Developing Vietnam with whom?

Restoration 2.0 for the Resurgence of Modern Vietnam

 

By Mia Ji Sørensen

”Wouldn’t you define Vietnam as a middle-income country?” I was asked this rhetorical question last week. Despite its emerging economy status, with a growth rate of approximately 7 per cent during the past two decades, it is still one of the poorest of the ‘Next 11 Countries,’ and even though Vietnam has been in vibrant development, it is now faced with stagnant economic growth. There is a lot of potential for Vietnam to move up the ladder, as it has a vast young workforce, 50 per cent of the population being younger than 26. In addition, Vietnam has gone through a gradual shift from the agricultural sector towards an industrial sector that has attracted a great amount of Foreign Direct Investment (FDI). FDI has been the primary focus of many developing countries over the past decade, as most host countries have liberalised their FDI regulations. FDI has been the primary source of the buoyant economic growth in the Southeast Asian economies, and in contrast to other regions, which over the past years have experienced a decline in their FDI inflows, Southeast Asia increased by 2 per cent annually ($110 billion)[1]. Here, Singapore is the leading host destination for FDI, which also improves FDI levels in the lower-income countries in the neighbourhood such as Vietnam, Myanmar and Cambodia.

According to the IMF, Vietnam is defined as a lower-middle-income country (also referred to as a developing country), as its GNI per capita falls in the range between $1,026 and $4,035. Developing countries are regularly stimulated by aid from developed countries, and this is also true of Vietnam. Before the end of the Cold War, the Soviet Union was one of the central donors to Vietnam. After the conquest of South Vietnam in 1975, and the strain between the Chinese and the Vietnamese, the elimination of Chinese aid in 1978 compelled Hanoi to look to Moscow for economic and military assistance. This made the Soviets the largest contributors of aid, in addition to being a pivotal trade partner. But frequent occurrences of distrust between the two, in the context of Sino-Soviet contemplations, entailed that the Soviet resented their enormous aid burden in the beginning of the 1980s, as they perceived it a wasted investment. As a consequence of the Soviet experience, Vietnam is uneasy about dealing with its donors.

Developing interaction with developed countries

The European Union (EU) is by far the largest donor to Vietnam; 2013 disbursements are measured to be EUR 743 million, and the Union is also the second largest investor of FDI, surpassed only by Japan.  Nevertheless, there has been a vibrant wave of European donors shifting their relationship with Vietnam from disbursing millions of euros for Overseas Development Assistance (ODA) towards developing their respective partnerships into a more strategic manner. This goes hand in hand with more EU member states gradually phasing out donations.

In fact, during the past decade, Vietnam has conducted more than ten partnerships. Of these, four are European: Italy (2013), Germany (2011), the UK (2010) and Spain (2009). France is currently negotiating one, and two European member states have contracted sectoral partnerships that focus on climate change. Deepening relations with external partners is clearly an important aspect of Vietnamese foreign policy. The partnership agreements with the European countries should match the strategic importance in regard to the security, prosperity and international standing of Vietnam. Strategic partnerships are established to diversify the external relations of a country and for proactive integration of it into the world, by helping to develop the country and make it more resilient to external shocks. From this point of view, a partnership with real potential to create prosperity for Vietnam is the one with Germany. Germany is one of the most important EU members when it comes to economic relations, as it accounts for more than one-fourth of the overall two-way trade between the EU and Vietnam. Germany is also the second largest contributor of ODA, subsidising 8.4 per cent of overall EU grants. In 2012, the EU market became the largest export market for Vietnamese products, overtaking the United States, which had until then been the central export market ever since the trade-embargo was lifted between the two partners in 1995. It is not just because of Germany’s economic strength that Vietnam draws a great deal from this European partner. The common history of the two Germanys and the two Vietnams has connected the former DDR and North Vietnam in the framework of socialist solidarity; also, a German-Vietnamese University will be established in order to promote sustainability in the relationship between the two countries.

In April this year, a conference between Vietnam and Germany was held in Hanoi in order to discuss the process of developing a social market economy in Vietnam, utilising Germany as an example. Social Market Economy stands for an ideal compromise between two ideological ways of organising and coordinating an economy: social democracy and economic liberalism. Soziale Marktwirtshaft was an idiom introduced by former German chancellor Konrad Adenauer, and the Konrad Adenauer Foundation in Hanoi was thus the host of this event. Several prominent academics were invited to the conference to elaborate on the importance of reaching this ideal compromise.

Avoid the middle-income trap

In this regard, and in numerous other international gatherings between European partners and Vietnam, the Vietnamese rhetoric of what Europe can do for Vietnam focuses on avoiding the middle-income trap. The middle-income trap refers to a situation in which a middle-income country fails to transition to a high-income economy due to rising costs and declining competitiveness. A situation only a few developing economies have managed successfully, as seen in East Asia where South Korea, Taiwan, Hong Kong and Singapore have made a transition to advanced economies. Domestic forces drove the transitions on a political and bureaucratic level for each country, albeit with different national obstacles. For Vietnam, there are several detrimental challenges; one is the correlation between growth, public governance and corruption. This is a challenge when aiming for a less closed and dynamic Vietnam, because the government maintains austere control. As the legacy of Stalinism remains, the Communist Party of Vietnam and its one-party structure largely determine the outcome of any reform and proceeding. The government maintains strong control over land ownership and enterprises of the most influential sectors, which is why the State Owned Enterprises (SOEs) remain powerful, and thus impedes private enterprises in becoming more competitive. In the current context of booming free trade agreements taking place in Asia (more than 30 were completed in the Asia Pacific in the past two decades), the SOEs and their influential presence in the Vietnamese economy is a factor crucial to the lack of sustained economic growth. As the SOEs in Vietnam are a pivotal income source for public officials, these officials are hesitant in negotiating free trade agreements.

Since the economic reform, the doi moi introduced in 1986, Vietnam has recorded impressive growth rates. Doi moi means restoration in Vietnamese and was intended to push forward a much-needed renovation process in order to reshape the regional and international agenda of the country. The Vietnamese restoration process has contributed to a successful escape from the poverty trap into the emergence of a middle-income country. Notwithstanding, there is still a long way to go; the economy is now characterised by slow growth and frail international competitiveness. For seven years, the average GDP growth rate was recorded to be 8.7 per cent (from 2000 to 2007) whereas in 2012, the growth rate has dropped to 5 per cent[2]. In the latest investment outlook conducted by The Economist (2013), Vietnam’s macroeconomic troubles have taken the shine off the country’s once strong appeal as investments and growth have a cohesive and reciprocal effect (investors are more attracted to invest in countries with a high growth vis-à-vis investments help to create growth). One of the main challenges to economic growth in Vietnam is the SOEs, and in order to continuously sustain growth, there is a demand for restructuring them.

The asymmetrical relation between private and public enterprises is a paradox because of the significant performance of the private sector in Vietnam. After the doi moi, private enterprises gained legitimacy, and their contribution to economic growth has been remarkable. According to the General Statistics Office of Vietnam, the private sector accounted for 50 per cent of the total industrial output in 1989, whereas 15 years later, this figure nearly reached 73 per cent. The private sector is also responsible for creating the majority of new jobs in this period.

