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It also called for fundamental reforms in social policy, urging higher overall spending and improved benefits; measures to reduce income inequality; expanded investment in human capital and infrastructure; widened social pooling of risks, costs, and gains from growth; a more efficient balance between state and private provision; and better quality of services. It tacitly urged democratization to give society more voice over policy.

Coincidentally, a group of experts convened by Russia’s government issued a report at almost the same time with very similar content.² Russia’s challenge is to diversify the economy away from its resource dependency. But its solution is much the same as China’s: to invest substantially more resources in upgrading skills and technology, expanding opportunity for entrepreneurship, reducing social inequities, and increasing public participation in decision-making. What explains the remarkable similarity in the two white papers? I would contend that many of the dilemmas China and Russia face in changing their economic and social policy models owe to the continuing impact of the common legacy of the old socialist “social contract.” Like other post-Communist states, both China and Russia have had to adapt inherited systems of entitlements to a market-driven, globalized environment. Unlike their East Central European counterparts, however, Russia and China have seen growing levels of informal employment, rising income inequality, and increasing deficits in their pension funds despite high payroll tax rates in the formal sector.

Often China’s social policies are explained by the pressure of globalization.³ But China’s rapid economic development is inextricably linked to its transition from a communist economic structure. This fact is particularly pertinent to the transformation of the urban industrial sector.⁴ Therefore it is relevant to note that other post-Communist states with similar levels of foreign trade exposure and foreign direct investment exhibit far lower levels of inequality and dualism in their labor markets, and higher income replacement levels in their welfare regimes. Other studies emphasize specific characteristics of Chinese society, such as the enormous flow of China’s surplus rural labor to the cities after market reforms began in the late 1970s.⁵ These perspectives need to be complemented, however, with consideration of the way the old regime shaped the distribution of political interests and resources.

Most observers would agree that Russia and China represent diametrically opposite strategies of transition from communism to capitalism. For China specialists, it is axiomatic that Russia’s record demonstrates the failure of its model of reform. Most would agree with Susan Shirk that “the Soviet strategy of political reform before economic reform produced political chaos and disintegration and a decline in living standards and growth rates,” or Dali Yang’s assessment that “Russia’s shock therapy did not produce a sound market economy but instead a sort of anarchic capitalism riddled with corruption.” ⁶

However, valid these arguments may be in fact, it certainly is the case that the Chinese leadership believes the Russian model to have failed.⁷ Deng Xiaoping, according to his son, thought Gorbachev was an “idiot” for trying to reform the political system before the economy: “He won’t have the power to fix the economic problems and the people will remove him.”⁸ The chaos of the Soviet and Russian experience is treated as an object lesson in how not to conduct reform — “fanmian jiaocai” — negative teaching material.⁹ Many Western scholars agree. For example, Mary Gallagher argues that China’s “integration into the global economy, the increased use of legal institutions to mediate conflict, and the influence of a small but growing middle class may together slowly build up a more stable societal foundation for democratization…there may be benefits to continued authoritarianism.” ¹⁰

Yet despite the differences, Russia and China share three marked similarities in the social sphere: high social taxes but rising pension fund deficits; a growing share of informal employment; and rising income inequality.

In China, as in Russia, the government has converted state-funded, state-provided services to social insurance schemes for pensions and health care. With respect to pensions, beginning with a pay-as-you-go system of pension coverage for urban state-sector workers funded through enterprises in the 1950s, in 1984 China began reforming its pension system, adopting a three-tier scheme for state-sector workers in the cities. (Except for state employees in the countryside, the rural population was outside the state pension system. ¹¹) Since then, the pension system has been steadily extended to wider categories of the population. In 1997 it was broadened to cover individual entrepreneurs and temporary workers. The current plan consists of public and individual accounts, both funded by social security taxes. Employers pay the equivalent of 20% of wages into the public account and employees pay another 8% into their individual accounts. Together with other social insurance contributions, the total payroll tax is effectively about 45% of the wage fund, which is one reason evasion is high.¹² By 2010, all provinces had a province-wide pension insurance fund for old-age incomes. As of July 2011, the government had enacted a pension plan nominally covering all urban residents, including those without jobs or covered by other programs, which was gradually being implemented. ¹³

Although the pension and other social contributions levels are relatively high, the pension system in China faces rising deficits. As is true of Russia as well, China’s government is meeting current pension obligations by raiding the individual accounts funded through the mandatory insurance contributions and through large transfers from the state budget.¹⁴ In China in 2011 the central government budget transferred about 180 billion yuan (about $30 billion) to make up shortfalls in the provincial pension funds of 13 provinces. Province-level governments also subsidize their funds; Shanghai had to spend more than 10 billion yuan to make up the deficit in its pension fund.¹⁵

Like Russia, China still relies heavily on taxes that are administratively less costly to collect but regressive. Although payroll tax rates are relatively high, they are capped at relatively low ceilings, imposing a proportionately greater tax burden on low and middle-income individuals in the formal sector. They are also highly variable depending on local arrangements between firms and governments. Income tax revenues do not form a large part of government revenues (consumption taxes, including the VAT, comprise more than half of total tax revenue in China). The personal income tax yields only 7%-8% of total tax revenue in China, and it is principally a source of revenue for subnational governments.¹⁶ Tax declarations are voluntary for the highest income groups, contributing to widespread evasion. As a result, the richest pay a much lower share of overall income tax than other groups.¹⁷ The relatively low income ceilings on payroll taxes mean that high-end earners pay a much lower share of their total earnings into the social insurance system than lower-income groups, while informal labor is not paying in at all. This fact imposes a substantial burden on middle-income earners in the formal sector, and on state enterprises, where compliance with payroll taxes tends to be higher.

