Impact of Globalisation and FDI on Chinese Labour Law
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The Impact of Globalisation and Foreign Direct Investment on Chinese Labour Law and Policy
There I was, situated in Shanghai as part of a new student program with the University of Sydney. I drew back the curtains of my hotel suite on the thirtieth floor and beheld the Shanghai skyline. I had been told that not a single building was more than ten years old and I believed it. Before me stood a futuristic New York with sturdy glass skyscrapers towering above the masses as they went about their day on rudimentary cycles. I felt Caucasian and large in a world of physically short men and women whose world was running away from all that they had been and understood. I almost felt as though I were more at home in this strange, capital leviathan of structures, fitting precariously at the doorstep of wealth and clutching like a lost child to the parent sleeve of communism.
Over the next four weeks I would study the impact of globalisation on China’s economical, political and social traditions. I was to tear away at the old fabric of a people’s country and in my own way seemingly justify intellectual property, uneven distributions of wealth and a drive for profits in this world that was steadily before my eyes, turning from red to green. Those students who had come before me had ignored the sheer impact of such factors on this socialist world. They focused merely on the steps that would need to be taken to eradicate bad habits that were hostile to Foreign Direct Investment. Yet the irony was that each and every one of us would venture into the markets and pick up accurate knock-offs of Prada and Hugo Boss for a fraction of their genuine retail value. I did however choose to focus on the people that remained behind the curtain of global market triumph. These were men and women whose lives were left uncertain in a country now becoming more and more devoid of lifetime guaranteed jobs. I wondered at their predicament, I focused on thinking of the changes to their lives and hoped that they would understand that it was all for the best.
Nicola L Tysoe
The clear combination of Foreign Direct Investment (FDI) welcoming policies and a relatively low cost economy spells a formula which, with the addition of cheap labour will become an area that foreign investors are only too happy to target by means of outsourcing the bulk of their services to the People’s Republic of China (PRC). China is rapidly growing in strength into a super power of the future and it becomes necessary to take a good look at the anatomy of this prosperous period of growth.
This paper will begin in Chapter one by focusing on the substantive legal reforms that have been brought on by China’s bid for a more FDI welcoming environment. This will begin by giving an historical account of the social factors that encouraged reform Chapter two will then provide substantive analysis of the Chinese Labour Law of 1994, the Trade Union Law of 2001, Occupational Health and Safety and social security.
In theory, and in a perfect world, the rapid race to FDI impacts on the economy of the target State in much the same manner as the Marshall plan that brightened the horizon for West Germany after the Second World War. Analysts would be forgiven for assuming that it is only a matter of time before the standard of living and sophistication of infrastructure of China begins to reach levels that are on a par with Western markets. This does after all go hand in hand with development in many infrastructures such as pensions and insurance, banking, intellectual property enforcement, taxation and corporate governance. It is also assumed that the process of acceleration will become exponential due to China’s recent accession to the WTO.
In March of 2003, three major institutions came together to convene the International Conference on the Labour Reform: Employment, Workers’ Rights and Labour Law in China. These were; the International Institute’s Advanced Study Centre (ASC), the Institute of Labour and Industrial Relations and the Centre for Chinese Studies. In addition delegates from the World Bank, Amnesty International and University of Michigan faculty members and event co-sponsors.
The central point of discussion for this two-day conference was to discuss changes to the labour market of China as a result of over twenty years of rapid economic reform. Interestingly, this conference went beyond the mere analysis of new laws and looked more closely into the socially impacting factors of implementation in order to illustrate the true reality for workers in post economic reform China.
This conference illustrated the clear need for a social analysis of labour in addition to the more procedural concepts of law reform and economic policy changes. Chapter three will therefore provide the contrasting reality for workers and give an account of China’s weak implementation policies as well as the emergence of inequality of worker treatment due to geography, gender and, surprisingly, the corporate entity of the employer.
Finally, no social, financial and economic analysis of labour in post economic reform China would be complete without also analysing the issue of China as a global influence that may be set to create an international benchmark for attracting FDI. Chapter three will explore this point with reference to the existing impact of China on the global investment scene. The question asked will be whether the international community has cause for concern given China’s poor implementation strategy against promising legal harmonisation such as recent accession to the WTO. This will raise the worrying issue of risking a trend within workers rights that will witness a ‘race to the bottom’.
Chapter One: Analysis – Social-Economic reform in China
AHistorical Changes to Labour
The political reason for economic reform in China was derived from unrest between 1966 and 1976 in which there had been a loss of confidence in the communist regime. By instigating reforms towards the creation of an open market, the Government hoped to establish popularity in an ever more dissatisfied population.
In addition to politics, China instigated reforms as a result of practical necessity and clearly prioritised economic welfare over purely communist ideals. This revolutionary compromise saved the regime and is exclusively responsible for China’s preservation of communism to this day.
China initially instigated its experiment with private ownership in 1978 but prior to this time annual growth rates in industrial production were measured at an average of 9.59 percent between 1952 and 1978. In addition, industrial capital assets increased by an average of 11.08 percent and this contrasted with employment growth of a mere 5.98 percent per annum and a wage rate increase of a mere 0.1 percent!