By contrast, the SOEs are challenged with debt, while the public authorities, the owners of SOEs, give favourable conditions to the SOEs. The government’s mismanagement also entails a society with incomplete domestic supply chains, creating dependency on other supply chains (such as China’s) to provide the necessary components, which in turn leads to wage inflation and less attractiveness for investments. Subsequently, before we can start talking about a competitive state circumventing the middle-income trap, there are domestic obstacles that have to be dealt with by the government – obligating the public officials in showing true strength. This will require a new model of thinking within the Vietnamese government and public officials, who are rather rigid and still bound to traditional socialist ideologies.

Obviously, the German model of a social market economy seems appropriate for Vietnam because of the shared ideologies about market and state, but it will only function in practice with true political determination of adapting to it, particularly in relation to market reforms. The central idea of a social market economy is to protect the freedom of the market participants, on both the demand side and the supply side, while securing social equity. If the country is to avoid falling into the middle-income trap, there are domestic challenges that have to be solved, as there is restricted freedom for private enterprises, which creates a gap in social equity. If the officials are serious about a social market economy, one of the key responsibilities for the government is to establish a policy framework which is effective for competition. This will require openness and transparency and a serious alternative to ingrained public preferential treatment. This is the challenge in a one-party state and the process is now in a reactive phase, rather than a proactive one; hence a significant demand for change has already arisen. Ultimately, if the Vietnamese politicians and public officials want to put Vietnam in focus, overcome stagnant growth and middle-income traps, it all begins at the core of the one-party system.

What is necessary is a new doi moi, a restoration process 2.0 in order to make the essential shift from rhetorical promises to action taken to start/create a structural reform that can renovate and renew the notion of a modern Vietnam.

 

Mia Ji Sørensen,

MA Student in International Studies and Social Science, Aarhus University,

Affiliated Workplace Student at Nordic Institute of Asian Studies Political Science, University of Copenhagen

Bibliography:

 

  • Freedom House: Countries at the Crossroads 2012 freedomhouse.org
  • United Nations Conference on Trade and Development UNCTAD STAT Database
  • General Statistics Office of Vietnam (GSO)
  • East Asia Forum – Economics, Politics and Public Policy in East Asia and the Pacific: Developing Asia and the middle-income trap http://www.eastasiaforum.org/2013/08/05/developing-asia-and-the-middle-income-trap/
  • EUROSTAT Comext Statistical Database HS2,4
  • International Monetary Fond, imf.org 2013
  • The Economist Corporate Network 2013: Investing in Accelerating Asia
  • Vietnamnet.vn: article published April 26, 2013 “How many strategic partners are enough for Vietnam” by Le Hong Hiep
  • Nguyen, T.T. & Dijk, M.A. (2012). Corruption, growth and governance: private vs. state-owned firms in Vietnam. Journal of Banking and Finance 2012.
  • Kokko, A. (2011). EU and Vietnam: From a Parental to A Competitive Relationship. Retrieved from academica.edu

[1] UNCTAD: United Nations World Investment Report 2012

[2] Data and own calculations retrieved from UNCTAD 2013.


The gunslinger state of Laos

On December 15, on his way back from work, the Laotian director, activist and award winner, Sombath Somphone, mysteriously disappeared. The last people to see him, according to leaked surveillance footage, were the Laotian authorities at a police control post, where he was pulled over, and then driven away in a different car.

Despite that, the Laotian government still went out with a full denial of any knowledge as to why Sombath Somphone was detained…by their own officers. Since then, there has been no sign of the director, and no explanation as to why he disappeared.

Just weeks before, another activist had a run-in with the Laotian authorities – the director of the Swiss NGO Helveta, Anne-Sophie Gindroz, were expelled with a 24-hour warning for writing a critical letter.

The Laotian government explained that she “dismayed” the government with her “improper behavior.” Whatever that means – a quite surprising argumentation for throwing a peaceful activist out of a country.

Somehow , though, Laos has still managed to successfully present themselves as a charming little nation with a slow pace and idyllic farm life for the ever-smiling population. Relaxation, leisure and spirituality are key words in any glittered tourist brochure on Laos.

Truth is that the life in Laos is far from idyllic, and the pace is very, very far from slow. Since the 90s, the Laotians have built dams, constructed hydropower plants and made deals with neighbors Thailand, China and Vietnam so efficiently that the economy is today the fastest growing economy in ASEAN.

The country has recently joined the World Trade Organization, hosted an ASEM-summit – the biggest diplomatic event ever to take place in the country – and they have co-signed a range of international agreements, putting them into a world market that they could only dream of entering just a few years ago.

The main reason for the excellent economical performance is the energy sector. 30 percent of the country´s BNP comes out of natural resources converted into energy, mainly hydro electricity from plants and dams on Mekong and it´s many tributaries.

And while making this profit and shining in the spotlight of international recognition, Laos – quite on par with the behavior in the cases of Somphone and Gindroz – ignores that there are people living on and off these rivers.

Right now, Laos is constructing a dam called the Xayaburi Dam. Since the proposal of the project in 2007  it has been met with protests from experts, governments, activists, NGOs…pretty much everyone, who knows anything about water: It will hurt the migration of fish, it will endanger a number of species of fish – including the rockstar of Mekong; the Mekong giant catfish – and it will affect crops cultivated in and near the river. WWF estimates that a whopping 60 million people will be affected by the dam in its present form.

Naturally, there are negotiations going on, both with international experts and with the neighboring countries, on how to construct the dam with minimal damage. Both Vietnam and Cambodia have officially called for a halt in construction.

The Laotian response? Well. They ignore all the fuss and carry on building.

Laos has risen from dirt-poverty into a flourishing trading nation, and the fact that it will hurt some groups in the population – namely the poor and the minorities – seems to be of minor importance. The logic is: You cannot make an omelet without breaking some eggs.

But you know what, Laos? Economy is not an omelet and people are not eggs. There are ways to have economic growth without shattering the lives of the most vulnerable groups in your nation.

It is so, though, that the cases of horrible governance, the breaches of basic human rights, the bypassing of negotiations and good advice – all these things factor in, when you new lucrative, international friends are to do business with you.

You don´t seem to realize it, but the spotlight is on you now, Laos. What are you going to do with it?

 

Anya Palm, Journalist and NIAS Associate

Palm Writings

 

 


Kitakits

Migration and Overseas Filipin@s [1]

by Niklas Reese

Close to eleven million Filipin@s across more than a hundred countries around the globe—that was the picture of Philippine outmigration at the end of 2009. This figure represents more than ten percent of the total Philippine population and a little more than one fifth of the working-age segment. Each passing day, more than three thousand Filipin@s leave the country to seek greener pastures elsewhere, registering a 42 percent increase in the span of just ten years. Of this eleven million, three million have settled overseas, having married nationals of the host country and/or those who have taken on foreign citizenship. Since they continue to nurture their ties to the Philippines, they are included in the statistics as overseas Filipin@s.[2]  However, with a headcount of 8.5 million, Overseas Filipino Workers (or OFWs for short) represent majority of these migrants.[3]

There is a steady demand for Philippine labor at the international level, given Filipin@s’ high levels of education and excellent English language skills. However, there is a two-class system in place. There are those who make it to “Western” countries in Europe, North America, Australia and New Zealand and mostly work as nurses, caregivers or special education professionals. Also included here are Filipino priests who fill in the gap of declining numbers of Catholic priests at the global level. And then, there are those sixty percent “second class” migrants who work in the Middle East and other parts of Asia. These include domestic workers in Hong Kong and Singapore, construction workers in the Gulf states and so-called Japayukis or “entertainers” in Japan whose daily grind sometimes borders on prostitution. It is also a fact that Filipin@s represent 20 to 30 percent of seafaring staff on high seas.[4] About one to two million OFWs do not enjoy legal migrant status in their host countries and lead a life of “TNT” or tago nang tago, meaning that they are always hiding and on the run from authorities. A more recent phenomenon are Filipin@s’ deployment as drug mules.