The basic problem is that, as in Russia, the current three-tier pension system was built on top of the old socialist model that was based on state control of labor and capital. That system could offer generous pension benefits to all state employees and urban state-sector workers because wages were low and budget constraints soft. Even though wages and pensions were in cash form, cash could only make limited claims on goods and services. When the economies were put on a market footing, and budget constraints hardened, the government needed to finance its social spending obligations through new taxes that required substantial administrative capacity to collect. Wages became an important regulator of the labor market, so employers wanted to raise wages but minimize the taxes paid on the wage fund. Employees had little trust in the system and often preferred to receive the full amount of wages in cash. Tax evasion and labor market dualism — i.e. the divide between those “inside the system” and “outside the system” (“tizhi nei” vs. “tizhi wai”) —followed. Many migrant workers in China prefer to receive all their wages in cash because they do not believe that they will benefit from the retirement benefits system.¹⁸ Evasion of social insurance taxes by workers and firms at the micro-level aggregates up to large-scale deficits in the social funds at the macro-level.

Dual Labor Markets

A major reason that the payroll tax contributions in China do not meet rising pension obligations is the growing dualism of the labor market. A large and growing part of the labor force is informal, that is, working under ad hoc employment arrangements that leave earnings largely outside payroll taxes and social benefits. In China there are two different sources of informalization. One is the downsizing of workforces at state enterprises, which pushed tens of millions of workers into various forms of off-book labor (in many cases, as in Russia, workers earn wages outside the enterprise while maintaining formal relationships with firms).¹⁹ The other is vast migration of labor from the countryside to the cities: around one-quarter of the urban workforce in China consists of migrants. This is the most important source of pressure on China’s social welfare regime, because until recently, rural migrants in the cities were largely excluded from the extensive social benefits provided to workers with urban residence status. Roughly speaking, 35%-40% of the urban workforce in China is informal, compared with about 30% in Russia. ²⁰

Informality in China is higher than in Russia because of the significant overlap between migrant workers and the informal sector (most informal workers are migrants).²¹ Approximately one-quarter of urban workers in China are migrants, but in typical industrial cities the figure is 40%-45%, and in some cities it is as high as 70%-80% of the labor force.²² Specialists describe the rural migrant workers in cities as “a huge underclass of super-exploitable and low-cost labor.”²³ Only in the last few years have they begun to acquire the right to a labor contract, pension income, health care, unemployment, and other social protections. Actual enforcement of these rights has been slow, however, and the rights themselves are limited. For example, rural migrants obtain their health insurance through their place of residence, making benefits difficult to access when they are in the city. Moreover, when migrant workers move to another province or even city, they lose the employer’s portion of the contributions.²⁴ Although there are not recent figures on the extent of the problem, employers often do not pay into the social insurance funds for rural migrants. ²⁵

There is much evidence indicating that dualism has increased, both in China and Russia. The new labor contract law that came in force in 2008 in China had perverse consequences: it obliged labor recruiting agencies that supply labor to contractors to pay social insurance contributions, letting the enterprises off the hook. As a result, informality increased, as enterprises hired more agency labor and cut back on wages and benefits for their formal workers.²⁶ In many cases, migrant workers hired by recruiting agencies are contracted out to other agencies who in turn contract them to construction or other firms. Workers lacking an urban hukou are often in a position of dependency, with little recourse in case the employers fail to pay them the full promised wage.²⁷

Adding to the pressure on the social welfare system is a worsening demographic situation. Russia’s working age population began shrinking several years ago. In China, the decline in the size of the labor force is just beginning.²⁸ The booming coastal cities have already experienced labor shortages, raising wage costs and leading some firms to move inland in search of cheaper and politically more docile labor²⁹. In both countries, the trend puts upward pressure on wages and further increases the incentive for firms to evade social tax obligations.

Rising Inequality

Reforms of social policy have tended to reinforce income inequality in the labor market. As has been widely discussed, China features levels of income inequality comparable to that of both Russia and the United States. The U.S. Census Bureau reported a Gini coefficient for the United States in 2010 of 46.9 and a decile ratio (the 90:10 ratio) of 11.67.³⁰ Russia’s State Statistical Committee reported a Gini index of 42.1 but a decile ratio of 16.5 for 2010. China’s Gini index is a matter of dispute. However, in January, the National Bureau of Statistics reported that China’s Gini coefficient was 47.4 in 2012 and 49.1 in 2008.

Like the United States, Russia and China also have experienced a concentration of income gains at the top.³¹ As in the United States, theories of globalization and skill-biased technological change fail to explain this fact.³²

Not only are Russia and China similar in their levels of inequality, but they also have higher inequality than their post-Communist peers. Russia’s level of inequality is higher than that of any other former Communist country in Eastern Europe or the former Soviet Union, as China’s is higher than that of any country in East Asia.³³ Wage decompression and economic restructuring initially widened income disparities in all post-Communist countries in the immediate post-transition period. In Russia and China, however, the inherited institutional features of the Communist system reinforce labor market inequality, whereas in East Central Europe, rising inequality has been checked by democratic political institutions.

