Friday, January 09, 2009

Dear All, my new post on RGE Monitor:

"Will job losses lead to social unrest?"

Victor Shih | Jan 9, 2009

Today, there was a note written by Wang Tao at UBS with the above title. The question is a crucial one today because bullish sentiment for China depends almost entirely on the Chinese government's ability to prevent large scale social instability. The conclusion of the piece was that "large-scale unrest that threatens general social stability and overall investor confidence is unlikely." The arguments sound quite reasonable:

1. Job losses will only be about 15 million, or 3.5% of non-agricultural employment.

2. Migrant workers, who are hit the hardest, can't organize effectively anyway.

3. China weathered the last wave of unemployment, which saw unemployment level at around 35 million, with little difficulties in the late 90s. And, China had less money back then.

I have no issue with argument #3. Indeed, though ugly, China weathered the unemployment wave in the late 90s with only scattered protests in a smattering of cities in the northeast and the interior. All in all, not so bad (well, it was bad for the unemployed!).

However, I find the 15 million figure highly unlikely, even for now, much less for 2009. A Ministry of Labor and Social Security official revealed recently that some 10 million migrant workers have already been laid off and returned to the countryside. It seems extremely optimistic to say that total unemployed migrant workers in 2009 will be 15 million. Let's start the calculation again.

First, total migrant labor population in 2007 was about 140 million. I think global recession and partial rebalancing will impact at least 20% of the migrant labor population. This makes about 28 million migrant workers unemployed in 2009. On top of that, education officials revealed recently that only 70% of the 6 million or so college graduates found jobs in 2008. This leaves unemployed college graduate population at 1.8 million. In 2009, I expect things to be much worse, so at least 50% of college graduates will be unemployed, creating another 3 million or so college educated unemployed. For the Chinese government, this is the most dangerous ingredient since it was collective action by college students that led to systemic political trauma in 1989. To prevent recurrence, the central government will likely roll out a scheme to pay for the living expenses of almost all unemployed college graduates. I think my students at Northwestern would have wished for that policy too!

So, we are up to 33 million unemployed already, nearly the highs in the late 90s. If we add a couple million more from layoffs from urban private and FIEs, we would have an unemployed force of at least 35 million. I would not be surprise if at the end of 2009, we see an unemployed labor force of 50 million. To be sure, if we believe in the other arguments that Ms. Wang puts forth, we would not see a major problem. At the extreme, the central government would simply roll out subsidies that pay for the living expenses of every unemployed person. Even if the unemployed force reaches 50 million, the Chinese government would only have to pay (50 million*100dollar*12 months) 60 billion USD (408 billion RMB). That is a substantial sum, but China can surely handle it for two to three years, suffering perhaps slightly lower credit ratings. However, the notion that migrant workers have less ability to act collectively is unfounded based on everything that we know about unrests in China. All of the rebellions in Chinese history were led and carried out by peasants, including the one that put the current regime in power. Besides 1989, the largest domestic disturbance took place in rural Renshou County in the mid 90s, which saw the deployment of tens of thousands of troops. Furthermore, unlike the layoffs in the 90s, which mostly affected middle-age or elderly SOE workers, the current wave of layoffs affects a young and vibrant cohort most capable of carrying violent collective action against the state. Without any systematic triggers, we at least will see a spike in localized riots which necessitate the mobilization of People's Armed Police (PAP) units all over China. The central government would also be compelled to (and they are doing so already) roll out generous unemployment benefits for migrant workers and college graduates (to the tune of 300-400 billion RMB). If a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilization of both PAP and army units and possibly substantial bloodshed. In most scenarios, the CCP regime would still survive a large scale, cross regional rebellion. However, "overall investor confidence" will be lost.

What is the "systematic trigger" which I refer to? I don't know exactly what it would be. However, if we look back in history, it can be a wide range of events, including the death of a popular leader, a serious natural disaster, the spread of a deathly infectious disease, a small student demonstration turned violent, religious groups....etc. The point is that there is an interactive effect which is quite harmless when unemployment is low (as shown last year). However, when unemployment is high, a number of different shocks can interact with unemployment to create something explosive. I think the UBS note, besides getting some numbers and history wrong, vastly underestimates the possibility of this interactive effect.

