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November 11th, 2009
09:34 AM ET

China on $2 a day

Editor's Note: This article continues our series excerpted from AC360°'s contributor David Gewirtz's upcoming book, How To Save Jobs, which will be available in December. Over the next few months, we'll be excerpting the first section of the book, which answers the question, "How did we get here?". Last time, we looked at our changing relationship with work This time, we'll begin our look at how changes China and India will be impacting our workforce for years to come. To learn more about the book, follow David on Twitter @DavidGewirtz.

David Gewirtz | BIO

AC360° Contributor

Editor-in-Chief, ZATZ Publishing

Here's an interesting universal truth: everyone wants a better life. This is as true of the desperate poor in third world nations as it is of middle-class Americans. And while economic downturns are scary to most Americans, even the poorest of Americans live a better life than the shocking level of never-ending squalor experienced by some of the poorest of the poor in developing nations.

Almost five times as many Chinese and Indian citizens live on less than $2 a day than there are people in the United States.

Nations like the People's Republic of China and the Republic of India have vowed to change all that. Together, China and India make up 37 percent of the world's population. By contrast, the United States has only 4 percent of the world's 6.77 billion people and yet our Gross Domestic Product (GDP) is almost double that of China and four times that of India.

That means that if you want to understand the current job situation in America, you absolutely, positively have to understand the job situation in China and India.

China's economic overhaul

Both China and India began their long march to first-world status decades ago. Until about 1978, the PRC's economy was barely a blip on the world's radar.

When measured in terms of purchasing power, the economy of the People's Republic of China (PRC) is now the second largest in the world, with a $7.8 trillion GDP in 2008. The European Union's economy is technically larger, but that's for a cluster of countries.

China's economic reforms were gradual, often in response to specific problems or economic circumstances.

Since its inception in 1949, China ran a Soviet-style economy. Consumer spending was virtually non-existent, central planning determined nearly all economic activity, and the nation's industrial growth consisted mainly of building big factories. Entrepreneurship was not only not encouraged, it was actively punished.

Chinese laborers work at a construction site in Hefei, Anhui province.
Chinese laborers work at a construction site in Hefei, Anhui province.

From 1949 through the 1970s, China tried all sorts of economic gimmicks. The Great Leap Forward turned out to be a great leap into failure. The country's leaders attempted to move its farmers into communes and force the formation of small-scale factories and agriculture. The country's peasants weren't prepared for this, and agricultural productivity plummeted.

Small-scale factories produced output of scarily bad quality that was incredibly expensive to produce. During this time, the Soviets and the Communist Chinese found they couldn't play well with each other, and even though they shared similar economic philosophies, relations soured. China lost its Soviet advisers, and production quality dropped even more.

By the late 1960s, the situation had gone from bad to worse. Chairman Mao resigned. Liu Shaoqi became the second President of the PRC and headed up the country until 1968.

Liu Shaoqi instituted a series of changes, first among them letting farmers have private plots of land to tend. Communes got smaller and teams managing production were given greater independence. All this helped China's economy.

But then, in 1966, Mao decided he wanted to retake power and began the Great Proletarian Cultural Revolution. Although the Cultural Revolution didn't have a specific economic plan, it generated enough confusion and unrest to cause the country major economic damage as millions of people stopped working.

The Cultural Revolution left lasting damage to worker productivity. Salaries were frozen, bonuses eliminated, factories employed too many workers simply to counter the extreme unemployment, and workers were hired on a permanent basis, with no regard for performance or quality. For almost 14 years, China's workers simply phoned it in and while the country's GDP grew, it didn't grow by much.

In 1978, Chairman of the Chinese Communist Party Deng Xiaoping initiated a series of economic reforms with the support of Chinese economic pragmatists. They reasoned that previous reforms like the Great Leap Forward hadn't really worked and didn't generate enough of an output surplus.

China's economic reforms were gradual, often in response to specific problems or economic circumstances. In some cases, like the closing of state-run enterprises, the government didn't really want to carry out the policy change, but found that economic necessity forced the change.

Initially, China began to allow farmers to keep their surpluses, which effectively incentivized them to be more productive. The Chinese government then began to allow international trade and direct foreign investment. These basic reforms increased the overall standard of living for many Chinese, which provided encouragement and motivation for later reforms.

As China entered the 1980s, the government worked to transform production from an industrial base driven primarily by dictates from a central management committee into an industrial base driven much more by market forces.

A key to this was a dual-track price structure, where some goods were offered at state-specified prices, while other goods were allowed to price-fluctuate based on demand. Over time, the ratio of price-controlled to market-driven pricing dropped, and by the 1990s, the pricing of nearly all goods was driven by market demand.

By the end of the 1980s, the Chinese system was a strange mix of near-capitalism and old, Soviet-style central planning. But there was a lot less poverty and China was beginning to enter the world economic stage.

China began to encounter a new problem, one which is still suffers today: wealth disparity. Some Chinese had solidly entered and embraced the middle class, while many others remained dirt poor.

Despite the problem of wealth disparity, by the 1990s, it was clear China was onto something. Growth was increasing, foreign investment in industry had increased markedly, and inflation soared, but then later dropped as interest rates went up. And, in 2003, one of the biggest changes was made in the Communist Party's Third Plenum (a legislative assembly of sorts). In 2003, protection was enacted for private property rights.

Change was working. China has seen an astounding level of GDP growth, averaging around 10 percent per year.

Living on $2 a day

In 1981, 53 percent of Chinese were subsisting at the poverty level. By 2001, only 8 percent of Chinese citizens were considered at the poverty level. Of course, what China considers middle class is a lot different than what we here in America do. Although the poverty rate dropped from 53 percent to 8 percent, it's not like 92 percent of Chinese now have homes and cars.

Many Chinese who are no longer considered "in poverty" still live in huts with dirt floors. But now they have enough food to survive. To the Chinese, anyone making more than the equivalent of $2 a day is middle class. That's $730 a year, or about what most of us Americans spend on cable TV each year.

In the next article, we'll look at India, and then we'll start to explore why the economies of these two nations are so tightly linked to our own future and the future of American jobs.

Editor's Note: This article continues our series excerpting AC360 contributor David Gewirtz's upcoming book, How To Save Jobs, which will be available in December. Over the next few months, we'll be excerpting the first section of the book, which answers the question, "How did we get here?". Last time, we looked at our changing relationship with work This time, we'll begin our look at how changes China and India will be impacting our workforce for years to come. To learn more about the book, you should follow David on Twitter @DavidGewirtz.


Filed under: China • David Gewirtz • Economy
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