China’s National Interest in a Full Employment

I have a partial answer to a question posed by Kash at Angry Bear: Why is China still holding on to its dollar peg if it’s not in its own interest? Let’s go back to Alan Greenspan’s comments, which, while cast as a negative are probably seen as a positive by the Chinese government:

[China, by] …holding their exchange rate down, create a misallocation of resources in China in the sense they are subsidizing the capital stock associated with very large numbers of workers… [This] prevents standards of living from rising, because their intellectual technical capabilities are rising and if the exchange rate began to rise they would start to move capital into more efficient types of uses, which essentially would mean that output per hour would rise.

Holding their exchange rate where they are is preventing the growth in the terms that would be most valuable for China in the decades ahead. So as far as I’m concerned, it is very much in their interest to move.

Turn Greenspan’s words around and we have the Chinese answer: the nation could undoubtably see productivity gains from capital investment in “more efficient types of uses” but these would come at the cost of investment in “capital stock associated with very large numbers of workers.” Productivity gains and improvements in the standards of living are Western policy goals; they have little, if any, place in developing economies where unemployment is high and poverty wide-spread. To riff off a legend about FDR, the Chinese are avoiding buying a steam shovel so they can hire ten men.[*] This policy preference for more jobs made immediate sense to me – of course China’s worried about the trouble tens of millions of unmarried, unemployed men are going to cause!

Tens of millions of unmarried men? Where did I get that? I must have got it from a 2004 post by Daniel Drezner about China’s demographics that sourced Power and Population in Asia by Nicholas Eberstadt (Policy Review Online). See the section titled Sex ratio imbalances:

“Simple, back-of-the-envelope arithmetic suggests that some very large proportion of tomorrow’s young Chinese men — certainly over 10 percent, perhaps 15 percent or more — may find themselves essentially “unmarriageable” on the mainland in the coming decades… It does not seem wild, however, to propose that the emergence and rise of the phenomenon of the “unmarriageable male” may occasion an increase of social tensions in China — and perhaps social turbulence as well.”

I doubt there’s anything the Chinese government has a greater aversion to than “social turbulence”. In short, Mr. Greenspan: It may not be high-value added work, but it’ll keep the boys off the streets and out of Tienemen Square.

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[*] There’s a legend about FDR stopping by an earth works project and being taken around on a tour. At one point the foreman pointed out a new steam shovel digging a ditch and he boasted the machine could do the work of ten men. “So get rid of the steam shovel,” replied FDR, “and hire ten men.”