Albert Park, Professor of Economics, University of Oxford

1. Albert Park, Professor of Economics, University of Oxford Industrialization in China –Rural Enterprises, Migration, and InformalitySeminar on Growth, Transformation, and Job CreationFebruary 9-11, 2011, Maputo, Mozambique

2. Industrialization in China • Industrialization and balanced growth • Rural enterprise development • Comparison with Taiwan • Opening to the outside world • Migration and urbanization • Labor regulation and labor market informality • Conclusions: lessons for Mozambique

3. Industrialization and balanced growth • Agriculture contributes to industrial growth • Keeps food prices and industrial wages low • Agricultural growth increases demand for industrial goods through rising income and demand for inputs • Savings from rural income can help finance industrial investment • Higher agricultural productivity releases labor for industry • Implication: investments in agriculture and improved incentives/higher prices can fuel industrial growth

4. Growth of rural enterprises Millions of workers Share of national employment By the mid-1990s, rural enterprises accounted for 20 percent of national employment , 28 percent of industrial output, and 48 percent of exports

5. Unexpected Rise of TVEs in China “All sorts of small enterprises boomed in the countryside, as if a strange army appeared suddenly from nowhere.” Their emergence “was not something I had thought about. Nor had the other comrades. This surprised us.” --Deng Xiaoping in 1987

6. Explanations for the success of rural enterprises in China • Initial reforms in agriculture raised prices, improved incentives, and increased rural incomes • Gradual market liberalization eased tradeoff between agricultural prices and urban wages • Free entry into new market niches, with little regulation or taxation • Relatively undistorted output and input prices • Well-educated labor force • Active leadership by local government leaders • Collective ownership (township and village enterprises, or TVEs) until the mid-1990s, followed by widespread privatization

7. Other lessons from China’s rural enterprises • “Rural” industry heavily concentrated in coastal areas, peri-urban areas • Many failed government efforts to replicate success of TVEs in interior regions • High administrative decentralization led to excessive dispersion of industrial activity • More recently, enterprises have become more spatially concentrated in peri-urban locations, often in industrial clusters

8. The Case of Taiwan • Initially, the government was skeptical that Taiwanese firms could produce goods of sufficient quality to export • One survey in the early 1950s found that only 241 of 400 factories and 337 of 600 products passed minimum quality standards • Led to early protectionist period (1953-62), focus on domestic market

9. Employment share of SMEs in Taiwan SME share of manufacturing consistently high, also key to service sector

10. Keys to Successful Development of SMEs in Taiwan • Rapid growth of rural incomes and domestic demand in early stages (with protectionism) • Non-distortionary macroeconomic policies encouraged labor-intensive production • Well-educated labor force • Active government role in developing new technologies in agriculture and industry • Major infrastructure projects facilitated growth with equity (unlike China)

11. China’s Opening to the Outside World • Since 1979 when Deng normalized diplomatic relations, China has been committed to opening its economy to the world • 1979 Foreign Direct Investment law • Permissive emigration policies • Gradual trade liberalization • WTO accession agreements unprecedented in opening domestic markets to foreign competition • This approach was courageous, it prioritized gains from globalization (esp. technology transfer) over risks from foreign competition

12. Key Elements of China’s Joint Venture Law (1979) • Income tax rate of 15 percent • No income tax-first 2 profitable years • 50 percent less income tax-years 3-5 • More tax benefits for large investments (over $5 million) • Imported inputs (and some consumption goods) exempt from duties • No export duties • Free remittance (after tax)

13. Attracting FDI through Special Economic Zones • 4 Special Economic Zones, 1981-85 • 16 Open Coastal Cities, 1984 • 288 Open Coastal Cities, 1988 • Limited early success…. • ….until the 1990s

15. Key Features of China’s Special Economic Zones • Strong infrastructure • Preferential policies, including taxation, land rights, less regulation • Focus on exports, joint ventures • Provincial-level authority in economic administration

16. Foreign Direct Investment in China

17. Reasons for Limited Early Success in Attracting FDI • Red tape, legal environment, price distortions for inputs, overvaluation, political risk • Early FDI mostly in tourist and property sectors, not export-oriented • Difficulty attracting high tech firms (2/3 simple labor-assembly) • Eventual success attributable to persistence, willingness to experiment, patience

18. Migration in China • Estimated 130-150 million rural migrants in urban areas today • In 2003, migrants accounted for 21% of rural workforce, 29% of rural income. 43% of rural population lives in a family with at least one migrant • Barriers to migration have eased over time, but migrants still receive unequal treatment and most work in the informal sector

19. Rapid growth of rural migration Migration has fueled rapid urbanization in China

20. Real wages of migrants have risen steadily NBS=National Bureau of Statistics RCRE=Research Center for Rural Economy (Ministry of Agriculture) PBC=People’s Bank of China

21. Informalization of the Urban Labor Market

22. China’s Labor Regulations • 1994 Labor Law • Established basic conditions for employer-worker relations, including minimum wage, overtime pay, labor contract, social insurance provision, etc. • 2008 Labor Contract Law • Provided greater employment security. After 2 fixed-term contracts, or 10 years of employment, contract must be open-ended • Increased severance pay (one month’s pay for each year of service) • Internationally, law considered highly protective of workers

23. U-shaped pattern of informality (CULS, 2001, 2005, and 2010) After long period of steadily increasing informality, notable reduction in Informality since 2005.

24. Labor regulation and employment • Flexible labor regulation likely contributed to employment gains during the period of labor-intensive manufacturing • New regulations arose when labor became scarce and China began shifting to higher value added products • Stricter labor regulations reflect rising societal aspirations but could constrain employment in the future

25. Conclusions • China’s experience included failures as well as successes, but pragmatic approach was consistent • Gradualist reforms • Experimentation • Strong motivation of local leaders • Industrial development success factors • Agricultural growth • External openness and outward orientation • Investments in human capital • Undistorted output and input prices • Active government leadership • Appropriate labor regulations for different development stages

26. Crossing the River by Groping the Stones (Deng Xiaoping)