While Mexico boasts of the highest number of migrants in terms of absolute numbers and El Salvador and Tadzhikistan carry the distinction of having up to 40 percent of their population living and working outside their respective national borders, Filipin@s are the most highly dispersed workforce across the globe. Filipin@s are thus the most globalized working population of the world. Taking a closer look at remittances reveals another interesting pattern. While remittances sent back home to India, China and Mexico are higher in terms of absolute numbers, what is remarkable about the Philippine economy is that total remittances represent more than ten percent of the Gross National Product (GNP), which is not the case for the other three countries above.

The important point to be made here is that given the massive extent by which the Philippines is shaped by outmigration, it is almost impossible to understand Philippine realities outside the context of this phenomenon.

Migration
in its various forms has profoundly shaped Philippine society. Past decades have witnessed massive internal migration from the provinces to the urban centers, such as greater Metro Manila which is said to host a population of 15 to 30 million Filipin@s. This push from the countryside to the city is caused by inequitable land ownership (land reform notwithstanding), the lack of rural development, as well as development aggression, which manifests itself in the displacement of farmers, agricultural workers and indigenous people due to big mining operations and plantations. In 2008, 65 percent of the population lived in urban areas, with the rate of urbanization increasing by three percent each year (CIA Factbook 2008). These mega cities are however unable to provide decent shelter, jobs and public services to all, resulting in slums and miserable living conditions, especially in Metro Manila.

In Mindanao, armed conflict between Muslim rebels and the government has caused waves of civilian evacuations, affecting hundreds of thousands who live in internal refugee camps. Others have sought refuge across the border in the Malaysian state of Sabah where they suffer from lack of legal protection. One of the root causes of the long-standing conflict can be traced to a government program of the 1950s which transplanted millions of settlers from Luzon and the Visayas to Mindanao, displacing the original inhabitants.


History and Contemporary Context of Outmigration

During the time of the American colonial administration, at the beginning of the 20th century, hundreds of thousands of Filipin@s were deployed to the pineapple and sugarcane plantations of Hawaii.

Mass migration began in the 1960s and 1970s due to employment opportunities in the industrial countries of Europe and North America as well the booming oil economies in the Middle East. This created a big demand for manual labor and domestic helpers. Former president Ferdinand Marcos recognized that supporting labor migration was a way of getting hold of foreign currency to repay the country’s debt without having to initiate long overdue structural and economic reforms. This meant that the selective opening up to the world market as witnessed in the neighboring tiger economies was not forthcoming. While the Philippines and Japan were considered the most economically promising and developed in 1950, a number of Asian economies overtook the Philippines by the 1980s. Singapore, Hong Kong, Taiwan and Japan sought more and more cheap labor from overseas, including from the Philippines.

The effects of migration are found everywhere. Overseas employment agencies and brokers are found everywhere, offering jobs for construction workers and domestic helpers in Dubai or Hong Kong. It is not uncommon to find plaques attached to school buildings, village plazas and churches indicating the generous financial donations of their native sons and daughters who have made their fortune abroad in the renovation of public spaces and development of their hometowns. In the provinces, only landowning elites used to live in houses made of concrete. Nowadays, however, many a nipa hut has been replaced by a modern abode. These new houses have become status symbols that reflect the success of their owners overseas. In the provinces of Batangas and Laguna, just south of Manila, there are several villages built in Italian style (see box). In the big cities, gated communities and subdivisions have mushroomed all over, accompanied by the construction of shopping malls—all made possible by the spending power fueled by overseas remittances.

These remittances have become the most significant source of foreign currency for the Philippines. In 2010 alone, government figures indicate that OFWs sent home 20 billion dollars through banks and other financial institutions. This figure represents one tenth of the GNP. According to the estimate of journalist Rodel Rodis (Philippine Daily Inquirer, 09 September 2009), however, the actual figure could be closer to 40 billion dollars. This includes the value of all goods and services that reach the country through informal channels, whether in the form of cash (padala), souvenirs (pasalubong) or mailed packages (balikbayan boxes) and even voluntary services rendered by OFWs. This amount not only surpasses any foreign direct investment or development aid package. It is, in fact, the equivalent of the Philippine government’s national budget. No wonder then that politicians hail OFWs as the “new heroes” and rally support behind labor migration. Sadly, this outpouring of support is not matched by the level of official commitment and government initiative when it comes to the protection of migrant workers’ rights abroad.

Culture of Migration

In 2009, one in five Filipin@s agreed in a survey that they would emigrate to another country, if given the opportunity to do so.[5]  Many observers, such as the journalist Marlen Ronquillo (Manila Times, 27 August 2008), feel that the actual number is much higher, reaching as much as 99 percent of the population. A student of medicine, Kris Mangunay (Philippine Daily Inquirer, 25 August 2011) puts it this way: “…most people believe that going abroad is the only way to a better life. Who would not know about the overseas worker who just built a house in the town proper, or the young woman who at a relatively early age already provides for her family? It is a story known to the tambays [the ones hanging around – the Ed.] at the sari-sari store.”

The push abroad is not just a result of economic factors, even if these are important reasons.[6] The Philippine economy has been undergoing a prolonged period of stagnation and job opportunities are far from bright. The local labor market is unable to absorb highly qualified Filipin@s. Seeking for employment overseas is often seen as the only chance to find a decent job if at all. Plus there is the added prospect of sky-high salaries compared to the local rates. Migration has become a standard response to this bleak outlook that goes largely unquestioned. Indeed, those who have the necessary qualifications must often justify to friends and family why they do not wish to migrate.

Moreover, migration has become a way of “voting with your feet” or giving expression to one’s dissatisfaction with conditions at home. The seemingly hopeless state of affairs in politics and public service, corruption and criminality and the lack of opportunity have resulted in a “let’s just get out of here” attitude. Given the seeming bankruptcy of the state and the rudimentary features of the present social security system, the decision to send a family member abroad seems like the only feasible solution to these problems. It is often the only way to sustain one’s family, to finance the education of one’s children and siblings, and support one’s parents in old age. Working abroad also presents a way of saving up some capital to be able to start one’s own business upon returning home.

Outmigration and internal migration are not the only two forces that continue to leave their mark on the country. The Philippines is shaped by immigration as well. Aside from the ancient movement of people from present-day Indonesia to Philippine shores, there is also a discernable Chinese influence on the local cuisine and a visible sub-population of Chinese mestizos as a result of more than a thousand years of active trade with Southern parts of China.

Spanish and American colonial influences are noticeable in the cityscape. The Iberian character of ubiquitous churches and altars is unmistakable, as are the Spanish roots of thousands of words that have found their way into the local vocabulary. With English being the language of education and business, the American influence on the public sphere is hard to miss as well.

Mindanao, for its part, bares a strong Muslim influence. Arabic traders and missionaries reached the southern tip of the archipelago via India and the Malay part of the world in the mid-14th century.