The increased labour was resourced from rural regions as prospects in these areas diminished and young people undertook economic migration in search of better wage rates in China’s urban centres. This displacement of the population placed pressure on the maintenance of food supplies into the cities and called upon increased spending on housing and public services. The resulting reduction in rural labour resources also resulted in a decrease in agricultural output thereby increasing food costs across the country.
The response from the Chinese government was to prioritise on the development of industries that yielded the highest revenue and these were centred in the urban districts. Unfortunately this resulted in a destabilization of equilibrium of employment availability between the urban and rural regions thereby resulting in increased unemployment in the latter by the late 1970s. The result was an increased migration of rural populations seeking work and numbered a staggering, albeit modest estimate of 5 to 6 million Chinese between the years of 1978 and 1980.
The Government was effectively faced with a crisis as the traditional communist solution to simply create jobs within state owned sectors proved to be wholly unrealistic given the scale of the problem.
Clearly relaxation of FDI restrictions, coupled with the attractive incentive of low cost labour would open the door to investment from the West. It was also conceded by the Chinese Government that this economic reform would create widespread modernisation of existing infrastructures and provide a breeding ground for technological advancement, as well as facilitate greater responses to consumer demands.
The Chinese Government regarded the allowance for economic growth within a private sector to tackle the problem of unemployment and treated the venture as an experiment. However these areas of private growth had originally formed part of the old communist infrastructure and this alleviated the brunt of political connotation for creation of a thriving private sector within a socialist regime.
As is typical for developing States, China utilised the system of allocating Special Economic Zones (SEZs) for the purpose of concentrating FDI into specific geographic locations. Allocation of the location of these zones began in the early 1980s and there are now five SEZs in the provinces of Guangdong, Fujian, Hainan Hunchun and Pudong (Shanghai).
To this day these zones provide huge tax incentives in the early days of development and can typically entail tax exemption during the first years of business until profits are declared. Thereafter a ‘Tax Clock’ is counted whereby corporations tax would fall payable after the second year of profitable business. Tax is then chargeable at a discount until the end of year five.
This method does however create vast inequalities of economic wealth between SEZ and non SEZ regions. This will be discussed further in chapter insert.
B.Direct Implications for Labour
1986 saw China make the bold step of awarding further preferential treatment to businesses within the SEZs that had been established with overseas capital. Under new regulations these firms were permitted to independently determine the size of their own workforce and were given carte blanche discretion on setting wages.
In addition, the Government acknowledged the need for entrepreneurs and hence, increased freedoms for domestic companies. Earlier in 1978 China had therefore given leave for small, privately run businesses to be given permission to exist and grow. In 1981 the State Council set up regulations governing the business ventures of entrepreneurs. By 1988 large domestic companies had been awarded the same workforce level control and profit distribution freedoms as FDI funded companies.
Chapter Two: Understanding Labour Law in Post Reform China
AUnderstanding Chinese Labour Market Structure
In order to fully appreciate the effects labour reforms that were brought on by FDI and globalisation it is essential to fully understand the current labour market structure. There are now four types of in addition to privately owned companies and urban collectives. Firstly there are State owned enterprises which, while resembling a capitalist entity by being profit-driven, remains under the control of the People’s Republic of China (PRC). These enterprises form the historic legacy of the pre-reform days of centralised State planning. This type of entity is used for the implementation of public policy ventures. However, since these reforms have taken hold, there has been a need for wages to be competitively set in accordance with market trends thereby facilitating external, capitalist behaviour when dealing with human resources.
Secondly township and village enterprises (TVEs) consist of groups of firms that are inextricably and contractually linked to the local governments of a township or village. These types of business entity are restricted to the employment of local people and must adhere to stricter budget constraints than their state owned enterprise counterparts. Township and Village Enterprises are clearly also connected to local markets such as fishing and agriculture and are not subject to state planning policies for the implementation of public sector ventures.
Thirdly Joint Ventures (JVs) are largely located in the five SEZs of the PRC where one party to the venture is a foreign investor. Where however domestic enterprises engage in a similar agreement, no such geographic restriction applies and as a result JVs tend to be scattered around the whole of the PRC. JVs enjoy the contractual freedom of being able ensure that they may hire and fire whomsoever they please within their constituent workforces and are therefore awarded far more flexibility than their state owned enterprise counterparts.
Lastly, foreign owned firms are similar in this respect but they of course obtain far more advantageous tax advantages than any of the other three types of entity. This therefore means that of all the types of corporate forms, the foreign owned firm is by far the least restrained.
This description of the status of the various separate entities throughout the PRC is, as stated above, essential for a full understanding of the labour law reforms. Part B will now explain reform in relation to the Labour Law of 1994. Part C will do the same for the Trade Union law of 2001 and Parts C and D will explain current Chinese policies on Occupational Health and Safety and social security respectively.
BThe Labour Law of 1994
The Labour law of China was passed by the Standing Committee of the National People’s Congress in 1994 and became effective on 1 January 1995 and was in fact the first substantive legal source for labour relations in the history of the PRC.
The statute consists of a series of principles that are derived from China’s administrative regulations and, as will be seen, represents a clear desire of the PRC Government to create a system of labour and industrial relations that is far more in keeping with the international community’s standards.
Interestingly, there exists a clear attempt to combine the two concepts of traditional command economy with the Western market economy ethos. This balancing act may seem to be a conceptually awkward marriage.