In China, as in Russia, the largely non-redistributive system of taxation and social spending, the preservation of categorical rather than targeted benefits (such as the tie of social privileges to residence status), the widespread diversion of public resources into private gain by state officials, and deepening labor market dualism mean that inequality in earnings is translated directly into high post-tax-and-transfer inequality. Thus in some respects, social policy deepens inequality. Gao and Riskin estimate that the net effect of social benefits other than housing is to increase income differentials.³⁴ China’s minimum livelihood subsistence guarantee, the so-called “dibao,” is means-tested but extremely low.³⁵ Neither in intent or effect is it redistributive. The cumulative effect is to compound advantages for those well-off enough to benefit from access to better services. As in liberal market economies such as the United States, the entrenchment of privilege also increases the ability of the rich and powerful to block moves toward more redistributive taxation, spending or toward broader pooling of risks and benefits.

Certainly Chinese leaders have repeatedly expressed concern over the high level of income inequality. In March 2012, seizing on the issue of inequality in a desperate but futile move to save his political career, Bo Xilai warned that “if only a few people are rich, then we are capitalists. We’ve failed.” ³⁶ The next day Bo was expelled from his leadership posts. Two days later, however, Prime Minister Wen Jiabao declared that the government would do more to reduce inequality.³⁷ In January 2013 the National Bureau of Statistics published Gini index figures for the first time in 12 years. In February, the State Council released a major planning document detailing measures intended to reduce income inequality, particularly by raising the minimum wage. ³⁸

While the social welfare regimes in Russia and China have been subject to very different pressures, the similar dilemmas outlined above can be traced to their common origins in the Soviet “social contract.” The term refers to the intertwined nature of the political regime, economic system, and social structure of the Soviet-type socialist state: the state maintained control over the economy, trading a certain level of social security for compliance with the terms of the contract. Unenforceable as it was, and extremely inefficient, it nonetheless allowed the state to achieve certain goals, and provided guaranteed employment and social protection to those segments of the population that it covered—above all, the urban industrial sector. As the China Development Research Foundation observed, “a de facto contractual relationship existed among government, employers, and employees that ensured a lifetime job together with related pension and medical benefits to employees.”³⁹ Like “liberal market economies” and “coordinated market economies” in Western capitalist democracies, the Soviet-type social contract integrated political, social, and economic institutions. Reform of one set of institutions (notably the liberalization of economic relations), therefore, inevitably affects the balance of interests and demands in polity and society. Three lingering features of the old regime have particular significance for reform-era social policy outcomes.

State Enterprises as Central Sites of State Welfare Provision

State enterprises were central to the administration of social benefits and controls, and even more so in China than Russia because Chinese enterprises formed their own pools for pension and other funds.⁴⁰ The political implications of this are far-reaching. Because of the weakness of other associational means of pooling and representing collective interests, state enterprises became major sources of power. They were powerful both in their relations with local governments, for which they supplied employment security and a wide range of public goods, and vis-a-vis their employees. The leverage possessed by the large state enterprises has persisted well into the post-Communist era.⁴¹

The power of the SOEs stems in part from the characteristic gigantism of the Stalin-era enterprises. Often an enterprise is the source of employment and social amenities for an entire town. In Russia, there are several hundred “mono-cities,” the equivalent of company towns, that depend on a single massive enterprise. An example is Togliatti, in Samara Oblast, home to the giant AvtoVAZ autoworks. At the point when the worldwide recession struck in 2008, one in seven residents of the city worked for AvtoVAZ, and 90% of the city’s revenues came from the plant. Like GM and Chrysler, AvtoVAZ was “too big to fail,” so the government intervened with a bailout and a restructuring plan that saw it through the immediate crisis. Post-Soviet Russia has hundreds of similar towns.⁴² In other cases, of course, SOEs in both countries serve as state champions in international markets (as in the energy and telecommunications sectors).

State enterprises in China have emerged from the drastic downsizing in the 1990s in an even stronger position than before. According to the World Bank report, a quarter of SOEs in China are loss-making. Often they restrict competition in their industries. Because they provide politically crucial public goods, such as employment and social services, and enjoy privileged relations with governments at different levels, they resist restructuring.⁴³ One of the dilemmas in China has been that richer state enterprises have resisted turning over their social insurance funds to the fund pools of the jurisdiction to which they are administratively attached. Poorer enterprises of course are only too happy to do so.⁴⁴

Extensive In-Kind Benefits

The old social contract made wide use of in-kind benefits, such as subsidized housing, utilities, transportation, pharmaceuticals, food, recreation, cultural services and the like. Additional benefits were available for designated categories of the population, such as officials and war veterans. In both Russia and China, in-kind benefits and social services represented about one third of the total wage bill.⁴⁵ Generally the in-kind benefits system was regressive in its effects because higher-ranking people enjoyed better benefits. The infrastructure providing in-kind benefits, such as housing, utilities, and transportation, was inadequately financed. Maintenance costs were deferred. Russia and China have handled the conversion of in-kind benefits to new financing mechanisms somewhat differently. China transferred responsibility for providing many social services to “public service units” on contract to local governments. These have often found creative ways to generate private incomes for their employees.⁴⁶

Both countries have found it difficult to put the in-kind benefits onto a fully market-based footing, in part because monopoly providers are able to keep prices high and services poor, and in part because cash incomes remain low. An attempt at marketizing a few benefits in Russia in January 2005 —badly planned and implemented— resulted in nationwide protests, often featuring elderly people deprived of needed medications and transportation in the dead of winter.

Moreover, the system of in-kind benefits linked social privilege to administrative status. After the transition, therefore, the system enabled officials to continue to use their positions to control access to education, health care, housing, child care, and other services.⁴⁷ This has fed rent-seeking and corruption in both countries. Officials often prefer holding on to their privileged access to administratively allocated benefits (elite hospitals, housing compounds) rather than to see them placed in a competitive market.

