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tion, its health care system, pensions and social security — “especially for its vast rural population.” The result will be less of the population holding onto “precautionary savings.” “China should establish efficient institutions to assure appropriate earnings for the household, protect the basic rights of workers and enforce the employment contract law,” he says. In the past five years, China has raised minimum wages for blue collar workers by 10 to 15 percent each year. “Despite concerns over whether minimum wage is an efficient measure for income redistribution, the rise in the income of the poor will stimulate consumption internally and have important implications for businesses.” In addition to wage growth, land value and housing prices have gone up significantly in the past 10 years, “raising the general cost of manufacturing and reducing the profitability of businesses,” he says. “When China’s labor becomes more expensive, there will be a reallocation of business to locations with cheap labor, possibly to countries like Vietnam and Indonesia; at the same time, Chinese workers are richer and can contribute to the rebalancing of the Chinese economy.” Meanwhile, the Chinese government appears eager to improve the productive capacity of its workforce and to spur innovation-driven growth, says Yang. “China needs to invest more in education and the right kind of infrastructure for innovation. So far, public investment in education and training as a share of GDP has been below the average of developing countries.” “I think it’s time for China to reconsider its overemphasis on exports as a source of economic growth and reconsider export tax rebates. It should also gradually remove special privileges given to companies in special economic zones.” Yang says the “mammoth current account surplus in recent years … was by and large not intended or desired by China.” Policymakers simply failed to understand the complexities causing the economic imbalances that were further compounded by past policies favoring the government and production over welfare of the people of China. Yang says, “In this sense, China is both the culprit and victim of its own macroeconomic imbalances.”

I THINK IT’S TIME FOR CHINA TO RECONSIDER ITS OVEREMPHASIS ON EXPORTS AS A SOURCE OF ECONOMIC GROWTH AND RECONSIDER EXPORT TAX REBATES. IT SHOULD ALSO GRADUALLY REMOVE SPECIAL PRIVILEGES GIVEN TO COMPANIES IN SPECIAL ECONOMIC ZONES. Dennis Yang, Dale S. Coenen Free Enterprise Professor of Business Administration at Darden, is co-editor of the book Has China Passed the Lewisian Turning Point? with co-editors Cai Fang and Huang Yiping (Social Sciences Academic Press; Beijing, China; 2012; in Chinese).

SPRING 2014

Ideas to Action  

Faculty Research from the University of Virginia Darden School of Business Spring 2014

Ideas to Action  

Faculty Research from the University of Virginia Darden School of Business Spring 2014