- Scope of the Law
Article 4 of the Labour Law firmly states:
“The employing units shall establish and perfect rules and regulations in accordance with the law so as to ensure that labourers enjoy the right to work and fulfil labour obligations.”
The Labour Law of 1994 is applicable to all business entities, whether nationally or internationally owned and governs employment across the skills spectrum. The clear aim to remove distinctions in labour rights between the various skills types and corporate entities is a positive effort to create one high standard of rights for workers in China.
A further aspect of the Labour Law is contract employment is given a great deal of attention within Chapter 3 of the Law whereby it has become necessary for all employment to be protected in accordance with a contract. Article 16 states:
“A labour contract is the agreement reached between a labourer and an employing unit for the establishment of the labour relationship and the definition of the rights, interests and obligations of each party.
A labour contract shall be concluded where a labour relationship is to be established.”
Prior to the economic reforms that were brought on by unrest and global pressure, the PRC Government was solely responsible for the allocation of labour. Instead, the Labour law follows 1986 regulations whereby the standard contract of employment is described.
By 1995, the Ministry of Labour had stated that this contract employment system was already in operation among some 85% of the state workforce.
A further internationally respected issue of the Labour law is direct address to anti-discrimination. Article 12 states:
“Labourers shall not be discriminated against in employment, regardless of their ethnic community, race, sex, or religious belief.”
This is followed by Article 13 which provides that:
“Females shall enjoy equal rights as males in employment. It shall not be allowed, in the recruitment of staff and workers, to use sex as a pretext for excluding females form employment or to raise recruitment standards for the females, except for the types of work or posts that are not suitable for females as stipulated by the State.”
The issue of gender equality does in reality reflect the PRC’s existing policies of equality that are not unusual for a communist state. In addition to the Labour Law, the PRC also produced the Law on the Protection of Women’s Rights and Interests in 1992 and is in keeping with the international campaign of the United Nations Development Fund for Women .
The law also consists of mandatory periods of rest, restrictions to overtime and overtime pay. In relation to factories that are set up within the Special Economic Zones (SEZs) it is surprising to note that these mostly foreign owned companies are the worst culprits for worker exploitation. The reason for this is that the bulk of those employed are from the rural areas and tend to be on a temporary basis, which is associated with the fluctuating demands for labour in privately owned firms. This is by contrast to the state owned businesses that promote longevity of working contract as a legacy of the communist era. The Labour Law stipulates in Article 36 that workers are to be engaged for no more than 8 hours per day and that the working week is no to exceed 44 hours. In addition, Article 38 calls for the right to have at least one day off per week. It is also interesting to learn that only three months after the coming into effect of the Labour Law, one State Council reduced the minimum standards of working hours within the Labour Law to a maximum of 8 hours per day for five days per week.
The Labour Law also provides for criteria for the calculation of a minimum wage within Article 48, which specifies that:
“The determination and readjustment of the standards on minimum wages shall be made with reference to the following factors in a comprehensive manner:
- the lowest living expenses of labourers themselves and the average family members they support;
- (2) the average wage level of the society as a whole;
(3) labour productivity;
- the situation of employment; and
- the different levels of economic development between regions.”
As stipulated above, Article 48 also provides for the reporting of wages to the State Council which means that the Central Government has the power to supervise wages across the nation. This is only a slightly more invasive policy than that of Western Civilisations that specify a minimum wage but is arguably superior given that the wording of Article 48 provides for relative considerations such as geographic cost of living and worker commitments in order to determine wage levels. This therefore means that deemed income that is sufficient for comfortable living is more realistically achievable for Chinese workers than many low income earners in the West. This also provides for the availability of a large amount of data concerning minimum wage levels across the PRC and there is a sizeable difference between the South Coast SEZ provinces by comparison to the Northern regions. This will be discussed further in Chapter 2.
- A new kind of relationship between the worker and the state
The Labour Law has cleverly converted administrative sanctions into liability for breach of contract, thereby maintaining a sense of obligation for workers without the stigmatising concept of the over-lord State. An example of this can be seen in Article 25 which stipulates situations that would permit the revocation of the contract of employment:
“The employing unit may revoke the labour contract with a labourer in any of the following circumstances:
- to be proved not up to the requirements for recruitment during the probation period;
- to seriously violate labour disciplines or the rules and regulations of the employing units;
- to cause great losses to the employing unit due to serious dereliction of duty or engagement in malpractice for selfish ends; and
- to be investigated for criminal responsibilities in accordance with the law.”
Another example is the right to sue workers for damages in the event that they walk away from the job.
As regards the obligations and duties of the employer to the employees, the Labour Law deals with Legal Responsibility of the employer exclusively in such areas as excessive overtime and breaches of occupational safety but these will be dealt with further in part D.
This incentive of shifting the premise for disciplinary violation as a contractual breach is also in keeping with the PRC’s efforts to award legal personality to businesses, regardless of whether they are state or privately owned. Indeed, as far as state enterprises are concerned, there will be a marked change in its relationship towards its workers and the contractual format of establishing such a relationship will be the basis for this change.
In addition it is clear that the Chinese Labour Law was written to combat the inevitable onslaught of problems of abuse of uneven bargain positions that are common in the West. Indeed, with the introduction of a market dependent labour force it is clear that Western style abuses would arise and that therefore, workers would require to be entitled to the internationally recognised right to privately instigate litigation.
