 3 percent drop in employment growth as per the relationship mentioned earlier.

 

This does not take into account the fact that if companies cut back on investment or reduce output in response to the gloomy outlook for the market, even more jobs could disappear. Pressure from the market may also make companies strive harder to increase efficiency and upgrade technology to further cut production costs, and jobs.

 

For 2009, the outlook could be even worse. Growth in China's main export markets is slowing or might be in recession, as demonstrated by the reduction in contracts signed at the autumn Canton Fair, China's most important foreign trade fair. Damage to exports may be even further aggravated if the yuan continues to appreciate, as suggested by the increase in the nominal effective exchange rate from 108.32 in September to 112.1 in October reported by the Bank of International Settlements.

 

If that is the case, exports could well stagnate or contract next year, meaning that the supposed 4.6 million jobs that the export sector would create under good conditions would vanish completely.

 

The government’s 4-trillion-yuan stimulus package, loose monetary policy and tax-cuts for exporters might support the export sector for a while. However, the apparent emphasis on investment is hardly a blessing for employment.

 

Intensive investment could actually substitute, rather than promote labor. The reason is that, given the context of cheap money resulting from government-controlled interest rates, even if private companies can do a better job than SOEs in allocating resources, the low cost of financing might encourage them to invest more in heavy industries that employ fewer workers than otherwise.

 

The most effective way to support the labor market is to encourage domestic consumption. Consumer strength means greater demand for labor-intensive products, providing alternative markets for companies frustrated by weak foreign demand. More importantly, the service sector should be further deregulated, as it can not only supply future consumption, but can also take over the role of the export sector as a driver for creating new jobs.

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