Inequalities Unveiled behind Economic Restructuring: China’s State Sector during the 1990s

During contemporary economic recessions, whether public policymakers should take an active role in response to massive restructuring and shifts in the labor market has always been a heated discussion. A historical example of struggling economic restructuring in China in the 1990s may shed light on how administrative institutions could approach economic recessions and the accompanied crisis in the labor market.

Unlike most of the world’s other largest economies, China’s state sector has been a crucial driving force of continuous economic growth, now contributing over 40% of the national output. Although always backed by a dominant government influence, the state sector would not have achieved such strength and vitality if the state had failed to initiate critical reforms in the 1990s. However, such substantial improvements did not come without a cost: the widening income and social inequality became a primary concern of its citizens and policymakers.

The reform of state-sector enterprises, abbreviated as the “SOEs,” has been among the priorities of the economic reform agenda since 1984. Prior to 1984, 59% of the working-age population was employed in SOEs, a proportion higher than most international counterparts (Lee, 2000). Most SOEs featured long-running unprofitability due to the superfluity of workers and the bureaucratic central planning. As a direct result of the ground-breaking reform such as removing government bureaucrats from enterprise executive boards, accelerating partial privatization of state-sector firms, and embracing international competition by cutting tariffs, the gross industrial output increased by nearly 1.5 times. The state sector’s total profits significantly increased by nearly 5 times from 1997 to 2005 (Hu et al., 2006). Hence, the reform gave rise to significant improvements in the productivity and efficiency of SOEs.

The employment restructuring of the state sector in China is often compared to the transformation of other post-socialist societies in Eastern Europe, which abruptly resorted to a neo-liberal strategy involving massive economic liberalization and total privatization. Such a strategy termed “shock therapy” resulted in declined productivity and surging unemployment (Adam, 1999). China adopted a pathway different from its failed counterparts in East Europe by strengthening state supervision of the process without totally rejecting private shareholding. However, such large-scale layoffs still required substantial efforts from the government to ensure a steady economic transition.

Despite the apparent success in resolving inefficiency, radical reforms also came with heavy costs. The SOE reform remained an unfinished endeavor without a feasible solution to another severe problem: the massive layoff of workers. Throughout the reform, the number of workers in the state sector decreased by almost 30 million, mostly comprised of retrenched workers. (Ministry of Labor and Social Security, 2002).

The structural change in the labor market was one of the roots of the soaring inequality. Manifested by a significant increase in workers with a short-term contract or without a contract, the substantial change in the composition of the working class propelled the process of labor commodification, a phenomenon characterized by expropriating state-sector workers into wage laborers. Such a drastic change exposed state-sector workers to a higher possibility of deprivation and employment insecurity.

Another consequence of labor commodification was that it deprived the workers of entitlements to essential social care, a status quo that lasted for decades to the present day. The partial withdrawal from social welfare for the working class aggravated the inequality, particularly among migrant workers. In fact, the social insurance coverage of migrant workers was consistently lower compared to urban nonmigrant workers. In 2017, only 27% of the migrant labor force received additional employment compensation, and 22% received health insurance and pensions. The percentages for urban nonmigrant workers are 54% and 69% respectively (Huang, 2020).

Although the sacrifice of equality was unavoidable to improve efficiency, the government could have overseen the change in labor relations and mitigated the growth of inequality more effectively through a sound social welfare system that covers the majority of the working class.

 Edited by Joshua Jacobs

Works Cited

Adam, Jan. 1999. Social Costs of Transformation to a Market Economy in Post-Socialist Countries: the Cases of Poland, the Czech Republic and Hungary. New York City, New York: Macmillan.

Hu, Yifan, Sonja Opper, and Sonia M.L. Wong. 2006. “Political Economy of Labor Retrenchment: Evidence Based on China's State-Owned Enterprises.” China Economic Review 17 (3): 281– 99. doi:10.1016/j.chieco.2006.04.004.

Huang, Tailei. 2020. “Many Migrant Workers Are Excluded from China’s Social Programs.” Peterson Institute for International Economics. https://www.piie.com/research/piie-charts/many-migrant-workers-are-excluded-chinas-social-programs.

Lee, Hong Yung. 2000. “Xiagang, the Chinese Style of Laying Off Workers.” Asian Survey 40 (6): 914–37. doi:10.2307/3021195.

Ministry of Labor and Social Security. 2002. China Labor Statistical Yearbook, China Labor and Social Security Publishing House, Beijing.

National Bureau of Statistics. 2015. “Migrant Worker Monitoring and Investigation Report 2014.” http://www.stats.gov.cn/tjsj/zxfb/201504/t20150429_797821.html.

Zhang, Weiying. 2006. “China’s SOE Reform: A Corporate Governance Perspective.” Corporate Ownership and Control 3 (4): 132–50. doi:10.22495/cocv3i4p14.