millions of jobs. But it also created an economy characterized by deep discrepancies in the geographic allocation of resources and by very little internal cohesion. By 2001, the economies of Shanghai and Shenzhen, for instance, were in many ways more connected to those of Tokyo, Seoul and Los Angeles than of the hinterlands of Sichuan and Shaanxi provinces. For most of the 1990s and 2000s, this lack of cohesion was viewed as an unfortunate but necessary and temporary byproduct of an economic model that was otherwise doing its job. After the 2008-2009 financial crisis, internal economic disunity — like the growth model it embodied — became a social and political liability.
The foundation of this model was an unending supply of cheap labor. In the 1980s, such workers came primarily from the coast. In the 1990s, when coastal labor pools had been largely exhausted, factories welcomed the influx of migrants from the interior. Soon, labor came to replace coal, iron ore and other raw materials as the interior’s most important export to coastal industrial hubs. By the mid-2000s, between 250 million and 300 million migrant workers had fled from provinces like Henan, Anhui and Sichuan (where most people still lived on near-subsistence farming) in search of work in coastal cities.
This continual supply of cheap labor from the interior kept Chinese manufacturing cost-competitive throughout the 2000s — far longer than if Chinese factories had only had the existing coastal labor pool to rely on. But in doing so, it kept wages artificially low and, in turn, systematically undermined the development of a domestic consumer base. This was compounded by the fact that very little of the wealth generated by coastal manufacturing went to the workers. Instead, it went to the state in the form of savings deposits into state-owned banks, revenue from taxes and land sales, or profits for the state-owned and state-affiliated enterprises that controlled not only many of the major coastal factories but also the various inputs that made manufacturing possible: roads, rail and port construction; power generation; mining; and oil and natural gas. (Notably, state-owned enterprises continue to dominate heavy industrial manufacturing).
This dual process — accumulation of wealth by the state and systematic wage repression in low-end coastal manufacturing — significantly hampered the development of China’s domestic consumer base. But even more troubling was the effect of labor migration, coupled with the relative lack of central government attention to enhancing inland industry throughout the 1990s and early 2000s, on the economies of interior provinces.
Remittances from the coast kept families in the interior alive and paid for children of migrant workers to attend school, but they did little to improve the overall vitality of inland provincial economies. As a result, when the children of the first generation of migrant laborers reached working age, many of them followed their parents to the coast, where employment opportunities were far more abundant. However, unlike their parents, who had families to care for back in Henan and Sichuan, the new generation of migrants had far less incentive to one day return inland, let alone send money back. With the possible exception of a handful of inland cities (Hefei, Wuhan, Changsha and Chongqing, all of which saw marginal to moderate population growth between 2001 and 2011), the interior came to represent poverty and backwardness, a place to abandon rather than to develop.
Beijing has long understood that it will have to change that perception — and the economic and policy realities underlying it — before it can hope to address the growing structural imbalances of its current economic model. But in China, this is easier said than done. In trying to urbanize and industrialize the interior, Beijing is going against the grain of Chinese history — a multimillennia saga of failed attempts to overcome the radical constraints of geography, population, food supply and culture through ambitious central government development programs. Though its efforts thus far have yielded notable successes, such as rapid expansion of the country’s railway system and soaring economic growth rates among inland provinces, they have not yet addressed a number of pivotal questions. Before it can move forward, Beijing must address the reform of the hukou (or household registration) system and the continued reliance on centrally allocated investment, as opposed to consumption, as a driver of growth.
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Read more: The Geopolitics of the Yangtze River: Developing the Interior | Stratfor