Remittances

For all intents and purposes, remittances assume an important socio-economic function, representing a de facto pillar of social policy. In the year 2006, based on figures of Asian Development Bank (ADB), 23.3 percent of households received direct remittances from abroad—compared to only 18 percent in the year 2000. For nine percent of families, these remittances are their main source of livelihood, while 60 percent of the population belong to the wider network of beneficiaries (Philippine Daily Inquirer, 16 February 2010).

Even if it is difficult to ascertain the internal breakdown of household expenses (Weninger cited in Reese/Welkmann, 2010), only 44 percent of those who receive remittances are able to put aside some money in the form of savings, according to the Central Bank of the Philippines. For the rest, all money is spent, mostly on food (93 percent of households), paying off debt (46 percent), education (72 percent) and for “out of pocket” health expenses (63 percent). Nevertheless, 29 percent were able to buy household appliances and 7.7 percent a car. Only six percent were able to make investments (The Philippine Star, 14 December 2010).

Only those whose family members work as professionals in the West or in the booming economies of Asia have the spending capacity to go beyond the bare essentials (about 15 percent of all migrants). Seafarers are also included in this count. Seafarers may only make up 3.3 percent of all OFWs, yet their earnings account for 15.3 percent of all remittances (Camroux 2008). It is also interesting to note that although only about 13 percent of overseas Filipin@s live in the USA, a whopping 40 to 50 percent of total remittances originate from there.

How much a single household receives is determined by the amount the relative abroad is able to earn and how much thereof he/she is able to send back home. This may range from to 300 to 350 US dollars from domestic workers in Hong Kong or the Middle East to several thousand dollars earned by highly qualified medical professionals in the West.[7] According to ADB estimates in early 2011, there would be two to three million more Filipin@s below the poverty line if it were not for the dependable flow of remittances.[8] For “second class” migrants, remittances compensate, at least partially, for the lack of livelihood opportunities and social security at home. However, once destiny deals them a blow, such as sickness in the family, any savings generated by migration are quickly wiped out.

The class background of migrants also merits closer examination. Internal migrants who move from poor provinces to urban centers are largely from very poor families. Overseas labor migration abroad, by contrast, is a phenomenon of the “not so poor” of the so-called D class.[9] These migrants originate from urban centers. Almost half are from Metro Manila and neighboring provinces. The poorest of the poor who belong to the so-called E class and rural populations are largely outside the loop of remittance flows because they do not have family members who work abroad. While the richest 20 percent of the population received 44 percent of the remittance share, the poorest 20 percent received just seven percent, based on ADB figures from the year 2006 (Manila Times, 03 May 2011).[10] This is because this segment lacks the formal educational requirements or else, because they are unable to cough up the funding for the pre-departure expenses.[11] These “non-migrants” live in nipa huts, often without electricity, subsisting as peasants and upland farmers. In the cities, the poorest populations live in marginal settlements, scraping by in the informal sector. The luckier ones among them work minimum wage jobs where they earn about 250 to 400 pesos a day or equivalent to 5 to 6 euros. They are employed for example as casual sales personnel at shopping malls, where they provide services to migrants and their families. As early as 2001, columnist Belinda Aquino already warned of the gaping social divide between those who can depend on remittances from abroad and those who are left to fend for themselves (Philippine Daily Inquirer, 06 June 2001).

Brain Drain

Contrary to the commonly held assumption that migrants from the global south are less qualified and educated than their counterparts in the north, majority of Filipin@ migrants have had at least some college education.[12] Majority of them have also reached higher levels of job competence, labor productivity and quality as a result of years of job experience. The economic and social development of the Philippines is thus severely affected by this brain drain and the resulting lack of well-trained professionals and experienced workers. This lack of assurance of higher levels of labor productivity makes it unattractive for more foreign as well as local investors in search of new production sites to consider the Philippines. And as these skilled professionals and workers leave, it is instead the economies of the richer countries which benefit from all these years of accumulated working experience.[13] A jarring example from the health sector: in the time period from 2005 to 2007, five thousand medical doctors left the Philippines to seek employment overseas and another six thousand took additional nursing courses to qualify as nurses in other countries. While the United States and other Western countries actively recruit nurses from the Philippines, there are many obstacles for doctors who wish to practice their profession elsewhere. This is because there is still no shortage of doctors and so the job market is protected from outsiders.

While more and more students from countries such as India, Iran, Malaysia and Indonesia come to the Philippines to enroll in medical school, the World Health Organization (WHO) notes that no other country in the world exports as many medical professionals as the Philippines. While the demand for nursing graduates has been declining for a long time, new nursing colleges mushroomed all over place at the beginning of the new millennium. And while the number of new students of medicine declined by 40 percent from 2006 to 2009 (Manila Times, 26 August 2009), more and more made nursing their course of choice. Nursing students readily admit that their motivation for their choice is to be able to work abroad. According to the Department of Labor (DOLE), the number of new nursing students increased from 28,000 in the year 2000 to 454,000 in 2006.  At present levels, Philippine nursing schools train more than 90,000 applicants a year, out of which 50,000 to 70,000 later become licensed registered nurses.  There are more nursing board examinees per capita in the Philippines than in any other country in the world. Yet the reality is that year by year, only about 10,000 nurses clinch contracts abroad.[14] Consequently, there are now about 300,000 registered nurses who are unable to put their training into practice. Since working experience is an important criteria in applying for a nursing job abroad, many local hospitals take advantage of this surplus. They expect inexperienced nurses to first undergo a fulltime practicum (meaning they are asked to work for free) or even pay the hospital for training them.

“It’s time to serve myself!” These were the words of a highly qualified doctor when he trained to become a nurse in 2004. At the level of the individual, such a choice may be understandable and in full accordance with the neoliberal notion of the enterprising self. Yet at the societal level, this single decision represents a painful loss. Mass outmigration of nurses has weakened the Philippine healthcare system– not because there are not enough nurses, but because there are not enough experienced nurses. They are the ones who are in high demand abroad and where they can earn about twenty times as much as they would receive in a government hospital at home.[15]

Better working conditions for medical professionals are found only in the private hospitals in the big cities. These are those which cater to the small upper class and family members of migrants who can pay for services that remain beyond the reach of ordinary Filipin@s. These hospitals then are the only ones who are in a position to pay better salaries to prevent their employees from looking for greener pastures elsewhere—at least for the time being. Save for some idealists, Philippine hospitals are therefore staffed with nurses with less training (who do not yet qualify for employment overseas) or with those who do not want to be separated from their families. This results in a situation where novice nurses are deployed in operating rooms. The few experienced ones have to work more by doing double shifts.

These trends in the health sector are mirrored in the education and other fields. Students enroll in special education, hotel and restaurant management or information technology courses with eyes firmly fixed on lucrative opportunities at the international level. They enter university with one foot already outside the door. This means that numerous local positions for specialists and professionals in various fields are not filled.

To make matters worse, returning overseas Filipin@s do not find outlets for the skills and talents honed elsewhere because there is a lack of opportunity at home to make the potential brain gain a reality. The lack of positions and inadequate working conditions prevent this from happening. The government actively supports outmigration, but is less interested in creating an enabling environment so that returnees can apply their knowledge and experience for the good of the home country.

