Alarm bells ringing in Beijing: The days of cheap labour in China are over

While the world is vocal against trampling of human rights in Hong Kong
and the Xinjiang province of China, hidden from prying eyes the
Communist Party of China (CPC) is engaged in violation of human rights
against its own people, the Han Chinese, and this time in yet another form:
birth control measures.
In 1979 then supreme leader of China Deng Xiaoping imposed on
people a policy to have only one baby. Strict and sometimes brutal
measures were adopted to enforce the one-child policy, fines and even
forced abortion to prevent having a second child.
Come 2016 and the one-child policy was scrapped in favour of a twochild limit. Now in 2021, under the regime of President Xi Jinping, the twochild policy too was abandoned and couples were asked to have three
children.
Amnesty International has correctly stated that enforced birth control
measures are a violation of human rights. The government has no
business regulating how many children people would have. Invasive and
punitive control over family planning decisions of people must be ended.
The point to note is that the frequent changes in the policy on family
size in China have been made in the interest of maintaining a rapid rate
of economic growth, on which the very survival of the rule of the CPC
depends, and not of securing for people a higher standard of living. As the
American Economic Association (AEA) has analysed, these periodic
policy changes have not yielded the desired results. China would find it
difficult to return to the figures of yore of a double-digit annual growth rate.
In the interest of perpetuating the rule of the CPC, however, the average
Chinese is likely to suffer.
The population of China was 540 million in 1949 when the country came
under communist rule. In 1979, when Deng Xiaoping enforced his onechild policy, the population had grown sharply to 969 million; despite the
death of about 30 million people during the disastrous Great Leap Forward
under Mao Zedong. In 2013, the population of China reached 1.36 billion.
The one-child policy was estimated to have prevented 400 million births.
Subsequent to the introduction of two-child policy in 2016, however, the
population of China crawled up to 1.41 billion in 2021 when the three-child
policy was introduced. AEA’s projection is that by 2050 the population of
China would reduce to 1.13 billion and the working population from the
current 1 billion to 696 million. In 1980, the labour force of China was 583
million.
As the Journal of Economic Perspectives of the AEA, in an article in
2012 titled ‘The End of Cheap Chinese Labour,’ has pointed out, “cheap
labour has played a central role in the Chinese model, which has relied
on expanded participation in world trade as a main driver of growth.” The
labour-intensive industries are the major exporters with a very high export
to total sales ratio. Notably, for the iron and steel industry, which has the
lowest labour-intensity, the sales are mainly domestic. China has
traditionally used its abundant and cheap labour force for export
industries, undercutting competition in markets in other countries, thus
achieving a high rate of growth.
Notably, in 1978, at the beginning of the economic reforms in China
introduced by Deng Xiaoping, the annual wage of a Chinese urban worker
was $1,004, only three percent of the average wage in the USA at that
time. The wage rate in China was significantly lower than the neighbouring
Asian countries, such as the Philippines and Thailand. A large population
depressed the wage rate, aided by temporary migration of cheap rural
labour to urban areas to work in industries in; thus, giving China a
comparative advantage in the export market, though at the cost of the
standard of living of the Chinese people.
Between 1978 and 1997, the annual real wage, deflated by the price
index, increased to only $1,026, from $1,004, a rise of merely 0.1 percent
annually; while the average annual growth rate in real terms, again
deflated by the price index, was 4 percent. Labour was still cheap, and
everything was hunky-dory in terms of economic growth. To take
advantage of cheap labour, foreign direct investment, too, flowed in; its
cumulative figure reached $100 billion in 1994, from being negligible
before 1978. The FDI linked China to international markets and led to
important transfer of technology.
Since the late 1990s, however, when the impact of the one-child policy
started being felt and the rate of population growth started receding,
wages in China started increasing faster than productivity; suggesting that
Chinese labour was becoming more expensive. The period from 1998 to
2010 was a period of fast growth in wages at 13.8 percent, exceeding the
real growth rate in the gross domestic product at 12.7 percent. This was
partly due also to institutional factors such as privatization of state-owned
enterprises in the mid-1990s, the reestablishment of the labour market
and the slowdown in the migration from rural to urban areas.