Weak Organized Labor

A third feature of the old social contract was that labor was incorporated into state-run trade unions that enjoyed organizational monopolies but lacked autonomy from the state. Membership in the unions was universal but labor protest was outlawed. Trade union leaders were part of the party nomenklatura. Labor solidarity was undermined by wide differences in individual earnings within enterprises and by the dependence of workers on the enterprise for social benefits.⁴⁸ Rather than negotiating for common wage rates and conditions, trade unions collected and administered social benefits. They were also “transmission belts” for political control over the workforce. In practice, they were part of a clientelistic system in which trade union officials enjoyed access to power in return for enforcing worker quiescence. To a large extent, this relationship between unions, workers, employers, and government has continued.⁴⁹ In China, there is universal agreement that the official trade unions have been ineffective in representing workers in confrontations with employers despite the fact that labor protest has increased.⁵⁰ The passage and implementation of the new Labor Contract Law in 2007, where the All-China Federation of Trade Unions participated in drafting the law, demonstrated, according to Mary Gallagher and Baohua Dong, “the lack of legitimate bargaining bodies” that could represent workers’ collective interests.⁵¹ In China, the ACFTU depends on the government to pay its expenses out of the wage fund.⁵² Unauthorized labor organizations are repressed.

In Russia there are legal rival unions to the successor organization of the old Soviet trade union federation. However, the Labor Code makes it extremely difficult for rival unions to compete successfully (only one union may bargain collectively for the workers at any given enterprise). Meantime the main union federation avoids any confrontation with the state or private employers, preferring instead to maintain clientelistic relations with local authorities and a subordinate role in bargaining over wages and social benefits.⁵³

In both countries, the weakness of organized labor means that business has not had to generate the capacity to bargain with labor over thorny redistributive issues. Studies of advanced Western democracies suggest that the capacity of business to unite around common interests is greater where organized labor’s bargaining power is greater.⁵⁴ The ability of peak business and labor associations to constrain their own members and enforce agreements depends in part on the degree to which they must unite against their opposite numbers in the labor market. Where business and labor featured higher levels of centralization, they were also able reach agreements that alleviated redistributive conflict, for example by coordinating investment in human capital formation.⁵⁵ This helps explain the lower levels of inequality in coordinated market economies than in liberal market economies. The legacy of the authoritarian social contract in China is therefore not only a weak and clientelistic trade union movement, but also a business sector poorly equipped to form a collective will in dealings with the state or to reach agreements with labor over human capital investment. As Kellee Tsai and Bruce Dickson have shown, private entrepreneurs have little desire to exercise political influence in behalf of their common interests.⁵⁶

The enterprise-centered nature of the welfare system, the importance of non-monetary benefits, and weakness of organized labor under the old regime have shaped the course of subsequent reform in both countries. Powerful enterprises resist demands for higher social spending by underreporting the wage bill on which they pay taxes and expanding the use of informal labor. Organized labor is complicit in labor market dualism and patronage relations rather than championing workers’ interests. The government’s efforts to rebuild the social contract are hampered by the persisting political leverage of the interests that were most advantageously situated in the old regime: enterprise managers and state officials.

Although China exhibits levels of income inequality characteristic of liberal market economies, its levels of social taxes are similar to those of social democratic welfare states—but only in the formal sector and only for middle-income earners. The growth of the informal sector and rising income gains at the top undermine the regime’s goals for social policy by leaving social insurance pools starved of contributions. I have argued that this pattern reflects the enduring influence of institutional arrangements inherited from the old social contract. Greater associational capacity on the part of business, labor and other broad social sectors would enable the state to alleviate some of the conflict between growth and redistribution by raising the productivity of labor and investing in skill formation. This is the proposal of both the China 2030 report as well as that of the Strategy 2020 for Russia. Doing so will require overcoming the cooperation dilemma inherent in the relations between economic agents and the state. Firms and workers are more likely to contribute to the public welfare by paying taxes on the full value of their wages to the extent that they believe that the state is providing public goods such as order, legality, and efficient state administration. Strong institutions for coordination between the state, business, and labor might help overcome many of these dilemmas. In turn, cooperation among them could forge the basis for a new social contract.

Thomas F. Remington is the Goodrich C. White Professor of Political Science at Emory University in Atlanta, Georgia.

The post Toward a New Social Contract in China: Overcoming the Legacy of the Old Regime appeared first on China Research Center.

‘WTO Plus’ and ‘Behind-the-Border’ Issues

The TPP is discussing not only ‘WTO plus’ issues, that is issues involving further scaling-up on commitments already made by countries at the WTO, but also ‘WTO extra’ subjects that are beyond the WTO’s current mandate.² The ‘WTO plus’ matters being discussed include wider and deeper elimination of tariff barriers between negotiating members, removal of technical barriers to trade (TBT), deeper commitments in cross-border trade in services, framing new intellectual property (IP) rules and rules of origin for determining value addition, market access in textiles and apparel, and trade remedies for addressing rights and obligations of members. Environment and labor standards, government procurement, competition policy, customs laws, e-commerce, and financial services are the ‘extra’ issues. The TPP is also aiming to achieve regulatory convergence among members. The convergence is expected to facilitate seamless movement of goods and services among the members by minimizing obstructions created by differences in domestic regulations that are ‘behind the border’ factors adding to trade costs and affecting competitiveness of exporters and their market access prospects.