This does however contrast with continued State control over the process of employment termination and this reflects the ongoing strength of pre-reform ethics concerning security of employment. This therefore means that lay-offs are statutorily regulated, as is illustrated in Article 27 which stipulates a requirement to consult trade unions:
“During the period of statutory consolidation when the employing unit comes to the brink of bankruptcy or runs deep into difficulties in production and management, and if reduction of its personnel becomes really necessary, the unit may make such reduction after it has explained the situation to the trade union or all of its staff and workers 30 days in advance, solicited opinions from them and reported to the labour administrative department.”
The result of this law is that termination for employment as a means of increasing productivity is prohibited. The main reason for this is that communist manufacturing infrastructures create more than a mere job for labourers but also provide workers with an array of fringe benefits that overshadow those of Western counterparts. These benefits traditionally include housing and free medical care with the result that a loss of work often means a loss of home and health!
Layoffs therefore carry serious implications for political upheaval and are to be avoided at all costs and an employment culture of relocation, retraining and early retirement is unlikely to arise in the foreseeable future. This does contrast with pressures from both the World Bank and the World Trade Organisation of which China has now been a member since 11 December 2002 but in general it would be prudent for these global organisations to be sensitive to the impact of economic restructuring on a workforce that is dependent on the full-life-package derived through their employers.
It does seem that the influence of FDI into China has led to reforms that result in the workforce becoming a mere producer of manufactured goods as opposed to a fully rounded human being with social needs.
C.The revised Trade Union Laws of 2001
Following the economic reforms that have caused China to become globally open to FDI, the resulting reforms of labour laws and trends in labour activity have resulted in a new role for trade unions as safeguards of worker’s interests during the difficult period of reform that would give rise to dissatisfaction from the workforce. This is stipulated in the November 2001 report of the International Confederation of Trade Unions.
Interestingly this report regards the revised Trade Union laws of 2001 as representing only a minimal departure from the 1992 version. This earlier version had been heavily criticised by the International Labour Organisation’s Committee on Freedom of Association which condemned the 1992 law as a:
“serious constraint on the rights of unions to establish their own constitutions, organize their activities and formulate programs.”
However, the following substantive analysis will reveal that Trade Unions have been awarded substantial powers in their role as organisations that are established to represent the welfare of the labour force but also maintain a central system of regulating these Trade Unions.
As stated above, the original 1992 Trade Union Law was revised in 2001 in order to create a more comprehensive response to the continuing market foundation of the Chinese economy. The role of the Trade Union is defined in the basic functions under Articles 2 and 6 of the Trade Union Law of 2002.
Article 2 states that:
“Trade unions are mass organizations of the working class formed by the workers and staff members on a voluntary basis.
The All-China Federation of Trade Unions and all the trade union organizations under it represent the interests of the workers and staff members and safeguard the legitimate rights and interests of the workers and staff members according to law.”
In addition, Article 6 states that the basic function of the Trade Union is the safeguarding of the rights and interests of workers. Further to this, Trade Unions are to coordinate labour relations and arrange for members to partake of democratic decision making and remain in close relation with workers as their representatives to employers.
Before China’s economic reforms, Trade Unions were chiefly involved in the fringe benefits of workers such as education and welfare. This was based on the premise that worker unrest and industrial action were unique to capitalist regimes although the truth of this matter is debatable.
It is however true that the profound change to relationships between the worker and the employer are significantly different to justify an alteration of the role of the Trade Union. One of the main differences is the realisation that workers can no longer be automatically enrolled into Trade Union Membership. According to Union Chairman and Politburo member Wie Jianxing only 5% of workers in the private sector were actually Union members. This was by comparison to a mere 3.4% in township enterprises.
Incentives to increase Union membership are therefore present in the 2001 Union Laws. Article 10 encourages increases in Union branches and recruitment drives by the more superior branches also form part of the Union policy of increased membership under Article 11. In addition, Article 43 and Chapter VI have been introduced to protect the interests of maintaining Union property and income. Clearly this issue could not have arisen under the pre-economic reform era of Chinese communism.
This initial analysis of laws that are geared towards the protection of the Union does motivate us to question whether this has become a priority that exceeds the interests of workers. Clearly the path of the Chinese Government is to ensure that Trade Unions should work hard to remain at the forefront in order to continue to provide support to workers. This is especially important during a time in which Chinese workers are arguably more vulnerable in a commercial environment where traditional guarantees of life-time work and fringe benefits are becoming ever more unstable.
In addition to the above changes, Article 20 stipulates increased power for Trade Unions in collective bargaining and in Article 21 a right has been created whereby the Union may interfere in disciplinary proceedings and unfair dismissals. In the case of workers taking their employer to court, the Trade Union is obliged to assist.
Equally significant is the power for Unions to assist in strikes and work to rule action. Clearly the role here is for the Trade Union to act as the voice of the labour force and a theme of the collective, communist labour force versus the potentially corrupt, capitalist employer screams out through the provisions of the 2001 Law.