It seems that these comparisons to past slow downs or "rough patches" are ignoring the development of massive socio-economic inequality over the past few years. Therefore, the conclusions reached based on raw numbers may be highly misleading.

As recently as 10 years ago in Beijing, private car ownership was fairly rare, the first Starbucks had just opened and the phenomenon of wealthy Chinese urbanites was not so "in-your-face". These days, the contrast between rich and poor, urban and rural are much more significant and much more obvious to all. Perhaps being laid off in the late 90s was not so bad when everyone else in your rust-belt town was suffering equally or when pay and working conditions were almost universally low.

The situation is totally different today, where even the second and third tier cities are not for want of luxury cars, etc. There is also a whole group of "white collars" that didn't exist before. Many of them will be seeing the first hard times of their working lives (after spending the last few years hopping from company to company to meet ever increasing wage expectations). Many of them will find themselves unemployed for periods of time, particularly as more and more educated and qualified overseas Chinese flee the developed world for supposedly better opportunities in the homeland, crowding an already strained job market.

It is the expectations of this group that could prove the most difficult for the government to deal with. These people cannot simply be sent to the countryside or put to work building roads and bridges. And the fact that China has so much money doesn't make things easier, it will actually reinforce rising expectations. How do you tell the new middle class to go back to being poor after spending so much on the Olympics, launching men into space, world class airports, etc?

Social unrest may actually have been easier to control back when everyone was somewhat equal.
well, true, the problem of whether stimulus would help educated people applies to the US as well....
Career expectations aside, it would be useful to know if there has been a change in per capita caloric intake in areas experiencing high "social unrest" and/or unemployment. Hunger is likely to cause the more difficult security management problems.

Rich Kuslan, Editor
For CCP, even with the money, I doubted the efficiency of the transferring payment. How much will arrive at the end client per 100 dollars?
Haha, good point!
Do you think many families of migrant workers have contracted debts which they were depending on remittances to pay? Or is this a non-issue?
I am sure this is the case for some people, but I am not sure about the scale of it.
On the other hand, China is much more urban than before, and the experience of other countries is that rural needs are often ignored because they do not have mobilizing power. The situation in 1989, was very interesting because the government was rather popular in rural areas and very unpopular in urban areas, and it was unable to mobilize its rural supporters in any useful way.

Also the fact that Chinese society is more highly stratified I think vastly *decreases* the likelihood of systemic challenges to the political system. There is not much in the way of social connection between urban dwellers and rural migrants which means that coordinated action is very difficult as these two groups may have sharply different and conflicting interests. If you do have a situation in which the PAP has to go in to a major city to put down a demonstration by rural migrants, then I suspect that the urban dwellers are much, much more likely to side with the police than with the migrants. I also think that the migrants know this which means that they aren't going to push things too far.

The other major difference is that unlike 1989, there is no obvious ideology that you can use to unite the various groups. "Socialism" won't work, and neither will "democracy." The one ideology that might work is "nationalism" but that works in favor of the government rather than against it. This is a really big problem since in order to have a major challenge to the government, you need to find some alternative political and economic program, and so far at least, I haven't heard any one suggest that the government do anything other than what it is already doing, or explain how overthrowing the government is going to create jobs rather than lose them.

We can also look through the list of possible triggers. There aren't any popular leaders like Hu Yaobang that I can think of to rally around. Public cynicism around Chinese government officials actually works for the government. If they all are crooks, then none of them are worth fighting for.

Natural disasters and infectous disease have in the last few years *increased* the government's popularity, and during a national emergency it is very difficult to say anything bad about the government without turning popular opinion against you.

Students in China today are very different than the one's in 1989. For one thing, they are much more diverse and much more likely to be studying a field that requires social stability (like business or finance) than a field in which they can act as social conscience. My sense of the younger generation in China is that they are much, much more individualistic and career oriented than previous generations, and this makes political action difficult.

Of course, none of this matters if there is a sustained economic problem. If after a year or two it is obvious that the government is mishandling the situation, then everything changes, but at the very least, the government does have several months to deal with the problem.
Wen Bobo
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