Feminization

While women represented only twelve percent of Philippine OFWs in 1975, their number increased to 47 percent in 1987. By 2002, the percentage of women shot up to 69.  Although the construction boom in the Middle East has since somewhat offset this trend (at present women account for about 55 percent of OFWs), the feminization of labor migration is undeniable. The reason for this is the big demand for “caregivers”, which is considered to be a “female” domain. Nurses, domestic helpers, nannies, caregivers and sex workers are much sought after.[16] In Taiwanese factories, Filipinas’ renowned dexterity and nimble fingers likewise gained a good reputation.

The demand for female labor from the Philippines must be seen in the light of the dominant social relations wherein women shoulder a large financial responsibility in supporting the immediate, as well as, their extended family. The international labor market thus provides much needed opportunity for them. According to the Philippine sociologist Belinda Medina, female migrant breadwinners show greater commitment to their family compared to their male counterparts, i.e. females send a proportionally greater allotment back home than males.

Labor migration can also become an attractive option for women because it allows them to break free from conservative, discriminatory gender relations. This is especially true for women who do not fit the traditional mold, such as those who have gone through marriage break up or an experience of prostitution.[17] This re-positioning, however, is only partially successful since migration re-casts them into specific gendered relations of labor and reproduction. They may earn more money abroad, but it is at the expense of a diminished social status. Filipina domestic workers in Hong Kong, Singapore or the Middle East often become victims of verbal, physical and sexual violence. A study in October 2004 revealed that every fifth Filipina returning from work abroad was subjected to physical and/or sexual abuse at the hands of her employer.

Abandoned?

The feminization of migration profoundly changes the order of the traditional patriarchal gender relations.  Because of their relatively high incomes abroad, women (mothers, daughters, sisters) take on the role of providers and de facto decision-makers of the family. In cases where the mother, not the father, leaves for abroad, the family unit undergoes more extensive adjustments than if it were the other way around. Women are still seen as the primary caregiver and homemaker and men are supposed to work outside the home. Although some fathers do step up and take on the responsibilities of care work, most often, other female relatives are tapped to take on the mothering role in absentia.

The general consensus in the public discourse is that children suffer psychologically if left behind by their mother. Women migrants are blamed for causing families to break up, for driving their husbands into alcoholism and the youth into delinquency. Given these bleak scenarios, a mother forced into the role of breadwinner is plagued by guilt. Yet this doomsaying may not be entirely reflected in real life. Interviews of children with absentee parents show that they are indeed capable of coping with the situation, even without their mothers around (Rhacel Parreñas in Reese/Welkmann 2010).[18]

Beyond the human cost

Filipin@s seem to have internalized their position in the international division of labor, that it is their part to supply the rich countries of this world with cheap and compliant labor with a compassionate touch. Numerous children and young people probably identify with a sixth grader who, when asked about her future ambition, declared, she wants to work as a domestic worker in the United States.

The government is a beneficiary of migration. The billions of dollars remitted by OFWs each year decrease the deficit in the balance of payment and thus lessen the pressure to institute sustainable reforms. It is in the interest of those pushing these shortsighted policies that there is no ebb in the stream of migrants to the West. The dependable flow of remittances ensures that families of migrants are able to afford private education and health care and therefore pose less of a burden on the state and mute calls for improving public service in the country.[19]

Putting an abrupt end to labor migration would not just be unrealistic but would also most likely trigger a revolt in the country. “Migration remains a necessary strategy in the short and medium term,” writes Fernando Aldaba.[20] His suggestion for the short term is to ensure that the gains of migration are used to effectively protect OFWs in foreign countries. In the medium term, the government should refrain from its intention of expanding migration as a policy. “In particular, the government must find ways to channel remittances into productive investments to create more jobs locally. Education and training must be linked to the building of a dynamic economy that produces goods for local and international consumption and is not just geared towards overseas markets.”

These proposals would mean furthering structural reforms, increasing labor productivity and the base for wealth creation, expanding infrastructure, supporting local medium enterprise (to complement ecological re-tooling in the global north), increasing tax collection and strengthening consumer spending—premised on  the democratization of Philippine politics. What is needed is the fundamental transformation of the status quo and a renunciation of neoliberal economic policy. Only the assurance of a decent existence is able to stop mass migration, population growth and rural exodus.

Removing migration as an option would not be a welcome development. Forced migration may have its downside, but the Philippines would surely be less culturally exciting without migration. The country’s history is profoundly shaped by movements of people and various colonial and cultural imprints from all over the globe. At present times, OFWs are the conduits of cultural impulses from all the corners of the world. These are transmitted back home and amplified to the world in a colorful cultural mélange. What would the world be without Pin@ys?[21]

 Niklas Reese is a social scientist and researcher in the University of Bonn (Germany) as well as lecturer for South East Asian Studies at the University of Passau (also in Germany). 

This article is an advance publication taken from Niklas Reese/ Rainer Werning (Ed.): Handbuch Philippinen.  The German edition will be published in September 2012 (Horlemann Verlag: Berlin); the English edition will be published later this year in the Philippines.

Suggested Reading

Katrin Bennhold: From afar, moneymaker and mother: Women who left families behind have become a global force, in: International Herald Tribune, 08.3.2011 – available online: http://www.nytimes.com/2011/03/08/world/europe/08iht-ffhelp08.html?ref=thefemalefactor

David Camroux (2008): Nationalizing Transnationalism? The Philippine State and the Filipino Diaspora – available online: www.ceri-sciencespo.com/publica/etude/etude152.pdf

Mary Lou U. Hardillo-Werning (2000) (ed.): TransEuroExpress – Filipinas in Europe. Bad Honnef.

Niklas Reese/Judith Welkmann (Hg.) (2010): Das Echo der Migration. Wie Auslandsmigration die Länder des globalen Südens verändert. Bad Honnef.

IBON Facts and Figures, Special Release (15.5.2008): OFWs, Remittances and Underdevelopment.

 


[1] Kitakits is a colloquial Filipino expression among people who are close to one another, bidding one another farewell. Loosely translated as “see you”, it is an open-ended goodbye that does not indicate a timeframe for a possible reunion.

[2] Since government statistics only reflect legally documented migration, official headcounts are significantly lower than the actual movement of people and magnitude of remittances. This considerably hampers the search for reliable data and current facts and figures.

[3] According to the Commission on Filipinos Overseas, there were more than 700,000 Filipin@s living and working in Europe in 2009. Of these, 300,000 obtained either permanent or time-bound residency permits, while about 100,000 were undocumented migrants. Great Britain hosted the highest number of Filipin@s with a headcount of 200,000, followed by Italy with 120,000. In Germany there were about 55,000 Filipin@s, 30,000 in Austria and 22,000 in Switzerland

[4] While legal migrants in Western countries are often able to obtain indefinite working permits, OFWs in the Middle East and other parts of Asia are usually hired for two to three years and must return to the Philippines upon expiration of their contracts if these are not renewed.

[5] It is said that upon the assumption of office by President Noynoy Aquino, which was accompanied by much hope in the future, this figure drastically dropped to nine percent! 75 percent explicitly disagreed with the statement, compared to 56 percent previously (The Philippine Star, 06 August 2010).

[6] One non-economic reason for migration is the unquestioned belief in America as the “land of milk and honey” where life just must be sweeter than elsewhere. Other reasons are the wish to have children with light skin and pointy noses, having a shot at the possibility of social mobility and the chance to live one’s own life outside the rigid social controls in place at home. Many also cite a sense of adventure and their wish to experience something new as motivations to leave the country, at least temporarily.

