Business

China’s ‘experiment’ fuels growth

The business centre of Pudong: Lujiazui Financial City

“Look at the past 30 years. What I would say is that in the history of humankind there has never been such a large experiment in economic prosperity. There have been 600 million people taken from below the poverty line, basically to middle class. It is an amazing thing they have accomplished.”

Rosaline May Lee is talking about China’s Special Economic Zones or SEZs, regions with different economic systems and policies to the rest of the country. These policies create a favourable environment for foreign enterprises and investment.

First seen in industrialised countries during the 1950s, modern SEZs have spread across the globe to many developing nations, including India, Philippines, Thailand and Iran. It would appear that China’s model has seen the most success, with an average yearly GDP growth of 10 percent since 1980. This is the fastest sustained growth of a major economy in human history, according to The World Bank.

SEZs are not without controversy. Some consider them havens of worker exploitation in some developing countries.  Conversely China’s SEZs have benefited millions. Are they good or bad? The answer is complex.

In 2010 China launched its first SEZ in Shenzhen, a small border town near Hong Kong with 30,000 people. By 2015 Shenzhen had grown into a metropolis with 11 million residents, according to the Shenzhen Government.

Rosaline May Lee at the ShanghaiTech University campus in Pudong.

SEZs were implemented by the leader and reformist Deng Xiaoping, who saw economic reform as a pathway to modernisation and industrialisation. But Xiaoping and his successors recognised the dangers of blanket reforms in a nation accounting for 18 percent of the world’s population.

“There is an expression in Chinese: ‘feel your way across a river by feeling the stones at the bottom of the river’. That is kind of the model for how they do things,” Lee says after taking a sip of her Americano coffee.

“The Chinese Government does these small controlled experiments. They work and they expand it.”

Originally from New York, Lee has spent 25 years advising corporations on regulatory landscapes, cross-cultural communication and market entry into China.

She is now the Dean of the Entrepreneur and Management School at ShanghaiTech University in the Zhangjiang District of Pudong New Area.

In 1990 Pudong, a 1210sqkm district in the east of Shanghai, became a SEZ. The Shanghai and central governments envisaged it as the new face and next step of China’s economy.

Pudong was mostly undeveloped swamplands and sparse warehouses before 1990. It is now a region of contrast between the neon skyline and skyscrapers along Huangpu River’s edge and an industrial sprawl extending towards the East China Sea.

Despite accounting for 8.4 percent of the Shanghai’s land area and 12.2 percent of its population, Pudong was responsible for 19.9 percent of Shanghai’s GDP and 15.1 percent of its foreign trade by 1999, according to the Pudong Government.

Growing Pains

However, even economic prosperity comes at a price. Lee says the consequences of such unrestrained growth include pollution issues, wage disparity and corruption.

“Wage disparity in China now is a huge issue and they are figuring out how to cope with it,” she says.

Japan’s Nagoya University professor of international development Octasiano Mendoza has researched wage disparity in China’s SEZs and says wage inequality in cities with SEZs is considerably lower.

“Cities that have this liberalisation, deregulation and market orientation are doing better than a lot of the country,” he says.

“If you look at the richest 10-20 percent who live in SEZs and you compare what share of total income they have to the richest 10-20 percent in other cities, you can see it is much more disproportionate.

“If you look at it country-wise it has increased in inequality, but when you look within SEZs, their inequality levels are way lower than other places.”

Mendoza says that many other countries have tried to replicate China’s success and failed. “You look at India especially. India have tried to copy the SEZ model since the 1990s,” he says.

“But they didn’t copy any of the reform orientated autonomies that the Chinese gave their cities. They only copied the incentives.”

Local governments of SEZs are given freedom to experiment with reform and regulations, including wages and workers’ rights. Foreign enterprises are also allowed to operate without much interference from the central and local governments, according to an article by Bin Xue Sang in the Northwestern Journal of International Law and Business.

An inherent issue is the potential for workers’ legal protections and conditions to erode in areas with low oversight. Labour rights advocates have criticised some SEZs as havens for worker exploitation.

Developing nations are under constant pressure to lower labour costs and working conditions to attract the attention of foreign business in what University of Maryland sociology professor George Ritzer theorised as a global “race to the bottom”.

How far are governments and corporations willing to go to keep investment and profit margins growing?

Made in China?

William Hurst standing at Taipingqiao Park, Shanghai.

William Hurst is sitting in an Italian restaurant not far from the site of the first national congress of the Communist Party of China in 1921. The old brick building sits opposite Xintiandia, a multi-storey shopping centre and dining district. A perfectly round pair of spectacles and glaze of sweat rest on his forehead.

Hurst is a professor of political science at Northwestern University in Illinois and a board member of a non-government watchdog called China Labor Watch which investigates working conditions in Chinese factories.

“Most of the areas where you find real problems aren’t foreign companies directly manufacturing something in China, but rather subcontracting to component producers or final assembly manufacturers,” Hurst says.

“When you see something in Australia with a foreign brand on, it will say ‘made in China’. But whether a piece of it was made in good labour conditions or poor labour conditions? That is a really hard question to answer.”

Hurst says the biggest problems have traditionally been found in sectors that are lower value-added or more prone to dangerous conditions, such as technology manufacturers using chemicals.

In 2015 China Labor Watch conducted an undercover investigation on a Taiwanese electronics manufacturer’s factory in Pudong, which makes parts for Apple products such as the iPhone.

