Concluding Remarks: Restructuring the Triangle for Sustainable Growth

The shocks that the current economic crisis have brought to the PRC economy can be largely explained by its export-oriented strategy and high savings ratio. The economy's dependence on exports is induced by low labor costs, whereas the high savings ratio is derived from the widening income inequality. Both of these phenomena resulted from the labor market reform began in the 1980s and accelerated in the mid-1990s. If we divide labor market reform into two stages, taking the mass lay-off and separation of surplus employees in SOEs in 1996 as the turning point, the PRC's economic growth pattern can also be roughly separated into two stages. In the first stage, although people's income sources were diversified, economic growth mainly benefited from market competition, while the labor market reform was slow and gradual to avoid social unrest. In the second stage, employment restructuring was much more radical, when massive numbers of redundant workers were separated from SOEs. The labor market reform further intensified competition, promoted efficiency, but also aggravated income disparity. At the same time, since the mid-1990s, rural-to-urban migration has increased significantly and provided sufficient low-cost laborers to labor-intensive industries. When globalization meets urbanization in the PRC, labor's market power has been weakened, with the result that the PRC, as in many countries globally, saw labor's share of national income decline. The PRC's growth path—with high levels of both growth and inequality—has been seriously challenged by the current economic crisis, compounding the prospect of increases in income disparity that would jeopardize investment growth and further thwart overall economic growth.

Drawing a triangle between labor market reform, income distribution and economic growth, as in Figure 17 [ PDF 27.8KB | 1 page ], we can see that PRC is currently at the first triangle; namely, where labor market reform directly enhances economic growth, yet at the same time exacerbates income inequality, and the enlarging income disparity hinders economic growth. If labor market reform strategy were wisely adjusted, income disparity could be effectively narrowed, and labor market reform would be beneficial to and promote the final objective of economic growth. Through this reform, the economic growth pattern would be transformed from depending on low labor costs to promoting productivity and social harmony. The present economic crisis is just a stimulus for such transformation. Although institutional forces that aggravate income distribution are still at work, restructuring this triangular relationship should, nevertheless, be a policy goal of the PRC Government in order to establish a harmonious society and to sustain economic growth. The New Labor Contract Law, which forced the employers to sign contracts with and provide social security to their employees, has been implemented in the beginning of 2008. Adopting a law that increased costs on the eve of the crisis aroused heated disputes in the PRC. The implementation of the New Labor Contract Law has led to increases in labor costs in production. This could force the growth of the PRC economy to depend less on exports and more on domestic consumption demand, and is beneficial for sustainable economic growth according to the logic in our article. However, the law has also been intensely criticized. In our view, it is only the timing of the law that is to be doubted, because it was carried out at the beginning of 2008, on the eve of the crisis hitting the PRC economy, and this has imposed great pressure on PRC enterprises, especially those relying heavily on exports. However, if looking at the institutional change against the background of the PRC development path, the New Labor Contract Law might also be a symbol of the PRC's change in its growth pattern.

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