Occupational Health and Safety are dealt with in relation to Trade Unions in Articles 23 to 26. Here Trade Unions have heightened powers in relation this matter which will be dealt with in greater detail under part C below. As regards the relationship between Occupational Health and Safety and Trade Unions, the latter are obliged to conduct investigations into accidents where there have been infringements of health and safety. Trade Unions also have the power under Articles 33 and 34 of the 2001 law to assist in the process of creating new labour laws, further health and safety regulations and policies relating to social security. Consultation rights are also enjoyed by Trade Unions under Articles 37 to 39 of the new 2001 law in relation to these self same issues of pay, health and safety, social security and the democratic election of ‘worker directors.’
By comparison to the old law relating to the power of Trade Unions it is clear that their increase in power is in response to exposure of China to the international community. It is therefore more of a protective mechanism in the face of a more mobile, market influenced labour force as opposed to any international Trade Union movement. In addition, the reforms ought not to be mistaken for a step in the direction of democracy. This is blatantly illustrated in Article 4 which announces a clear adherence to the Communist state:
“Trade unions shall observe and safeguard the Constitution, take it as the fundamental criterion for their activities, take economic development as the central task, uphold the socialist road, the people’s democratic dictatorship, leadership by the Communist Party of China, and Marxist-Leninism, Mao Zedong Thought and Deng Xiaoping Theory, persevere in reform and the open policy, and conduct their work independently in accordance with the Constitution of trade unions...”
The communist ideology is also maintained in Article 7 which refers to such notions as the building of a ‘well educated and self disciplined’ labour force are clearly notions of enforcement of the ‘People’s’ factories.
The above analysis of reforms of the Trade Union law reveals a response to the development of a market economy and the greater risk to stability of employment that this transition will create. Criticism of these changes relate to inherent lacks of self regulatory provisions for Trade Unions but it must be remembered that China is still a communist country that is merely acceding to the need for a market economy as opposed to creating a passionate, political revolution. Professor Chang Kai of the Labour Relations Research Institute at the China Labour College stated that this is most likely the best that can possibly be obtained from communist China.
D.Occupational Health and Safety
A true source of law for Occupational Health and Safety in China is absent and there is a mere presence of overtly broad provisions in the Labour Law of 1994. The only other national regulation is that of the National Standard Bureau which regulates standards for the use and maintenance of industrial machinery and equipment. There are also a number of regional provisions that have been implemented by individual provinces. Naturally the scope of these provisions cannot extend throughout all of China. Further to this, China is not a signatory to the International Labour Organisation’s Convention on Occupational Health and Safety.
However, despite this lack of provision there is a clear demand for a comprehensive Health and Safety Law. It is however true to say that despite an apparent lack of substance in the Labour Law of 1994, these provisions form a response to the international community and it therefore seems likely that change will occur.
Of the regulations that do exist, there are two categories of prevention and good practice. In relation to the former, the rules implemented by various ministries are separated in accordance with respective industries such as construction, ship building and transportation, to name but a few. In relation to the latter, local authorities may draft regulations in accordance with the powers conferred to them. This therefore means that a ministry has the authority to issue Occupational Health and Safety regulations for its specific industry.
The disadvantage of this system is that it is strictly in keeping with the concept of centralised, controlled industrial regulation and is therefore wholly unsuited to the current market economy that is growing at a phenomenal rate in China. This is particularly true for Town and Village Enterprises as these have undergone vivid development since the onslaught of China’s market reforms and as a result of their location in rural areas, would not be subject to the urban regulations of industrial ministries. This therefore means that developing business entities such as the Town and Village Enterprises are regulated by rural ministries that are associated with such industries as agriculture. In addition to this clear incompatibility, there is strong incoherence of co-ordination between these various ministries.
This segmentation creates difficulty when attempting to enforce these laws. State monitoring and supervision is no longer possible and there are two main reasons for this. The first is that, together with labour reform, there have been a number of changes to the social/economic strategies of Chinese industry and these include the fact that industrial ministries are no longer exclusively in control of State Enterprises. The result of this is a lack of acknowledgement of who precisely is responsible for the enforcement of Occupational Health and Safety regulation. The second reason is that the Chinese Government has transformed these ministries into entities with lesser powers under the State Economic and Trade Commission. Within this Commission there is the Bureau of Work Safety and its role in regard to Occupational Health and Safety is the provision of management, case investigations, supervision and more importantly, legislative drafting.
It is clear that the economic reforms of China have rendered the current system wholly obsolete and there is a definite need for a central law on Health and Safety that is implemented by the employer itself. Analysis of this area of labour law is therefore a clear indication that the extent of reform of Labour law in light of globalisation and FDI is not yet fully comprehensive.
E.Chinese Social Security
“Under [a] mandatory state basic security, people's basic living needs will be met corresponding with China's economic development level, and the social security network will cover all citizens step by step.”
This statement within the Governments White Paper on social security clearly indicates the reason for reforms in the social security system since the early 1980s. It is however true that the reforms themselves are in keeping with socialist theory that would be:
“Independent of enterprises and institutions, funded from various channels, and with socialized management and services, a system characterized mainly by basic security, wide coverage, multiple levels and steady unification.”
This has been achieved in 2001 when 98.2 billion Yuan were allocated by the PRC’s Central Finance to cover social security payouts. This figure was substantially higher than that allocated for 1998 and is perhaps an indication of high levels of unemployment that are hitting the nation. Despite this it does appear that efficiency has taken a hold of China’s social security system with the creation of the National Social Security Fund Executive Council whose role is to manage funds that are received for the state social security system. The creation of this body is clearly in line with the aim of the Government as specified in the White Paper, which is to:
“Establish(ing) and improve(ing) the social security system is a necessity for the full implementation of the Scientific Development Concept. In accordance with the objective and mission of building a well-off society in an all-around manner and on the basis of a comprehensive analysis of both domestic and global circumstances.”
