The South China shock and the world's biggest rustbelt
Thoughts on the Chinese economy
During the 1990s, China adopted a policy of “shock therapy”. If you get your information from fashionable pundits, you may not know that. You might have read that China avoided the “tragedy” of places like 1990s Poland by adopting a policy of gradual reform that avoided radical changes. Not true, China adopted a policy of shock therapy that led to one of the most dramatic examples of creative destruction in human history.
During the 1990s and early 2000s, China suddenly privatized thousands of bloated state-owned enterprises (SOEs), laying off tens of millions of workers. In aggregate, the policy was a big success. The restructuring made China’s economy much more efficient, contributing to rapid economic growth. But as is always the case with creative destruction, there were losers. China’s economic reforms cost lots of jobs in their “rustbelt”.
When most people hear the term rustbelt, they often think of an influential paper by Autor, Dorn and Hanson:
China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.
The first half of that final sentence is true, but the second half has not held up well. Subsequent research does not support the claim that China reduced aggregate employment in the US, and indeed the US job market improved during the period they studied (1991-2007).
More importantly, the China shock literature misses the bigger story. The hardest hit area was China’s “rustbelt”, concentrated in the northeast region of the country. This region is known as the Dongbei, or Manchuria, and contains 100 million residents. Jordan Schneider directed me to a post by Zilan Qian that describes what happened:
The country’s enterprises, built for a planned economy, were suddenly exposed to market competition — and consequently began hemorrhaging money, especially in industries like steel and textiles. By 1997, the state had decided to consolidate the strategic enterprises and let the rest restructure, merge, or collapse. The slogan it coined was 减员增效 (jianyuan zengxiao) — “reduce headcount, increase efficiency.”
The consequences of this transformation depended on where you lived. Over 24 million workers in China lost their jobs in the state sector by the end of 1999. The layoffs were concentrated in the northeast — Liaoning, Heilongjiang, Jilin — once the industrial heartland of socialist China and now called China’s rust belt. In 1957, the [Manchurian] city of Shenyang’s Tiexi district produced the nation’s entire output of lathes, rock drills, gliders, rubber boats, and tower cranes, earning it the nickname “the Eastern Ruhr.”
By the late 1990s, 80% of the companies responsible for this output had gone out of production, and half of the district’s 300,000 industrial workers had been laid off. Between 1998 and 2000, nearly every year saw 7 to 9 million workers laid off nationally.
That’s right, the world’s biggest rustbelt was in China, and the majority of victims of the “Chinese shock” were Chinese workers. That’s how creative destruction works. At a time when Ohio had 5.6% unemployment (in 2007), Manchuria was in the midst of an economic depression.
If that’s the destruction, where was the creation part of creative destruction? Here:
Yet while the transition led northern China into economic crisis, the Pearl River Delta — geographically proximate to Hong Kong and Macau, home to China’s first Special Economic Zones, and the ancestral homeland of much of the Chinese diaspora in Southeast Asia and beyond — embraced rapid modernization and internationalization. The historical “land of fish and rice” became the “world factory.” Hong Kong investors established over 65,000 factories, employing about six million workers in the Delta. From 1991 to 2001, the Pearl River Delta’s regional GDP grew almost eightfold, and its population increased from 20 to 43 million.
Today, the Pearl River Delta has 86 million people, more than double the population of Jakarta, which is the world’s most populous metro area. The PRD is a bit too spread out to be viewed as a single metro area, but it’s a close call. The region has over 70 million people even if you remove Zhaoqing, Huizhou and Jiangmen from the light grey area on the map, and focus on the core cities:
(I plan to visit the area later this year.)
Recently, I’ve noticed an increasing number of people worrying that China is causing de-industrialization in other parts of the world. I believe these fears are exaggerated. Below the paywall, I’ll comment on arguments made by Matt Yglesias, the Peterson Institute, and Soumaya Keynes.