Pegatron Corporation is one of Apple’s major suppliers and employs almost 100,000 workers in mainland China. Pegatron’s Changshuo factory sits behind barbed-wire fences on the side of Xiuyan Road, just 20 minutes’ drive from Shanghai Disneyland.

The investigator found employees, mostly migrants from rural areas, living in overcrowded dormitories and working 80 hours overtime to earn $US591 a month – $US300 lower than the average wage of Shanghai employees. As of a pay rise in 2016, the hourly rate of workers was $US2.00, according to China Labor Watch.

Hurst says the complexity of global supply chains makes it difficult to determine whether foreign brands such as Apple are to blame for exploitation.

“They certainly don’t mind the low costs that come with poor conditions. Different companies are better or worse about policing their own supply chains,” he says.

Pegatron factory in Pudong New Area, Shanghai.

In China alone Apple made a profit of $US13.4 billion in 2015. The total base wages of the 1.6 million workers in its global supply chain totalled $US6.2 billion in the same year.

Pegatron employees are marked by identification cards hanging around their necks. They come and go through gates with facial recognition technology. They smoke cigarettes or get a cold drink from the nearby convenience store where a plump, shirtless man behind the counter hogs the breeze from a small electric fan.

Pegatron assembly line worker Guo, who is leaning against the outside wall of the store with his shirt hitched above his belly, says he is satisfied with his job.

“I think the working environment is safe. They do a good job protecting the safety of the workers,” he says.

“But of course with migrations of workers, sometimes employees will leave quickly and not work too long here. It is hard for leaders to value these people.”

Guo is from the Jilin province in China’s Northeast, on the border of North Korea. According to the Sixth National Population Census in 2010, 4 million people have migrated out of the Northeast region since 2000. While wealth has risen in coastal cities like Shanghai, areas to the West and Northeast remain poor. This has created swathes of migrant workers searching for opportunities in urban areas.

Guo says his base salary is 2430 yuan, or $US364, a month. The legal minimum wage in Shanghai is 2300 yuan. He mentions an “invisible benefit”, which is a 1500 yuan incentive for a month’s work.

Factory worker Guo.

When asked if the leadership value staff members, he rubs the back of his neck. “If you are hardworking of course they will value you,” Guo says.

Mendoza says migrants might get two or three times the wage they would earn in rural areas.

“If you actually interview these people they are very happy and grateful for these opportunities,” he says.

“Put yourself in their shoes. Incomes in China are growing between 10-35 percent. In SEZs they are growing at 35 percent per year, which means every four years their incomes double.”

As consequence of rising wages, companies depending on cheap labour for profit are starting to leave. “China is trying to switch from manufacturing to service. They are trying to move all these people from low-grade manufacturing jobs into service,” Mendoza says.

Knowledge revolution

After the global financial crisis of 2008, China experienced a significant decline in exports. William Hurst says about 35 million jobs were lost in the export sector as a result of the crisis, according to government estimates.

“There has been a loss of very large portions of manufacturing jobs in China over the last 25 years,” Hurst says “About 75 million jobs have disappeared in the state sector. Chinese contract producers are outsourcing to South East Asia en masse. They are also outsourcing to Africa.”

Construction in Zhangjiang High-Tech Park, Pudong.

China’s economy is once again on a precipice of another transformation. Zhangjiang High-Tech Park is on the frontier of China’s next experiment: a transition from a manufacture-based economy to a knowledge-based economy.

Mendoza says China’s economic experiments are unique because of their political context. “They have the advantage of a lack in democracy,” he says.

“China decides their direction and they stay in the same direction for decades. In other countries every time there is an election or a new government the policies change, so their growth is like a zig zag, still moving forward but not as fast.”

In 2009 the Shanghai and Central governments began a 10 year strategy to build China’s own national innovation centre in Shanghai: The Zhangjiang Science City. Envisaged as a high-tech haven for enterprises and innovators.

David Andersson is an associate professor and head of the Entrepreneurship and Economic Development Group at ShanghaiTech University. Andersson is pessimistic about the future of China and continuing effects of its great economic experiments.

“I believe that freedom of expression is a necessary condition for a truly creative knowledge-based economy,” he says.

“The current president, Xi Jinping, has orchestrated a crackdown on dissent that is more severe than anything since Mao Zedong. As a professor at a Chinese university, I have witnessed much more fear and more self-censorship than four or five years ago.

X-node chief executive Wei Zhou.

“The Chinese economy will become much less competitive in the future as it attempts to transform itself from a manufacturing-based to a knowledge-based economy.”

X Node is a private company providing services to accelerate the growth of tech start-ups in Zhangjiang. Its chief executive Wei Zhou says innovation is the biggest challenge China’s economy has to overcome.

“In a knowledge economy you don’t need 100,000 people to work in factory lines, you need people with knowledge. The way to attract knowledge is to build a perfect ecosystem like Zhangjiang,” he says. While this transformation may reduce the number of manufacturing workers at risk of exploitation, it does not mean everyone will be able to successfully transition to a desk job.

Hurst says the Chinese economy is in a race against the clock.

“They can’t create enough jobs right now to absorb all the people coming into the labour market, let alone take care of the people who are losing manufacturing jobs and don’t have the skills to take these jobs or services,” he says.

“If they keep up at least with the new entrants into the labour market, the hope is that the economy will grow fast enough to provide a cushion for those who have been left out or left behind. But we will see in a few years if that will work.”

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