China should raise wages to stimulate demand

David Piling – The Financial Times

Copyright The Financial Times
Wen Jiabao, China’s premier, this week told the FT it was “ridiculous” to criticise China for saving too much. If the US, UK and other westerners were foolish enough to hawk their future by spending unearned money, they need look no further than the mirror.
One can sympathise with that view even if economics dictates that China’s saving habit had to be balanced by excess spending somewhere else. Yet rather than assigning blame – although that is always fun – it is important to grasp that China and the rest of Asia cannot continue along the same road. Americans are too broke to resume their role as Asia’s demand engine.
To see why, look at US personal consumption, which hovered around 67 per cent of gross domestic product in the last quarter of the 20th century. That was already high by the standards of the previous 25 years. But from 2000 to 2008, it shot up again to an unprecedented 72 per cent. That trend has now gone into painful reverse. As Stephen Roach, chairman of Morgan Stanley Asia, notes wryly: “We are already all the way down to 71 per cent.” In other words, it will be a very long time before Americans are again filling up their shopping carts.
Asians must either make less stuff and spend more time cutting each other’s hair, or they must buy more themselves. Either way, households will have to increase spending. But things have been going in the wrong direction. Assumptions about the region’s swelling middle class notwithstanding, consumption as a proportion of a fast-rising GDP has been falling – and swiftly at that.
In 1980, 65 per cent of output of developing Asia was accounted for by consumption. Today it is about 47 per cent. The main reaction to the Asia crisis of 1997-98, when economies’ vulnerability to financial flows was exposed, was to build up exports. In doing so, Asia has swapped one kind of dependence for another.
Economists have started to put forward a battery of policies to rebalance growth. Sensibly, top of the list is to string up a better social safety net so that households indulge less in precautionary saving to see them through sickness and old age. Other suggested measures include ending subsidies that encourage exports and manufacturing at the expense of services; attacking monopolies that penalise consumers; and allowing currencies to appreciate.
Something more basic is rarely mentioned. What can be done to put more money in workers’ pockets? All over Asia, workers’ pay has lagged behind growth. With less disposable income, it is hardly surprising that consumption has slumped.
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