Proactive U.S. Role

The TPP’s ambitious and expansive scope has much to do with the strong U.S. commitment to the framework. The commitment is being driven by several factors. The TPP provides the U.S. the template for a regional economic and trade framework that can be the benchmark for other future regional agreements involving the U.S.These agreements, like the TPP, can accommodate more ‘WTO plus’ issues, as in several U.S. PTAs, in line with the comparative advantages of the U.S. A TPP negotiated successfully on these lines will help the U.S. in digging a deeper foothold

in the Asia-Pacific in areas of its specific comparative advantages, such as trade in digital and entertainment products, and contribute to revitalization of its domestic economy by increasing exports and creating new jobs. The TPP can also help the U.S. in increasing its economic presence in an Asia-Pacific that is heavily interconnected through a dense network of bilateral PTAs, most of which do not feature the U.S., and are dominated by ASEAN, China and Japan.

The Chinese Perspective and Counter-Response

Various implications of the agreement are also becoming critical for China. From a larger geostrategic perspective, the TPP can arguably be perceived as a U.S. effort to ‘ring-fence’ China. The perception stems from the negotiating members including U.S. political, military, and strategic allies such as Australia, Canada, Japan, Mexico, and Singapore. Vietnam’s presence in the TPP is a further irritant for China. China’s discomfort with the agreement is also due to its emphasis on the ‘WTO plus’ issues on which many of its views are radically different from the U.S. and other OECD economies. China’s domestic regulations on IP and government procurement, for example, hardly come close to those likely to be adopted by the TPP.

These hostile impressions on the TPP in China coexist with alternate pragmatic views arguing that entering the TPP can be economically beneficial for China by blocking the potential diversion in trade and investment following the formation of the TPP. China’s joining the TPP in the long run, however improbable it might appear now, is at least a hypothetical possibility given that the TPP is likely to have an open annexation clause allowing other APEC economies to join.

The TPP has provoked responses from the Asia-Pacific by activating parallel regional integration efforts. These efforts in the Asia-Pacific are typically distinguishable between Trans-Pacific efforts involving the U.S. and Asian efforts excluding the U.S. Both tracks have proceeded independently with the Asian track, or the Asia-centric approach to integration, aiming to combine regional economies through initiatives such as the East Asian Summit (EAS) and ASEAN+3. The Asian track assumes the centrality of ASEAN in a hub-and-spoke model of integration. The latest effort in the Asian track is the Regional Comprehensive Economic Partnership (RCEP) announced in November 2012, for bringing together all Asian economies with whom ASEAN has bilateral free trade agreements (FTAs) into a composite framework. Comprising ASEAN, Australia, China, India, Japan, New Zealand and South Korea, the RCEP has been enthusiastically endorsed by China.

China and RCEP

China, most probably, views the RCEP as an opportunity for balancing some of the strategic and economic losses inflicted on it by the TPP. The RCEP has a significant economic size and presence in global trade. Its share in global GDP measured in purchasing power parity (PPP) terms is 33.6 percent, which is larger than the corresponding share of 26.1 percent for the current 11-member TPP group. The TPP’s share will increase to 34.4 percent of global GDP (PPP) with the inclusion of Japan, South Korea, and Thailand. On the other hand, the TPP currently accounts for 20.7 percent and 20.9 percent of global merchandise and commercial services trades respectively. While these shares will also increase substantially with the joining of Japan, South Korea, and Thailand, at this point in time, the RCEP has a larger presence in global trade with shares of 27.7 percent and 22.5 percent in global merchandise and commercial services trades.

China will be comfortable negotiating the RCEP since the agreement is expected to evolve by imbibing key features of the Asian-track negotiations that China is familiar with. Unlike the TPP, the negotiations are expected to be non-binding and voluntary. The TPP and the RCEP are also likely to differ in structural characteristics, which would reflect features distinguishing the bilateral FTAs of the U.S. from those of ASEAN. As noted earlier, U.S. FTAs have relatively greater focus on ‘WTO plus’ issues such as NTBs, e-commerce, government procurement, investment, services, labor, and environment. ASEAN FTAs have much less focus on these issues and are more ‘accommodating’ toward members by granting special and differential (S&D) provisions allowing greater flexibilities in phased tariff reductions. China (as well as India, the other major regional economy figuring in the RCEP, but not in the TPP) is more comfortable with not only less emphasis on ‘WTO plus’ issues, but also the flexible ,non-binding approach of the Asian track. In this respect, it is happy to accept the centrality of ASEAN in the RCEP negotiations. Along with the RCEP, it is also participating actively in other Asian-track integration efforts such as the trilateral FTA with Japan and South Korea for maintaining its strategic presence and market access in the Asia-Pacific.

New Trade Architecture and Strategic Division

The progress on the TPP negotiations, and the counter-response produced by the TPP through the RCEP, are reorganizing the trade architecture of the Asia-Pacific into distinct blocs based on specific negotiating templates. These blocs are also reflecting the strategic economic interests of the U.S. and China.

With the RCEP negotiations under way, progress on both the TPP and the RCEP might be influenced by each other. Overlap of issues at both negotiations is unavoidable, given the presence of the common members (Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, Vietnam, and possibly South Korea and Thailand in the future). The roles of these members will be crucial in determining whether the two frameworks will converge in the future or remain separate and irreconcilable. The common parties might visualize both as different means for achieving the same end of a pan-regional Asia-Pacific free trade pact.³ The eventual progress on the TPP and the RCEP, depending on whether it follows a mutually inclusive or exclusive course, will also determine whether the Asian and Trans-Pacific tracks can assimilate to produce a common path for economic integration in the Asia-Pacific.