This ethos is clearly one that is geared towards prioritising the people of China in order to allow the social and economic development of a support mechanism that will be able to cope with the new, market economy. In particular a key aim is for a system that would harmonise current disparities between the rural and urban regions of the PRC:
"in accordance with coordinated development between urban and
rural areas, between different regions, between social and economic development, sound and harmonious development between mankind and the environment, and between domestic growth and opening up to the outside".
In addition to the aim to standardize social security for Chinese workers there is the added aim of improving upon the education of China’s people and reducing the vast tangents of living standards between rich and poor, albeit this is a strange issue given the fact that China is meant to be a communist regime!
As stated by the Vice Chairman of the National Development and Reform Commission of the PRC, Zhu Zhixin:
“China needs to balance efficiency and equity, attach equal importance to economic growth and social progress, and give priority to the overall improvement of living standards along with the growth of wealth.”
Again there is a clear correlation of China’s social security reform ethics and the ongoing economic reforms:
“The social security system functions as a pillar for the socialist market economy system”.
China has clearly realised that the market plays a huge role in terms of creating resources for social security and the rapid growth means that a reshuffle of management would maximise such resources. This therefore means that the old regime of using the companies themselves (or state owned enterprises as they were then known in pre-reform China) as entities that are independently responsible for social security cannot work in this rapidly changing, economic society as it leaves vulnerable groups at serious risk of exploitation.
Zhixin acknowledges that there continue to be a number of issues that remain unresolved but at the very least China is aware of ongoing problems of supporting the work force during these times of transition and significant global growth.
In addition to the creation of a strong social security system the Chinese Government also acknowledges within the White Paper that there must be added guarantees for workers who are faced with market economy treatment such as lay-offs. In 1998, the Chinese Government set up its ‘two guarantees’ policy of which the former is the guarantee of a basic standard of living for those who have been laid off from state owned enterprises. The White Paper continues by asserting that services will exist for workers in order to ensure that they are able to return to work.
The second guarantee is the provision of the same minimum standard of living for pensioners. This policy starts with the basic promise of regular and timely payments of the pension fund. Interestingly, a system is in place for the provision of payment that is structured and adheres to a clear three tiered stage for those who have been laid off by State owned enterprises. They can:
“receive a basic living allowance from the reemployment service centers for a maximum of three years; if they still haven't found a job by then, they can receive unemployment insurance payments for a maximum of two years; at the end of the two-year period, if they still haven't been reemployed, they can apply for the minimum living allowance paid to urban residents.”
Indeed, in 2001 it was recorded that these regulations had been implemented for the ‘vast majority’ of workers who had been laid off by state owned enterprises and that; therefore, the policies had become integral parts of the support mechanism for laborers.
It is however clear that such an advantageous package could never be matched by privately and foreign owned companies that are becoming more and more common in China. Indeed, the PRC’s policy seems to willingly create a disparity of treatment between the various workers of differing corporate entities. This will be explored in more detail in Chapter Two but for now it is clear that isolated policies that are applicable to employees of only one certain type of corporate entity will create worker unrest among those that are employed in the private sector. The risk is that there will be a resultant destabilization of already dubious harmony between state employees and those working in the SEZs of China. This poses a risk to future FDI incentives as unrest is likely to lead to industrial action, which, as stated above, is now permitted in accordance with the Trade Union Law of 2001.
It is additionally worth noting that upon inspection of the English translation of the White Paper, its proposals are very much in the language of abstract ethics and little substance is provided to give credence to any concrete plan for implementation other than the afore mentioned creation of the Social Security Fund Executive Council and the welfare system that exists for state owned enterprises. Much of the language can only be described as jargon of socialist rhetoric amidst claims for harmonisation with these ideals and the new market economy. The result is that the majority of the substance of the White Paper can be labelled as nothing more than propaganda.
Chapter Three: Practical Effects, Implementation and Arising Inequalities
From the analysis in Chapter two it is clear that China has adopted Western labour law model and has endeavoured to safeguard against the disastrous effects of Western vulnerabilities and consequently weaker job security.
While the onslaught of employment regulation has taken place in light of the ever increasing reforms of the economy, it is also apparent that strategies for effective implementation have not been so successful. Unfortunately, rapid economic reform has been prioritised over any need to protect the rights of the labour force. The reason for this is that the task of implementing practical economic reform was left in the hands of local governments who acted efficiently to pass through new legislation but failed to implement an effective form of enforcement. One consolidation however is that workers may now turn to the rule of law in order to justify their grievances.
This chapter will analyse lack of implementation of the Chinese Labour Law of 1994 by examining the emergence of western style problems faced by the workforce. Part A will look at unequal treatment of the workforce based on the differing corporate entities. Part B will look at geographic inequalities
ALabour Force Divergence as a result of Varying Corporate Entities
The variation of autonomy over hiring, firing and wage control within the various corporate entities such as the foreign owned company, the joint venture, the state owned enterprise and the town and village enterprise creates a clear segmentation of the workforce. An example of this has been seen above with the instalment of highly generous lay-off packages that are exclusive to the employees of stated owned enterprises. On the other end of the scale, Gallagher, Chen and Chen have described how disputes are more often settled by turning to the law where workers are employed by a foreign firm than those that are state owned.
