By David Pilling
Published: February 4 2009 18:53 | Last updated: February 4 2009 18:53
Wen Jiabao, China’s premier, this week told the FT it was “ridiculous” to criticise China for saving too much. If the US, UK and other westerners were foolish enough to hawk their future by spending unearned money, they need look no further than the mirror.
One can sympathise with that view even if economics dictates that China’s saving habit had to be balanced by excess spending somewhere else. Yet rather than assigning blame – although that is always fun – it is important to grasp that China and the rest of Asia cannot continue along the same road. Americans are too broke to resume their role as Asia’s demand engine.
To see why, look at US personal consumption, which hovered around 67 per cent of gross domestic product in the last quarter of the 20th century. That was already high by the standards of the previous 25 years. But from 2000 to 2008, it shot up again to an unprecedented 72 per cent. That trend has now gone into painful reverse. As Stephen Roach, chairman of Morgan Stanley Asia, notes wryly: “We are already all the way down to 71 per cent.” In other words, it will be a very long time before Americans are again filling up their shopping carts.
Asians must either make less stuff and spend more time cutting each other’s hair, or they must buy more themselves. Either way, households will have to increase spending. But things have been going in the wrong direction. Assumptions about the region’s swelling middle class notwithstanding, consumption as a proportion of a fast-rising GDP has been falling – and swiftly at that.
In 1980, 65 per cent of output of developing Asia was accounted for by consumption. Today it is about 47 per cent. The main reaction to the Asia crisis of 1997-98, when economies’ vulnerability to financial flows was exposed, was to build up exports. In doing so, Asia has swapped one kind of dependence for another.
Economists have started to put forward a battery of policies to rebalance growth. Sensibly, top of the list is to string up a better social safety net so that households indulge less in precautionary saving to see them through sickness and old age. Other suggested measures include ending subsidies that encourage exports and manufacturing at the expense of services; attacking monopolies that penalise consumers; and allowing currencies to appreciate.
Something more basic is rarely mentioned. What can be done to put more money in workers’ pockets? All over Asia, workers’ pay has lagged behind growth. With less disposable income, it is hardly surprising that consumption has slumped.
Asia is not alone in having sluggish wages. The increase in global trade and investment flows has tilted things away from labour towards capital. If people are too expensive to employ in one country, capital can simply pick up and move somewhere else. But the shift has been more pronounced in Asia, including China where total wages account for about 40 per cent of GDP. That is far lower than the Group of Seven leading industrialised nations’ average, which is even now about 52 per cent, about where China was a decade ago.
Japan fits this trend. According to research by Ronald Dore, a political scientist, Japanese workers have been hurt by structural changes in the labour market and a shift towards a more shareholder-centric view of capitalism. He found that, from 2001 to 2005, when the economy was recovering, nominal wages actually fell 6 per cent. Over the same period, dividends rose 175 per cent even as companies built up hoards of cash. By contrast, during the recovery at the end of the 1980s, wages rose nearly a fifth while dividends barely budged.
There are many explanations for this shift including a weakening of union power, higher foreign ownership of corporate Japan, a less stable shareholder base and the casualisation of more than one-third of the workforce. As a result, many Japanese companies have become more competitive. But the macroeconomic downside has been less disposable income.
China is slightly different, though the result is the same. Unlike Japan, it can still add to its labour pool by converting farmers into workers. The steady stream of factory fodder has helped suppress wages in most regions. As a result, consumer spending has wilted from about 45 per cent of GDP in the mid-1990s to a shrunken 35 per cent today.
China’s leadership was, until recently, trying to address this problem, partly in order to force industries, grown lazy on cheap labour, to move up the value chain. Authorities enforced higher labour standards and a minimum wage. The policy worked almost instantly, pushing factories to convert from making, say, lighters to eye glasses, or to shut. That was fine until the economy was double-punched by a property slump and an external trade shock. Now the government fears that 20m migrant workers, about 15 per cent of the total, have lost their jobs – not something likely to get aggregate consumer demand purring again.
These setbacks aside, the thrust of those policies, implemented from the top in the absence of viable unions, were a step in the right direction. Despite his protestations, Mr Wen knows that China’s 1.3bn people need to save less and spend more. As far back as 2006, he warned that the economy was “unstable, unbalanced, unco-ordinated and unsustainable”. What he did not say was that, given its growing weight in the global economy, what goes for China goes for the rest of the world.