[7] It is worth noting that OFWs in Hong Kong are able to remit about 70 to 85 percent of their earnings, which is simply not feasible for Filipin@s living in the West where living costs are considerably higher.

[8] Migration is not a guaranteed way out of poverty. In November 2010, 33 percent of OFW families were rated poor and 18 percent very poor. For families without migrant breadwinners, 51 are considered poor and 39 percent very poor.

[9] The access to jobs abroad is often a function of financial capacity, which effectively poses barriers to poorer strata of society.  The reason for this is that the farther one’s destination, the more prohibitive travel expenses become. The package prices of recruitment agencies are in the range of several thousand dollars. Enrolling in a good school where one can acquire an internationally recognized degree and fluency in the English language also does not come cheap—another factor influencing the opportunities of potential migrants.

[10]             Given the increasing feminization of migration, this disparity has diminished to some extent. Thus the poorest 20 percent received a mere three percent back in the year 2000. Female migrants are more likely to come from the countryside than their male counterparts.  Recruiters for the “entertainment” industry in the Philippines and abroad largely focus their efforts on rural populations.

[11]             Some recruitment agencies work around this situation by offering “fly now, pay later” packages. OFWs are able to travel abroad without advancing any expenses, but in return, they have to endure salary deductions for a long period of time before they are able to pay off their debt to the agency.

[12]             ADB findings from the year 2004 show that 58 percent of surveyed OFWs have at least a few semesters of college education under their belts and that 80 percent graduated from high school.

[13]             The local economy becomes particularly vulnerable when top experts in their fields are attracted by irresistible offers overseas, since they are hard to replace. In the summer of 2010, the Philippines was beset by a triple whammy. The government weather bureau of Dubai pirated 24 meteorologists from its Philippine counterpart. This was identified as one of the reasons for the inaccurate weather forecast and resulting lack of preparation in the eye of the devastating typhoon Basyang. The Department of Environment and Natural Resources (DENR) has a similar tale to tell. The department said goodbye to 83 geologists in the span of three years. As a consequence, there is not enough expertise to adequately map out the country’s earthquake fault lines and mineral deposits. Last but not least, 25 pilots collectively turned their backs on Philippine Airlines, which resulted in abrupt cancellations of flights.

[14]             For a long time, the projection was that the demand for Philippine nurses would increase over time, as populations in industrializing countries are growing older year by year. Yet the number of newly hired nurses actually declined in the past few years.

[15]             In the meantime, call centers are becoming attractive employment alternatives to hospitals, local health centers (or even schools and planning offices). Salaries of agents are twice or even four times higher compared to what new nurses, teachers and engineers usually receive.

[16]             The economic miracle of the so-called Asian Tigers is in part made possible by the employment of female domestic workers from the Philippines, Sri Lanka and Indonesia who are paid sub-standard wages and kept unaware of their rights. In Hong Kong, employees can fully concentrate on making money in their respective fields without being bothered by household chores, while “amah” takes care of their home and children.

[17]             Many migrants, male and female, note how they have changed upon returning to the Philippines. In cases where their social environment is not prepared to accept these changes, this can become a reason to leave the country anew contrary to earlier intentions of staying.

[18]             The social costs of migration described above are not fabricated. Yet Parreñas finds that exaggerated typecasting can be traced to stubborn patriarchal notions essentializing women as mothers and nurturers.

[19]             A nagging question remains. Does the steady flow of remittances breed false dependencies and laziness among recipients or do these impressions reflect the middle class biases of social commentators?  The appraisal of Belinda Aquino (Philippine Daily Inquirer, 6 June 2001)  illustrates this kind of thinking:  “Spoiled by the regular  “pension,” members of families, usually the males, quit school, treat out their “barkadas”  to endless rounds of drinks, and just slum around. Meanwhile, their poor sisters, aunts, mothers are working their heads off earning the money that just goes up in smoke and drink back home..”

[20] Fernando T. Aldaba: The Economics and Politics of Overseas Migration in the Philippines. Manila Time, 22 to 24 March (three parts)- available online: http://www.ercof.org/papers/migrationaldaba.html

[21]             Pinoy (male) and pinay (female) are common appellations used for one’s fellow Filipinos or kababayan.


Reflections on the Global Financial Crisis and China’s Economic Development

Christer Ljungwall. China Economic Research Center, Stockholm School of Economics, (chrlju@ccer.edu.cn)

The current global financial crisis may be regarded as one of the greatest challenges since World War II, and its far reaching implications are present in every corner of the world. The current crisis, however, is not the result of a traditional cycle-fluctuation. More correct, it is due to structural imbalances in the global economy. Saving rates has been too low and consumption too high in the United States and Europe, while China has provided both the saving to finance that consumption and the products themselves. This has not only led to huge trade-imbalances, but also a structural miss-match in the Chinese economy, i.e., too much focus on export-oriented manufacturing. It is true that China’s export-led growth model has generated enormous increases in output, higher incomes and new job opportunities. But it has also stalled the necessary re-balancing of the economy to one geared more at private and public consumption.

The toxic debts caused by the sub-prime mortgages in the United States, which in essence was the failure to properly price risk, was rapidly spread amongst western countries leading to an immediate financial crisis. Today, western countries are mired in low growth and the global economy is likely to enter recession in 2009 with the United States, Europe and Japan posting negative or very slow rates of economic growth. As the global demand for Chinese export goods diminish there is little doubt that China will suffer.

So far China has been able to avoid the worst problems due to its strict controls on capital flows, the relative conservatism of its banks and its large trade surplus. The real economy still remains reasonably strong and from this perspective China has powerful tools to maintain stability in its own financial system and to stimulate the domestic economy.

Signs are, however, already emerging that the global financial crisis is having an impact on China. In the third quarter of 2008, China’s annual gross domestic product growth slowed to 9 percent from 10.1 percent in the second. Inflation has slowed to an annual 4.6 percent in September from a peak of 8.7 percent in February. There is a sharp slowdown in industrial profit growth and fiscal income, China’s stock market has recorded its worst ever month and tens-of-thousands of workers risk losing their jobs in a near future. The uncertainties in the world’s currency markets have exposed the Chinese banking sector to higher foreign asset risks, and earnings growth is rapidly declining. It is serious to the extent that the central bank is devising a plan for providing emergency liquidity to banks in case they need it in the future.

The fundamental issue for the Chinese government today is to change its growth model and to re-balance the economy. This is the most important issue – together with the environment – and there is very little time. In this respect, the current crisis presents China with an opportunity to analyze its own problems, reflect about its weaknesses and in which areas they should focus their efforts.

In order for China to confront the many destabilizing and uncertain factors that exists it is necessary for them to strengthen the awareness of the difficulties and proactively deal with the challenges. The Chinese leaders are, however, caught in an ideological battle over the future direction of the country’s economy. Some view the problems that western financial institutions are experiencing as proof both of the superiority of China’s economic policies and its political system, while others argue in favor of continued market reforms. Indeed, the western-style democracy has recently been attacked, while lauding the Chinese one-party system and its tight control over the economy. From this perspective, pressure to act in a less optimal direction may be irresistible for Chinese leaders and as a result we are likely to see much of the macro-economic adjustment policies to be short-sighted rather than focusing more on the long-run development issues.