The question arises whether there will one day be a policy of convergence that will lead to a single basis upon which employment conditions such will be set.
In capital economies this factor is based on the concept of expenditure versus profit and for the higher skilled jobs, vacancy marketability plays a role for the purpose of recruiting the best candidate for the job. These considerations are all clearly economically based and no manner of political ideology is insisted upon except for the instalment of a minimum wage.
This trend is however emerging in the PRC with increased numbers of foreign owned companies. It is obvious that comparatively higher wages under these companies will generate a demand for reform as the PRC witnesses a brain drain into foreign owned corporate entities. The model is similar to the difference in Capitalist labour forces between the public and private sectors where there is a profound difference in salary levels. Indeed the only factor that ensures relative stability between these two sectors is the overall increase in quality of life that is enjoyed by civil servants. Although this is not a guaranteed rule of thumb and in the UK today there is an ongoing shortage of labour within both the teaching profession and the Armed Forces. By contrast, fierce competition exists in the private service sectors of accountancy firms, journalism and the legal profession, to name but a few.
BLabour Force Divergence on account of Geographic Inequalities
Following the economic reforms of the 1978 geography became an additional factor that created a divergence between various workforce groups. The main difference was that of regional income gaps. According to Cai, Wang and Du the two distinct contributors to these gaps were, firstly, the afore mentioned reduction in agricultural production in the rural regions and, secondly, the establishment of SEZs became an effective allocation of elite capitalist centres that thrived on the freedom to develop industrial profitability without political regulation or constraint.
Jean-Louis Rocca describes how labour systems in the various parts of China have therefore begun to demonstrate disturbing differences in their treatment of workers. It appeared that private firms in the south of the PRC display harsh working conditions whereas state owned entities in the north-east conditions are far better. Rocca also pointed out the unfortunate deterioration of this latter status. Wu also asserts the barrier to labour market integration that is presented by the Hukou system.
1.The removal of forced geographic balancing of the labour workforce
Prior to the reform era of 1978 policies had been installed to prevent worker migration, thereby forcibly creating a balance of worker populations across the PRC. These were commonly known as the People’s Commune System and the Residence Registration System (Hukou). However, as specified above, mass unemployment in the rural areas meant that such barriers to the migration of workers could not be defended on political grounds without serious outcry. It is clear that the PRC had no choice but to allow capitalist style freedoms that are akin to the freedom of migration of workers. The transition from a government dictated to market regulated workforce seems to have been an inevitability that was not so much influenced by globalisation or FDI but became a requirement that would prevent further political unrest among China’s people.
2.A lack of social welfare to prevent totally free migration
An inherent lack of welfare services presents the migration of rural workers into the cities as there is no initial support mechanism that will maintain those who are seeking work. These deficiencies in social welfare include child education, housing and medical care and the result of this is that the geographic disparity of wages and job prospects across the country remains all too apparent. Further to this, according to the economist John Giles of the University of Michigan, stark differences in educational standards play a huge role in contributing towards disparities as unskilled workers form the group that is most in need of a welfare support mechanism during their pursuit of work. Demographic evidence quoted by C Waldman from the Chinese Statistical Year Book of 2002 reveals the level of these disparities as they stood in the year 2001:
“The average annual wages of staff and workers in 2001 in the lowest ranked province of Anhui was just over 7,900 yuan versus nearly 21,800 yuan in Shanghai, a magnitude of difference of approximately 2.8. The standard deviation of wages for all provinces in 2001 was 3,685 yuan, more than one-third of the countrywide average annual wage figure of 10,870 yuan.”
Yongping Jiang has also pointed out the clear unequal treatment of women in the PRC since the economic reforms and states that the majority of redundancies and layoffs are attributed to women with a resulting cultural retreat to traditional, female roles. This resulting marginalisation of some groups has therefore meant that they face greater challenges in order to survive. Women are often marginalised into the sex industries and rural workers are finding their jobs at the mercy of competing tenders that result in most enterprises forming part of large production systems.
While these disparities are the result of huge regionally based bias, it is equally true to state that such differences in wage rates and other treatment of workers are inevitable in States that have created SEZs in response to a growing need for FDI. There is no other culprit for the inequality of various groups than the PRC itself.
Chapter Four: The other side of the coin - Global Implications of China’s
In order to obtain a full picture of the current changes affecting Chinese policy and labour regulations, it is essential to acknowledge that reform to Chinese labour is not a one-way process of responses to the Western, capitalist model of direct foreign investors but China itself is proving to be an influence on the West.
The reason for this is that the continued low cost of labour has attracted investment from a greater number of companies that are seeking to outsource for economic reasons. This was noted at the by Ching Kwan Lee and Mark Seldon of the University of Binghamton who stated that the global implications for the PRC’s recognition as a popular location for manufacturing does create a worrying trend whereby lax workers rights and low wages would insight a ‘race to the bottom’ of employment law standards on a global scale.