At present, though, the possibility of such convergence appears limited. This is not only due to different templates of the two agreements and the TPP’s greater emphasis on ‘WTO plus’ issues and regulatory coherence. The low possibility of convergence is also due to the contrasting geostrategic perceptions of the TPP and the RCEP. These perceptions are coloring them as alliances that can be strategically manipulated by the U.S. and China. If these perceptions become stronger, the Asia-Pacific might witness more intense trade-driven strategic competition between the U.S. and China to mold the TPP and RCEP into templates accommodating their specific economic interests and comparative advantages.

The TPP is already experiencing the U.S. influence not only through coverage of ‘WTO plus’ issues, but also the emphasis on cementing regulations strengthening and sustaining its comparative advantages, through measures such as stronger protection for IP and greater market access in government procurement processes of member countries. Similar dominant influence exerted by China on the RCEP (if any) will become known only over time as the negotiations are still at an early stage.

Unlike the U.S., which as the world’s largest exporter of commercial services is keen on entrenching its comparative advantages in the TPP accordingly, China is expected to focus on consolidating its comparative advantage in manufacturing through the RCEP. China’s economic relationship with several ASEAN members as well as with other major RCEP economies such as Japan and South Korea is unique in that it imports large quantities of intermediates, parts and components from these countries, which are processed and assembled in the mainland, and exported to third country markets such as the U.S. and Europe. These regional supply chains have been vital for the Chinese economy. It is imperative for China to utilize the RCEP for sustaining these supply chains given that the TPP is likely to create a different trade space in the Asia-Pacific with new trade regulations and exclude China.

It is evident that the TPP will substantively influence the trade architecture in the Asia-Pacific through its regulations and geo strategic implications. The possibilities of new trade templates such as the TPP and the RCEP, and their rules, becoming major sources of strategic antagonism between the U.S. and China in the economic turf of the Asia-Pacific is not a foregone conclusion but can hardly be ruled out.

References

Murray Hiebert and Liam Hanlon (2012), ‘ASEAN and Partners Launch Regional Comprehensive Economic Partnership’, Centre for Strategic and International Studies (CSIS), 7 December; http://csis.org/publication/asean-and-partners-launch-regional-comprehensive-economic-partnership (Accessed on 15 April 2013)

Henrik Horn, Petros C Mavroidis, and Andre Sapir (2009), ‘Beyond the WTO: An anatomy of EU and US preferential trade agreements’, Bruegel Blueprint 7, Bruegel Blueprint Series, Volume VII, Bruegel, Brussels, Belgium; http://www.bruegel.org(Accessed on 15 April 2013)

Peter A. Petri, Michael G. Plummer and Fan, Zhai (2011), ‘The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment’, East West Center Working Papers, Economic Series, No.119, October 24; http://www.usitc.gov/research_and_analysis/documents/petri-plummer-zhai%20EWC%20TPP%20WP%20oct11.pdf (Accessed on 15 April 2013)

Amitendu Palit is Senior Research Fellow and Head (Partnership & Programme) at the Institute of South Asian Studies in the National University of Singapore.

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However, this rapid economic growth has also produced an array of social and economic problems. One of the most serious and acute is the gap between rural and urban development. This gap is reflected not only in personal income. The ratio between urban and rural per capita GDP has risen from 1.85 to 1 at the beginning of the reforms to 3.1 to 1 by 2012 (see Figure 1). The gap is also reflected in the inequity of public services and government-offered benefits such as education, health care, and social security. These inequalities have negatively influenced household consumption (Qi and Prime 2009). Even though more rural residents migrated to cities for higher-paying jobs, this vast population of migrant workers still has significant barriers in accessing urban public services, which do not typically accommodate rural workers without the official urban “hukou” (city residence permit).

The 18th NCCPC recognized the importance of improving the livelihood of all Chinese people and adopted urbanization as its main strategy for achieving this goal. Urbanization was not a new term for the NCCPC. However, in the past it mainly referred to a means to coordinate and balance regional developments. The new report of the 18th NCCPC reframed urbanization and emphasized the term — together with industrialization and agricultural modernization— as key factors for adjusting China’s economic structure and developmental model. This initiative stirred both optimistic support as well as strong opposition.

Proponents (e.g., Li, 2013; Zhang, 2013; Yang, 2013) believe urbanization will do the following:

1) Transfer surplus rural labor to the cities. China faces an aging population and potentially a less-than-adequate labor supply for future economic growth. As Meng notes, since the late 1970s the government has included rural-to-urban migration in its set of tools to combat high rural unemployment (2012, p. 76). Currently about half of China’s population lives in urban areas (Bloomberg, 2012), though not all of this population actually has official permission to live there. Both of these numbers are far below those of developed countries. More urbanization will thus transfer rural surplus labor to urban areas, providing a supply for labor-intensive industries.

2) Increase consumption and investment. Urbanization will promote the construction of basic infrastructure, such as housing and public facilities, thus supporting demand-driven growth while lowering China’s reliance on exports. A recent report by the Academy of Macroeconomic Research of the National Development and Reform Commission shows that each new urban resident will lead to an average increase of 100,000 Yuan (about USD$16,200) in government investment for public facilities, including water, electricity, roads, housing, heating, health care, education, employment, and social security. Similarly, each rural resident is expected to bring an increase of 10,000 Yuan (about USD$1,600) per year in consumption in the urbanization process (Huo, 2013).