In the short-run domestic demand may be stimulated through massive investment in infrastructure. The government has already implemented a handful of monetary and fiscal measures, including cuts in interest rates and banks required reserves, to stimulate growth. The central bank will continue to reform interest rates to make them more market orientated and improve exchange rate flexibility while keeping the stability of the Yuan in check. In addition, the bank will keep a close eye on the real estate sector and improve the financial services related to it.

Stimulating the domestic economy may help in the short-run, but will only be effective if the government pays careful attention to its stimulating policies so as to avoid future problems. Critics argue strongly that it may be dangerous to increase debts levels rather than fighting the core of the problem – lack of a social safety net and private consumption.

In the longer-run household consumption must increase, with the main target being the rural population. Increasing private consumption is, however, a slow process and it will take at least a decade to reach sufficient consumption levels. On the other hand, increasing public consumption may help speed up this process. Creating both a new health care system and welfare system is seen as the key to rapidly increase private consumption among the poorest households. The plan is ambitious and the intentions are definitely good. The big question mark is the large distance between households and the central government and in this respect the political administrative layer will likely be a drag on development. The fact is that local governments do not have the ability to implement the needed reforms at a satisfactory level.

The fact remains that China finds itself in a very sensitive political and economic situation in which the uncertainty of what will happen over the coming two years are significant.


China – an important component in the global economy

Christer Ljungwall Assistant Professor Department of Marketing and Strategy, Stockholm School of Economics and guest researcher, China Center for Economic Research (CCER) (chrlju@ccer.edu.cn)

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China’s development suggest that the global economy no longer can ignore China’s internal development. The country is most likely to affect the international development for a long period. This is irrespective of whether the direction of development is positive or heads-off in a more turbulent manner.

An adventure

Almost five years have passed since I was invited to conduct my research on China’s economy at the prestigious China Center for Economic Research at Peking University. I had finished my dissertation in economics a year earlier and the timing was perfect. Since then, my work has been a combination of academic challenges and a private adventure. I have met hundreds of people from all over China and from the most different backgrounds. I have the privilege to work with some of China’s best economists, while teaching and supervising students provides new perspectives on the younger generation of Chinese citizens. New impressions comes in plenty!

My personal view on the Chinese development have been gradually changed during my stay in the country. My analysis is now based on a combination of economic theory and empirical studies mixed with knowledge of internal processes and experiences from the Chinese society. In my view, the Olympic Games is not in any way conclusive for the Chinese economic development. The ‘risk factors’ remains regardless of the games and what can cause serious trouble will not simply go away by itself.

Overtime, I am cautiously positive with respect to China’s future. It would, however, be a big mistake to view the current relative stability as a guarantee that the Chinese economy – and the Chinese society in general – is immune to severe crises.

A fascinating development

China’s radical change has fascinated the world for 30 years[1]. Although a number of changes took place already a few years earlier, the reforms formally begun in late 1978. At that time, the Chinese economic structure was plagued by a strictly planned economy and confronted by huge problems; productivity levels were extremely low and the allocation of resources were mismatched – by it self largely as a result of the Great Leap Forward and the Cultural Revolution. In order to maintain stability the Chinese leadership took a decisive decision to reform the economy and improve the standard of living for its citizens. It is worth noting that reforms, by definition, did not come as a result of immediate political or economic crises.

The early reforms

Domestically, early reforms was a combination of improved incentive structures in the agricultural sector, the well-known household responsibility system, and changes in the monetary and fiscal systems. Principally, control of the means of production and incomes was transferred from the central government to provincial governments. As a result households and newly established private enterprises experienced rapidly increasing incomes[2].

Initially, the deregulation of prices within the industry took the form of a dual price system, that is a system in which a number of goods were given an artificial (i.e., lower) price, while other goods – mainly processed goods – were priced according to the market. This means that those parts of the country who was rich in natural resources, mainly Central and Western regions, subsidies industries and hence the economic development in coastal provinces. The price of input goods were set at artificially low levels, while the processed goods were sold at prevailing market prices.

Internationally the reforms lead China into a completely new era, at least in modern times, as domestic reforms were matched by increased openness to the global economy. The most pronounced reforms to open-up China to the global economy can be summarized as:

– decentralizing of trade including geographic prioritization, symbolized by the special economic zones and cities with less restrictions towards international trade and investments.

– prioritization of key industries.

– membership in the World Trade Organization (WTO).

Generally speaking, there has been a rapid shift away from a relatively closed economy with state control of the means of production and allocation of resources towards a situation with increased focus on the individual. Market based allocation of resources, privatization and market based pricing constitute major elements in the economy. The pace of change has been very high and involved structural changes as well as increased levels of production.

Increased aggregated production volumes has also led to a decisive shift in the composition of GDP away from agriculture towards industry and services; consumption patterns and the distribution of the economic surplus has changed. Although the statistics tell the story, there is more to it: Xu and Ljungwall (2008) show that China’s service industry is underestimated and point out that its share of GDP is in the interval 45 percent to 55 percent in 2006 (compared to 39 percent reported by the official statistics). The exercise shows that China’s GDP is 9 percent to 32 percent larger than given by official calculations.

The opportunities created by economic reforms has attracted investors from all over the world to China, which has made the country the second largest recipient of foreign direct investment (FDI). International trade has reached impressive levels and the aggregated economy – with a few exceptions – has developed with relative stability. China’s GDP increased by 11,9 percent to RMB 24,66 trillion (USD 3,46 trillion) in 2007. The highest GDP growth in 13 years. Measured in USD, the Chinese economy is now the fourth largest in the world only after the USA, Japan, and Germany[3].

At the same time, China’s economy is currently confronted by rapidly increasing general price levels. Population growth, however, is less than one percent per year. Huge differences in term of standard of living and per capita incomes are also evident, in particular between urban and rural areas. However, these differences aside, there is no doubt that the absolute majority of the Chinese population has benefited from the economic expansion. In the 17 years between 1978 and 1995 more than 200 million people were lifted out of absolute poverty. Definitely, most people in China is better off today than 30, 20 or even 10 years ago.

China has entered the international scene and has gained a considerable influence outside its borders. The country has become a global concern and its domestic development – turbulent or not – is an important component of the global economy.

China’s future

China’s fut
ure development, however, is not only discussed in positive terms. It is clear that the opinions concerning the contents and speed of reform as well as its general results differ widely among politicians, researchers and the general public – both inside China and internationally. The costs of reform, for example in terms of environmental degradation are gigantic, and the problem of huge differences in the standard of living and per capita incomes is hard to solve in the short run. The financial system lacks thorough reforms and rests upon fragile foundations; state-owned companies (SOEs) are loaded with hidden problems of enormous proportions; and the society in general is facing severe corruption and is soiled by vested interests.

The opinions stretches over a wide area from unreserved pessimism via an arbitrary view on the development to a fear of a rising superpower with unclear ambitions in international politics.

To answer the questions what China will look like in 10, 20 or 30 years may seem relevant from a number of perspectives such as how the European Union (EU) should relate to China. Such an analysis, however, is heavily burdened by unsure assumptions.

One argument in favor of a continued positive development is that the Chinese economic development follows a pattern with distinct resemblance in modern development -and trade theory: structural changes, catching-up, and factor price equalization. China fits well these three criteria, which in this context points at similarities with the early developments of Japan, South-Korea, and Taiwan. There are, of course, differences – not the least in terms of the national and international conditions prevailing in respective countries at different times. At the same time, nothing indicates that these differences should be systematic with respect to their affect on economic growth in China. Corresponding pattern of development may very well be applied to China in the future.