Employers in other countries have in fact already exerted pressure on their workforces to reduce concessionary factors that make them less competitive than the PRC. An example is Mexico where reforms are being implemented in order to make its workforce more competitive. By contrast, countries with stringent worker regulations are facing huge losses in manufacturing contracts and in 2004 Indonesia lost out on deals with Nike to manufacture its products the corporation accordingly moved its operations to the PRC. This is despite the fact that US bilateral trade agreements with both China and Indonesia contain clauses that insist upon fair trade.
It is also worrying that companies such as Nike represent a larger spectrum of industries than the traditional toys and textiles manufacturers. In fact, Hi-tech manufacturing now forms an integral part of China’s economy. Despite lack of implementation of Chinese labour laws, increased interest in allocation of manufacturing contracts to China has nevertheless resulted in China becoming an ever larger influence in the bid for international employment standards.
The heart of the problem is of course the afore mentioned drive to maintain reduced operating costs and this has been pointed out by the Institute of Contemporary Observation whose responsibility is to examine labour issues in the PRC. This observation shows that the desire to increase profit margins inevitably dwarfs the efforts of foreign companies to increase labour conditions in the PRC.
It would however be presumptuous to suggest that there is a unanimous consensus on China’s ability to create an outright global race to the bottom. Economists believe that there has been a marked increase in wage levels since the introduction of reforms but, as shown in Chapter three, this progress has also created uneven increases between the PRC’s regions. In addition, they assert that continuing low wage rates by comparison to other States is more an indication of abundance of labour as opposed to a sign of oppression. Further to this, economists also give more moral credit to large multi-national corporations seeking to outsource manufacturing to China. They claim that the true reason for the PRC’s popularity is its zeal for high quality output and a long standing tradition of manufacturing against the post-reform backdrop of a stable, political infrastructure with FDI welcoming policies. A further assertion is that the PRC also maintains only a fraction of global imports and, with regard to the USA, China cannot be responsible for the onslaught of layoffs in this Western superpower. It is however true to say that the popularity of China as a manufacturing location is ever increasing and while the PRC continues to have only a minor share in global outsourcing, this will not last.
The reform of labour laws and policies within China is merely part of the larger picture of reform that is driven by the aim to take away the unmarketable, communist ideologies that governed China’s infrastructure and replace it with the more certain rule of law. This was due to the fact that stable laws would create a more inviting incentive for foreign investors and would produce a much needed stability for complex social and economical changes.
The true crux of labour reform in China is the challenge of stepping away from a centralised work force to an employment market model. The result of this is that labour is no longer associated with political considerations via government controlled allocations of labour in accordance with decisions over state owned industries. Instead, labour is now influenced by the West’s familiar market trend model whereby the labour is dictated by the level of consumer demand and the resulting growth of industries that influence that size and skill of the integral workforce.
This constitutes the age old capitalist concept of entrepreneurial ‘testing of the waters’ in order to ascertain whether a market niche has been filled by an innovative idea. Success will therefore stem from profit which in turn will lead to an employment infrastructure that is wholly dependent on maintained market demand. This creates an overall impression of the skilled labour force as being a commodity in its own right but it is true to say that the response of workforces in capitalist market models is to instigate a full scale demand for worker rights that include, to name but a few, trade unions, a minimum wage, health and safety regulations and effective labour laws.
As was established in chapter two under the four categories of Labour Law, Trade Union Law, Occupational Health and Safety and Social Security, there have been varying degrees of reform of the regulations affecting the Chinese labour force and arguably the substance of these reforms is not detailed enough to single-handedly form the basis of an academic paper. With regard to the Labour Law of 1994, there is a clear uneasiness about the presence of a single statute that is decidedly primitive by comparison to such documents as the UK’s Employment Act 2002 and the Employment Rights Act of 1996. However, the requirements of this analysis are not to analyse the laws of China but to recognise that credence has been given to the need for reform in the wake of globalisation and FDI into China.
In addition, Chapter two clearly provides evidence to contradict the concept that labour law is in place merely to attract Foreign Investment. It must be remembered that the crux of this paper’s analysis is to look at reforms in response to globalisation and FDI and there are two distinct reasons for response that has promoted reform.
The first is the obvious creation of incentives to invest and this has clearly occurred with the Labour Law of 1994 given that there is an obvious policy to adopt international standards for workers.
This is however not so true for the Trade Union Law or existing implementation strategies for Social Security. Instead, the substance of policies on these matters is for a second reason which is a defence mechanism to the onslaught of capitalist ideology into the now, market economy of China. This is interesting given that China is not merely responding to globalisation and FDI by copying the labour laws of Western societies, but is working hard to maintain a communist identity.
As for Occupational Health and Safety, the fact that there is ongoing pressure for reform is an indication that change is over the horizon. Analysis of this area has also shown that social political changes force the administration of change to key labour infrastructures. Therefore, as is also shown with analysis of Trade Union Law and Social Security policy, reform is not merely carried out for the purpose of gaining international trust, it is also an internal mechanism of self defence from abuse by the global community.
Chapter three shows that lack of implementation is coupled by a clear inequality of economic growth between the Eastern and Western regions of China with the former benefiting from phenomenal FDI and the latter suffering. The conclusion that must be drawn is that this distinction is a mirror image of the classic Western economic and social urban/rural divide that is almost inevitable in states where economic growth and the locating of major corporation headquarters are centralised to a handful of densely populated urban centres such as London for England and Paris for
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