3) Promote economic structural adjustment. Urbanization, and the accompanying higher population densities, will accelerate the process of transitioning from a secondary-industry-based economy to one that relies more on tertiary (service) one, increasing the industry’s part in the national GDP. In addition, an increasingly well-educated population will promote the development of new technologies, benefiting manufacturing.
These enthusiastic views are challenged by skeptics, who voice the following concerns:

1) Many people believe this process will most certainly damage the interests of rural farmers, both those who choose to stay in the countryside and those who choose to venture into the cities (Banyuetan, 2013). For those who choose to stay, the challenge shall lie in the new waves of urban construction, which will occupy a great deal of rural land and reduce the space available for farmers and agriculture (Chen, Liu, & Tao 2013, p. 32). For those who choose to migrate to the cities, the challenge is finding employment, housing, and educational opportunities for their children, while trying to secure social security benefits. In addition, most current migrant workers are not enrolled in urban medical insurance, unemployment insurance, or workers’ injury insurance (ibid).

2) There is a real possibility of over-investment. Many local governments are rushing to start new construction and other development projects in hopes of stimulating rapid economic growth. Recent National Bureau of Statistics (NBS) data shows that in January and February 2013, investment in real estate reached 667 billion Yuan (USD$106 billion), a 22.8 percent increase compared to the same period last year (2013). Some are concerned that this investment-driven growth is a high-risk strategy that can form a dangerous circle of investment-debt-credit growth.

3) Local government-led urbanization tends to not be very efficient. The use of large areas of land will no doubt lead to larger cities. But if resources are not used prudently, many worry that the rush to build bigger towns will simply result in operational inefficiencies that will produce more traffic jams and air pollution, which does not benefit anyone.

Generally speaking, the biggest concern for urbanization is the potential waste of investments and resources as local governments rush to build new cities but fail to truly improve the living standards of rural migrants. People fear that urbanization is a mere relocation of farmers to urban areas, without enough planning and policy consideration for the lives of these new migrants.

Premier Li Keqiang outlined the principles of this new urbanization strategy with Chinese characteristics in an opinion he wrote in the China Daily (2012). He pointed out that China used to focus on urbanizing the land by simply taking it and using it to geographically expand the cities. But now China needs to focus on urbanizing the people. This new round of urbanization aims to create more urban employment opportunities and provide public services to all new and existing urban residents, through the following:

1) Combine urbanization with industrialization to provide stable employment for new migrants.

2) Combine urbanization with modernization of agriculture to improve the efficiencies of economies of scale so that rural residents who stay behind can also increase their income.

3) Provide equal public services and benefits to both rural and urban residents. Ultimately Chinese people should enjoy the same level of government-offered benefits whether they live in rural or urban areas. The Chinese government has set 2020 as the target year to realize equality of basic public services including education, social security, employment, health care, and housing. The 12th Five-Year Plan of China outlined a fiscal investment plan to reach this goal, especially the plan to invest more in western provinces and poor areas. In fact, China has already increased its fiscal support to these regions with an annual growth rate of 26.3 percent (Zhang, 2012). Such momentum is expected to continue as China bridges the gap between rich and poor areas.

Premier Li’s suggestions addressed the major concerns about the new urbanization strategy. However, it is undeniable that this new initiative still faces significant challenges, especially the anticipated huge fiscal expenditure.

Equalization of public services is not the only factor straining the government’s budget. The aging population in China is estimated to require double the current fiscal expenditure on social security and to increase health care expenses by 50 percent by 2030 (World Bank 2012). With concurrent plans to increase expenditures for public services, China’s fiscal pressure will no doubt escalate.

Furthermore, these big increases in fiscal burdens coincide with a rapid decrease in fiscal income due to both internal and external factors. It is not likely that China can maintain the high fiscal income growth of previous years under such pressures. Figure 2 shows that the growth of fiscal income has experienced sharp drops.

China is now entering a new era of economic modernization in which Beijing is shifting its focus from mere rapid income growth to equality and social justice. The road to urbanization will not be smooth, but the underlying transition of structural change and social adjustment is a crucial step that all modern economies must take.

References:

Banyuetan 2013, “专家吁防城镇化快而不优 拆除农民市民化政策屏障”, Banyuetan 6 January. Available from: <http://news.xinhuanet.com/local/2013-01/06/c_124192995>_3.htm. [9 June 2013].

Bloomberg, 2012, “China’s Urban Population Exceeds Countryside for First Time”, Bloomberg 17 January Available from: <http://www.bloomberg.com/news/2012-01-17/china-urban-population-exceeds-rural.html> [8 June 2013].

Chen, M; Liu W; Tao, X 2013, “Evolution and assessment on China’s urbanization 1960–2010: Under-urbanization or over-urbanization?”, Habitat International, vol. 38, pp.25–33. Available from: ScienceDirect [8 June 2013].

Li, K 2013, “Releasing Growth Potential”, China Daily 20 February. Available from: <http://www.chinadaily.com.cn/opinion/2012-02/20/content_14643432.htm>. [9 June 2013]

Li, Y 2013, “城镇化既是发展转型又是体制转型”, Nanfang Daily 4 March. Available from: <http://news.xinhuanet.com/fortune/2013-03/04/c_124411984.htm>. [9 June 2013].

Huo, K 2013, “马晓河：城镇化与经济新动力”, Caixin Online 8 January. Available from: <http://special.caixin.com/2013-01-08/100480516.html>. [9 June 2013].

Meng, X 2012, “Labor Market Outcomes and Reforms in China”, Journal of Economic Perspectives, vol. 26, Number 4, pp.75–102. Available from: KSU SuperSearch [8 June 2013].

