The End of Cheap Labour?

1Introduction: A leap beyond the global factory model? During the last decade, Chinese leaders have not been reluctant to point out and criticise the weaknesses of the country's economic development model. Most outspoken about this was China's former premier Wen Jiabao. In 2007, he coined an expression by now known as the "four uns" among China observers when he said that the economy was "unstable, unbalanced, uncoordinated, and unsustainable" (cf. Roach 2009: 229-233). He repeated this critique in almost the same words at a speech at the National Congress in 2012 to underline the urgency of reforms (The Guardian 05.03.2013). In the 12th Five Year Plan, adopted in 2011, the country's structural problems are summed up as follows: "[I]t is important to have a clear sight of the imbalanced, incompatible and non-sustainable elements within China's development, which mainly turn out to be a tightened constraint between economic growth on one hand and resources and environment on the other, an imbalance between investment and consumption, a relatively large income disparity, uncompetitive technological innovation ability, unreasonable industrial structure, vulnerable agricultural basis, a gap between rural and urban development [.] a significant increase in social conflicts and a still considerable number of institutional obstacles that restrain scientific development" (FYP 2011). From a European perspective in the year of 2014, such a gloomy assess-ment appears odd. After all, China's economy has acted as a locomotive of the world economy since the recent crisis whereas the European economy, and with it the project of European economic and political integration, is stuck in grave difficulties that seem endemic. But China indeed faces mounting contradictions in its recent development model. Unlike it is the case with Europe, these are not the result of sluggish economic growth, but of the very economic success that lets China appear infallible in the eyes of many in the West. The "global factory model" (Ernst 2007), according to which China assumed the role of an assembly platform for consumer goods that were exported to advanced industrial regions, has reached its limits. The economic crisis of 2008/09 graphically demonstrated the risks of an overtly export-oriented growth pattern, and it underlined that high growth rates in the future will barely be sustained through exports of mass consumer goods to Europe and the US alone. And while stagnant growth in the West is putting a strain on China's export performance, domestic consumption up until now has barely generated sufficient demand to act as an alternative source of economic growth. After all, China's success of the last three decades has deepened social inequality which is reflected in a steadily shrinking share of wage incomes as a proportion of GDP and the parallel rise of the GINI co-efficient that measures social inequality (Zhu and Kotz 2011; Guo and N'Diaye 2009). Ecological damages contribute to a rather bleak perspective. They not only compromise the quality of life for hundreds of millions that breathe polluted air, drink contaminated water, and harvest from intoxicated soils, but also turn into an economic risk because of expensive measures that need to be undertaken in order to maintain basic conditions for investment and trade. In short, China is facing a turning point: Chinese political leaders and most international commentators share the view that either there is a reorientation towards a more sustainable and just economic growth pattern based on domestic demand or China's apparently limitless growth engine will lose steam (Eurasia Group 2011; Lardy 2011; World Bank 2012; FYP 2011). The notion that slower growth somehow could turn out to be a desirable alternative is deceptive in the case of China. For if the sources of the country's economic growth run dry, China's historic societal transformation could also get stuck. The result in all likelihood would be growing unem-ployment, a resurgence of poverty and an escalation of social and political conflict with uncertain outcome. The Chinese leadership therefore is performing the balancing act of achieving the transformation towards a more sustainable growth pattern while avoiding a substantial slowdown of economic growth that could undermine political and social stability. In response to the contradictions of the current economic growth pat-tern, the Chinese central government is pursuing the dual target of eco-nomic rebalancing and a transformation of China's industrial base. The strategy of rebalancing, a guiding theme in the Eleventh and the Twelfth Five Year Plan, aims at increasing the share of domestic demand in overall economic growth. There are several dimensions to this objective including a rise in the share of wage incomes, the construction of social security systems, and a regional rebalancing between the relatively affluent coastal regions and the poorer regions of the interior. These projects are being pursued with great fervour, though so far with limited effect in terms of a change in the overall composition of growth. The second strategy, industrial upgrading, aims at developing innova-tive capabilities of domestic enterprises in order to enable their emancipation from a subordinate role of low-tech assemblers in global production networks (GPN). By enriching the enterprises' functions, as is the assumption behind this strategy, Chinese entrepreneurs could siphon off higher revenues from advanced manufacturing as well as from design and marketing activities. It is widely agreed that this is the only perspective of escaping the trap of a profit squeeze in manufacturing industries triggered by sluggish export performance, rising prices for the most important factors of production, and the continuous appreciation of the Renminbi (RMB) that is undermining the competitiveness of Chinese exporters of low-end goods (Yu and Zhang 2009; World Bank 2012; HKTDC 2011a). In fact, the desire to overcome low-end production and to reach a higher level of economic development has shaped Chinese industrial policy not only in recent years, but effectively since the beginnings of the reform era in 1978 (Naughton 2007, 349-351). But in the course of mounting economic problems of low-end assemblers and the temporary breakdown of many export-oriented companies with low technological capabilities, such efforts are undertaken with a new urgency. No one expressed this more clearly than the former secretary of Guangdong's Communist Party, Wang Yang, who stressed that the economic crisis of 2008/09 was an opportunity for change and said at the height of the virtual breakdown of much of Guangdong's export industry that is was "time to open the bird cages for new birds to settle down", implying that the economic crisis was an opportunity for a sweeping replacement of low-end industries by more advanced successors (cf. Businessweek 15.06.2009). This study addresses the interrelatedness of both issues, the challenge of rebalancing on the one hand, and the goal of industrial upgrading on the other hand. A transformation of industries that leads them beyond production models based on cheap labour is a precondition for eventually raising the level of domestic consumption and thereby bringing about economic rebalancing. But industrial transformation in itself does not necessarily imply more just patterns of labour relations or income redistribution. In fact, as a growing body of empirical studies in the field of economic sociology has analysed in great detail (Barrientos et al 2010; Bernhardt and Milberg 2011; Bernhardt 2013; Lüthje et al 2013a), much of the literature on industrial upgrading in developing countries proved to be too naïve in assuming such a direct relationship between industrial transformation and what has come to be known as "social upgrading" of wages and working conditions. Hence, the principal aim of this study is to analyse recent transfor-mations of industries in China with special regard to the question as to how far the chosen strategies for industrial upgrading lead to improvements for workers in terms of wage levels and working conditions. It approaches this issue by means of case studies from factories in the Pearl River Delta (PRD), China's main hub for export production and at the same time the site of an unmatched conglomeration of those enterprises that were labelled as "old birds" in Wang Yang's metaphor. The case studies investigate two industries in this region. The first is the LED lighting sector, a rapidly transforming industry which belongs to the so-called Strategic Emerging Industries (SEI) that are particularly supported by the Chinese authorities. The second is the textile and garment industry, which has a centuries-old history in China and constituted one of the pillars of the country's recent period of rapid industrialisation from the early 1980s on. By choosing two industrial sectors with remarkably different characteristics, the investigation highlights the diversity of industrial upgrading strategies and their effects. A comparison of differences and parallels of industrial transformation in these industries provides ample insights for a discussion of general development tendencies in the region. The Pearl River Delta was chosen as the site for the empirical investigation not only because it is presumably the largest industrial area in the world with a particularly long history of low value-added manufacturing for overseas markets, but also because it has emerged as a laboratory for economic and political reform. Nowhere else in China has the economic crisis been felt as intimately, the scale of labour conflict been as high, and the reform programmes of the government been as ambitious as in this region. It is therefore assumed that an in-depth study of economic and social relations in the PRD will offer particularly valuable insights about the future of Chinese industrial and social development.