It should be pointed out, however, that these three factors not only are dependent on one another, but also stand in close relation the prevailing domestic and international conditions. A pattern of development similar to that of other Asian countries is applicable also to China but, perhaps with the major difference that China develops at an unprecedented pace and that the absolute size of the Chinese economy to a larger extent affects the global economy than does its predecessors.

No guarantees for continued high economic growth

The prerequisites for China’s economy to grow and develop in the previously mentioned direction rests upon a number of important assumptions such that existing problems are solved without hindrance and that coming problems are properly dealt with as they appear. Examples of obvious areas that need immediate attention is China’s inefficient financial system and its link to loss-making SOEs, corruption, capital leakage (for example from state-owned pension funds), differences in income levels and the standard of living between urban and rural areas, environmental degradation, and a rapidly changing political environment.

Without doubt, it must be clear to anyone of us that China’s rapid economic expansion and overall structural change cannot be guaranteed. The gradual reform strategy that so far has proven successful is now increasingly questioned from the perspective of sustainability – this is, not the least, evident by the insufficient reforms of China’s financial system.

Weaknesses in China’s financial system

The financial system plays a decisive role in a dynamic economy and, hence are further reforms and widening absolutely necessary. A failure in this area will, by definition, put a halt to China’s economic development. This, in turn, will bring serious consequences to the global economy.

There are two major argument in favor of such a development. The first rests upon previous experiences in other countries that financial systems from time to time undergo different stages of instability and turbulence – such as the sub-prime crisis in the US, the world’s most dynamic and transparent economy. The second rests upon the fact that China’s financial system generally is known to be fragile, filled with vested interests and political interference.

The financial system is, next to the legislating sector, the part of a country’s economy in which political interference and foot-dragging of political decisions have the highest affect. Despite sweeping reforms of China’s financial system there remains huge problems, in particular within the state-owned banks.

Government interventions in the capital market, such as capital injections to restructure state-owned banks, a deliberate strategy to keep insolvent financial institutions afloat, maintaining state monopolies etc., has created a skewed incentive structure among Chinese banks and other financial institutions. The same procedures prevail among SOEs as well as in the relationship between SOEs and state-owned banks.

The number of new loans has expanded rapidly in the past five yeas, thus increasing the probability of a new wave of bad loans and – perhaps more importantly an increasing number of bankruptcies[4]. In 2006, the share of fixed-asset investment in GDP reached above 50 percent – a historically high level – in connection to the banks financing a large number of investments in the real estate sector and increased industrial production capacity. We can already observe an increasing number of ‘bad-loans’ reports from the banks – often originating in the real estate sector – while at the same time excess capacity within certain industries indicate that a potential slowdown in economic activities, or increasing interest rates, will put severe financial pressure on firms. The latter is most evident among SOEs, which for a long time have enjoyed subsidized credits by the government.

Despite tough measures by the China Banking Regulating Committee, the average capital-ratio among Chinese state-owned banks is a mere 8 percent – significantly lower than in other Asian economies, while at the same time Chinese state-owned banks report significantly lower profits. To this can be added that investments in China generally is relatively inefficient as compared to, for example, India.

High inflation – a real threat

The high inflation rate in the Chinese economy depends on a combination of factors: high rates of fixed investment, an increasing number of new loans, a large trade surplus, increasing cost of production due to higher world prices for raw material and other input goods, increasing nominal wages, and of course higher prices on food. Behind these factors, however, is one major economic event – the rapidly increasing money supply.

As a matter of fact – and despite repeated actions such as increased interest rates and reserve-ratios – the Chinese central bank has not succeeded in slowing down the rapidly growing money supply in the last 18 months. The reserve-ratio was raised 10 times in 2007 while at the same time the interest rate was upward adjusted six times, all with the purpose of limiting overall liquidity in the economy. As it turns out, the Chinese economy has experienced a lowering of the real interest rate despite increasing nominal interest rates – indeed an interesting paradox.

According to official statistics released by the central bank, M2 reached RMB 42,1 trillion by the end of February 2008 – a growth rate equal to 17,5 percent compared with the same period a year earlier. Simple facts like this point at a continued strong liquidity in the Chinese economy. It is difficult to escape rapid price increases under such circumstances! At the same time, it is difficult for the central bank to efficiently sterilize the rapidly increasing inflow of foreign currenc
y. Interventions in the exchange market by the central bank, i.e., the purchase of USD and selling of RMB with the purpose to control the rate of appreciation of RMB, has also supported an increasing money supply leading to higher rates of inflation. Contributing to the inflationary pressure is also the natural inflow of foreign capital to China – largely due to interest rate differentials between China and rest of the world. China will definitely experience further price increases! It is also the case that the current macro-economic situation with high economic growth rates and inflationary pressure in the Chinese domestic economy, and a US and Europe on the edge of recession places the Chinese central bank and thus the central government in a difficult situation.

Lessons learnt from the late 1980s and early 1990s tells us that high rates of inflation in the Chinese economy leads to lower rates of real economic growth. Today, the situation is much more complex than in the 1980s or 1990s. A continued austere monetary policy and restrictive credit policies strikes hard against SOEs and sectors of the economy with a high level of private entrepreneurs, such as real estate developers. This can lead to devastating effects for Chinese banks. This would most certainly bring out the ‘dust under the carpet’ and, hence lead to even higher levels of money supply[5]. The result is rapidly increasing rates of inflation which, in turn, would have an immediate and negative effect on the average Chinese household through lowered purchase power and decreasing wealth. This may very well lead to social unrest.

One measure to prevent non-performing loans from reaching uncontrollable levels and lowering the costs in case of financial crisis is to widen and deepen the financial system, among other things, by establishing private banks on a large scale. A conclusive step in this direction was taken on May 11 this year.

In summary, my view of the Chinese economic development is cautiously positive. It would, however, be a big mistake to view the current relative stability as a guarantee that the Chinese economy – and the Chinese society in general – is immune to severe crises

References

Lin, Y., F. Cai. And Z. Li (2003). The China miracle: Development strategy and economic reform. The Chinese University Press, Hong Kong.

Nanto, D.K. and R. Shina (2001). ‘China: a major economic power’. Post-Communist Economies, Vol.13, No. 3.

Qian, Y. (2000). ‘The process of China’s market transition (1978-1998): The evolutionary, Historical and comparative perspectives’. Journal of Institutional and Theoretical Economics, Vol. 156.

State Statistical Bureau (2007). China Statistical Yearbook. China Statistical Publishing House.

Xu, D-q. and C. Ljungwall (2008). ‘What is the real size of China’s economy?’ China Economic Journal, Vol. 1, No. 1, Februray.

Xu, G. and C. Ljungwall (2008). ‘Business cycle accounting in China and India’. Forthcoming CCER working paper.

Xu, D-q. and C. Ljungwall (2008). ‘Dust Under the Carpet’. CCER report.


[1] This article is a brief overview of China’s economic development since 1978, including a discussion of the country’s near future. For a detailed overview of the most important segment of China’s reform, please see, for example: Lin et al., 2003; Qian, 2000.[2] The central government still controls means of production and incomes from a number of sectors in the economy.[3]According to calculations by CIA (2008).[4] Ernst & Young, 2005, estimated bad loans in the Chinese banking system to be in the range of USD 900 – 920 billion.[5] See ‘Dust under the carpet’, Xu och Ljungwall (2008).