National Bureau of Statistics, 2012, Statistical Communique on the 2012 National Economic and Social Development, China Statistics Press, Beijing

National Bureau of Statistics, 2013, National Real Estate Development and Sales in the First Two Months of 2013, available at http://www.stats.gov.cn/english/pressrelease/t20130311_402878958.htm

Qi, L. and Penelope B. Prime, Market Reforms and Consumption Puzzles in China, China Economic Review, Vol. 20, pp. 338-401, Sep. 2009
World Bank, 2012, China 2030 Building a Modern, Harmonious, and Creative High-Income Society.

Yang, Y 2013, “城镇化绝对是方向 提升工资有点纠结”, People’s Daily 7 June. Available from: <http://tech.ifeng.com/it/detail_2013_06/07/26223913_0.shtml>. [9 June 2013].

Zhang, L 2013, “提高城镇化质量 释放中国发展潜力”, People’s Daily 29 May. Available from: <http://gx.people.com.cn/n/2013/0529/c352269-18761880.html>. [9 June 2013].

Zhang P 2012 “2007-2011年公共服务财政支出12.7万亿”, The 18th National Congress of the Communist Party of China Press Center 10 November. Available from: <http://cpc.people.com.cn/n/2012/1110/c350000-19538713.html>. [9 June 2013]

Qiulin CHEN is Assistant Professor of Economics at the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences in Beijing, China (chen_ql@cass.org.cn).

Li Qi is an associate professor of economics at Agnes Scott College. She joined the faculty after completing a Freeman Foundation postdoctoral research fellowship at Columbia University. She received her Ph.D. from the University of Pittsburgh. Her research focuses on China’s economy, as well as behavioral and experimental economics and finance.

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Q:Many trends in the economy point to growing internationalization of business, such as growing exports, more foreign investment, growing tourism, etc. Does the growth in your industry track these trends closely?

A: Yes, there is a very close parallel to the internationalization growth of business and the continued growth and high demand experienced in the language services industry, not only in North America, but worldwide. In fact, in 2013 the language translation services industry in North America alone is expected to grow from U.S.$11.7 billion to U.S.$13.1 billion or 12%. Looking forward, the language translation industry in North America is projected to grow to U.S.$16.5 billion in 2015 and to U.S.$47.3 billion worldwide.

Q: Did the financial crisis of 2008-09 stall this growth? And if so, has it recovered?

A: Prior to the 2008-2009 recession, the industry had been experiencing growth of approximately 20% annually, but during the 2008-2009 financial crisis, the growth never really stalled or receded, instead it decelerated to very respectable and sustainable annual growth numbers of approximately 10%. I am not so sure the industry will get back to the level of 20% annual growth, but based on the five-year projections that I have seen, the industry is expected to continue growing at a very healthy rate of 12%.

Q: Is there a rising need for translation into, or from, Chinese?

A: While we don’t specifically track growth metrics for each client-requested target language, I can tell you that the demand for translation from English to Chinese remains very strong, and Chinese translation requests remain in the top five to six of our most requested languages.

Q: Where do you find your talent for Chinese translation?

A: We have a Vendor Management team that works very closely with our Chinese linguists. The Chinese linguist teams that we select must pass a very rigorous vetting process that includes certification from an association belonging to the International Federation of Translators, a degree in translation from a recognized institution of higher learning, years of experience (our linguists average over ten years of experience), previous project references, and sample translations. In addition, there are ongoing proficiency tests each linguist must pass on an annual basis.

Q: What are the most sought-after services in your sector? How much of your work is written translation as opposed to oral translation?

A: The greatest demand for services in the industry is in the form of written content, which is either printed material or digital content for websites. Approximately 10% of the services we provide fall into the oral category, which can either be simultaneous or consecutive interpretation or what is known as OPI (over the phone translation). Conducting a deeper dive, the manufacturing vertical represents the biggest share of where the need for language translation services exists, and this vertical represents about one third of all of the market for outsourced language services.

Q: If a conference needed your services to provide simultaneous translation in Mandarin, how would the process of a bid and delivery work?

A: The most important pieces of information needed in order to successfully fulfill a Mandarin simultaneous interpretation request are: subject matter, duration of the event, number of attendees, venue location, date(s), and whether or not equipment is needed. Once we know these components we can prepare a firm project estimate for the client and secure the services of the appropriate linguists. Of all of the components involved with the scope of the project, the subject matter is the most critical piece. Linguists are very specialized, and if the subject matter is biosciences-related, then an interpreter with translation experience in the biosciences field would need to be used.

Q: How has the delivery of translation changed over time? How does technology facilitate the delivery of your services now?

A: Technology has certainly played a vital role in the development of the industry. One of the biggest technological tools is something called Translation Memory or “TM.” TM is a client and client language specific database that stores every translation completed for that client. TM ensures accuracy and consistency of translations by keeping track of what was previously translated and then allowing the linguist to incorporate those translations into future translation projects, when the identical source words or “fuzzy matches” of sentences appear in the source text that is in need of translating. In addition to a cost savings for the client, TM helps improve the speed of translations. Two important items to emphasize are that a separate TM file by target language is kept for each client, and the TM is the client’s intellectual property and is treated as such.

Q: How did you become involved in the translation services sector?

A: I was in the midst of a career transition and I was looking for an opportunity in a growth industry. In addition, I felt very strongly about Keylingo’s business model and their client centric approach. As I investigated the industry it became clear that the demand for language translation services would be strong for many years to come and that Keylingo was positioned very well to meet this demand.

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