By 2008, the wage rates in China were higher than that in other
developing countries, like India and Indonesia. Among China’s
neighbours, its wage rates were next only to that of the Philippines. This
rise in wage rates was for both skilled and unskilled workers.
The AEA paper has compared the growth in wage rates in China with
that of growth in labour productivity to conclude if labour has been
becoming more costly in China. It has concluded that in comparison with
productivity, labour was becoming cheaper in China till the late 1990s, but
not since then. In the period from 1982 to 1997, the gross domestic
product in real terms increased in China at the rate of 5.5 percent annually
while the labour force grew by 1.9 percent per year, implying an increase
in labour productivity by 3.6 percent per year. During the same period, the
real wage rate grew by 1.3 percent; implying that labour was becoming
cheaper in China in relation to productivity.
Between 1997 and 2010, however, the situation changed dramatically.
While the GDP in China in real terms increased in this period annually at
a rate of 12.7 percent, the size of the labour force grew by 1.4 percent
annually; implying an increase in labour productivity by a healthy 11.3
percent per year. But, during this period, the real wage rate grew at a
much higher rate of 13.8 percent per year; thus, outstripping the growth in
productivity. Thus, China was losing its comparative advantage of a cheap
labour force. Labour – intensive industries like apparels, leather, fur and
electronics experienced a sharp increase in labour cost during this period.
Deng Xiaoping’s one-child policy, besides reducing the supply of cheap
labour, also led to a gender imbalance; with people preferring male child.
The girl child was often abandoned, placed in orphanages. There were
sex-selected abortions and female infanticide. Besides, the share of the
elderly in the total population started increasing. The number of people in
the working age between 15 years and 59 years dropped by seven
percent, while those over 60 increased by five percent. The relative
increase in the number of old people led to increased transfer payments
such as pension, putting a pressure on the state exchequer.
As a World Bank report on China has pointed out: “China’s high growth
based on resource-intensive manufacturing, exports and low-paid labour
has reached its limits and has led to economic, social and environmental
imbalances. Reducing these imbalances requires shifts in the structure of
the economy from manufacturing to high value services, and from
investment to consumption.” As the AEA puts it, the remedy lies in a
transition towards higher value-added industries.
Instead, the leaders of the CPC have tried to increase the birth rate in
the country in an effort to increase the size of the labour force and thus
restore the advantages of a cheap labour by first switching to a two-child
and then a three-child policy.
Ironically, the two-child policy, introduced in 2016, did not have the
desired effect of increasing the population growth rate in any significant
way. The cost of raising children has deterred many Chinese couples from
having more babies. The census figures of 2021 reveal the slowest growth
rate in population in decades. For the same reasons, analysts say the
three-child policy is not likely to succeed either.
The policy of increasing future labour supply through increased birth
rate so that the comparative advantage of cheap labour is maintained
would not succeed, say analysts. For, it would take many years for its
effects to be seen. The high growth rate in China seen in the past had
been driven by low-skilled manufacturing labour. The future, however, lies
in skills and technological innovation. It would take a minimum of 20 years
for the babies born today to enter the workforce as skilled labour.
There is a way of increasing the size of the labour force than through a
baby-boom; by encouraging immigration. An attempt by the CPC to
encourage immigration of a limited number of experts and specialists in
areas such as science and technology has met with a racist backlash from
the Chinese netizens. Ironically, past policies of the CPC are making it
difficult for the Chinese government to encourage immigration, even for
the purpose of attracting elite talents. Loyalties of individuals from a
different race are being questioned, besides simple racial biases and
prejudices. China’s closed cultural background is standing in the way. The
message of President Xi Jinping of ‘’cultural confidence,’’ asking artists
and writers to grasp “the aspirations of the Chinese people” and “promote
national spirit that is based on patriotism” is believed to have encouraged
nationalism that has little respect for other cultures around the world.