Case Study: Shenzhen’s tale of “success”

In the 1970s, Shenzhen was a small fishing village, population 30k, on the narrow river across from Hong Kong.  It was deemed a special economic zone in 1979, exempting any business within its boundaries from paying regional and national tax for 10 years of operation.  This exemption combined with other preferential trade agreements (PTA) attracted huge numbers of both businesses and workers. To construct infrastructure, the state functioned as a primary lending agency covering 48% of fixed capital investment in 1979, dropping to 24% in 1980 (Palit, p.17).  Growth was not without its pains as the province stretched to accommodate the influx of migrant workers. As a result, the region forged new policy including home purchase schemes for workers, a new tender system, and wage reform that shaped a “free” labor market emerging by the early 1990s.  Shenzhen additionally hosted the first stock exchange in China in 1990 (Yeung, p.227).  “To their credit, Shenzhen’s leaders recognized early on that … over the long term, structural transformation and technological learning would be necessary for development to become self perpetuating” (Yeung, p.229).  The Chinese oligarchy responded swiftly to the needs of industrializing village.

Every aspect of Shenzhen’s industrialization was integrated into a regional and national economic growth scheme.  The post-Mao regime inherited a legacy of industrialization and possessed a readiness for change. Just as their export-oriented manufacturing began, globalization was gaining momentum (Yeung, p.236) giving them the element of good fortune to offer the right program at the right time. That fortune translated into to an outstanding 58% annual growth rate for the region as it developed factors of production and a market within years (Yeung, p.225).  From this point, a demonstration effect took hold within China resulting in varying levels of success among the other SEZs.

Shenzhen was embedded in the national economic scheme so the accomplishments of the region are the accomplishments of the central government. The quest for foreign investment inspired incentives that were clearly successful as “China attracted record levels of FDI, with inflows amounting to $54 billion per year during 1991-2010. Annual FDI inflows from 2003 to 2010 ($81.5 billion) were more than double that of the 1991 through 2002 period.  Interestingly, the global financial crisis did not significantly disrupt FDI inflows. Figures have shown FDI rebounding to pre-crises levels in 2010 at $105.7 billion (Wignaraja, p.34). 

In addition to offering an experiment in trade liberalization, the SEZ offered an experiment with a new labor system. In the first SEZ, Shenzhen, a contract labor system was introduced to comply with the demands of foreign corporate managers. Because of the lack of local labor many workers had to be recruited from surrounding rural areas. But these workers were not guaranteed a permanent job.  Most full-time employees maintained a nonpermanent nonresident status. By the end of the 1980s, approximately 75% of full-time workers in Shenzhen were contract workers. These contracts may be as long as 3 to 5 years or seasonal which is the case for migrant workers (Sklair, p.201). Temporary employment denies many workers their rights.  Nonresident status also denies these workers rights of citizenship.  By the end of the 80s, half of Shenzhen’s 1 million residents had temporary status (Sklair, p.204).

Temporary and rapid urbanization leads to three categories of labor violations: 1) the use of child laborers 2) poor living conditions 3) excessive compulsory overtime (Sklair, p.206). Generally, there is great disharmony in labor relations in Shenzhen.  Sklair believes that this is due to the large population of temporary nonresident workers. “While the iron rice bowl does not always protect such workers, the combination of labor contracts, rapid growth in temporary work force and the foreign investor-driven emphasis on enterprise profits, has clearly altered the balance of power between labor and the state and introduced a new relationship between labor and private capital in China” (Sklair, p.208).

A minimum wage was implemented in 1995, and still declared unlivable by the International Labor Organization (ILO).  By 1997, the Shenzhen SEZ offered the highest wage in all of China set to Y420 (US$54) a month.  The minimum wage has been rising steadily since its inception.  By 2010 the wage in Shenzhen had risen to Y900 (US$132) a month (Harris, 2008)—still lower than the global labor market allowing China to maintain its comparative advantage.  Overwhelmingly, the workers in Shenzhen are migrant women from exceedingly poor rural areas.   They have small nimble fingers that are ideal for electronics assembly and resign themselves to their current fate.  Poor Chinese Women generally don’t complain and they send their money home.  The responsibility to family overrides the fight for individual rights, making gender-related labor issues in China very difficult to change.

The lack of occupational health and safety in Chinese factories is evident in the reported incidents of factory fires, explosions, and lost limbs.  Commonplace is the use of toxic glue in poorly ventilated areas (Chan, p.896).  The use of private security guards is also common in Chinese factories and dormitories.  Many guards are also police officers who carry weapons and handcuffs, lending themselves to an air of intimidation.  Food, water and toilet use were often extremely restricted.  And there were reports of this abusive environment escalating to beatings and acts of torture (Chan, p.893).

A 44 hr workweek was established in 1997 but not enforced.  Employees report mandatory overtime resembling forced labor.  Last year, Americans heard reports of suicides at the Foxconn factory in Shenzhen.  The factory produces Apple electronics and workers were required to work 68 to 90 hour per week, particularly before the launch of the ipad.  During that period, 17 workers plunged to their death from the factory windows.  In response, the factory raised wages, installed nets to catch jumpers and required employees to sign a no-suicide clause to their contracts (Johnson, 2011).  I presume that the workers maintain a workweek near 70 hours long because new strikes have resulted from cuts to overtime pay.  The idea of overtime pay is new, part of the 2008 Labor Contract Law (LCL) reforms.  A decrease in factory orders due to the recession in the West has reduced average employee workweeks to the 44 hour “limit,” and they are not pleased (Bradsher, 2010).

Between 1995 and 2006, labor disputes in China increased more than thirteen-fold and a large and growing number of these disputes erupted into public demonstrations. According to PRC official sources, “public order disturbances” have grown by nearly 50% in the past two years, from 58,000 incidents in 2003 to 87,000 in 2005 (Lum, 2006).  As a result, groundbreaking amendments were made to the Labor Contract Law (LCL) in 2008.  The LCL now gives workers a private right of action to enforce their own legal rights. In other words, employees may now sue their employers directly–without the aid of the state. This action minimized the role of the state in the employer-employee relationship and greatly increased the power of Chinese employees to handle their employment grievances on their own.  The LCL states:  “This Law has been formulated to improve and perfect the labor contract system, to make explicit the rights and obligations of both parties of the labor contract, to protect the lawful rights and interests of laborers and to build and develop harmonious and stable labor relationships”  (Harris, 2008).

In addition to issues related to wages and benefits, many labor demonstrations have been directed at collusive agreements between factory managers, local officials, and private investors, the “triple alliance.”  The push for privatization of state-owned enterprise has come at the expense of workers, and the state sponsored labor union, the ACFTU, has offered minimal advocacy (Lum, 2006).  The organization’s conflict of interest is obvious. “The trade union is not representing our views; we want our own union that will represent us,” said a striking worker, who insisted on anonymity for fear of retaliation by government authorities or the company (Bradsher, 2010).  The Shenzhen municipal Human Resources and Social Security Bureau stated on its website that the minimum monthly wage rose to 1,500 yuan (US$240) last February 1, 2012—still far below a livable wage in China’s cities. The Federation of Hong Kong Industries, representing around 3,000 industrialists running factories in China, has lobbied hard against the wage hikes (Reuters).  They claim that wage hikes may cause the factories to close—despite having orders.  That seems unlikely when they can logically raise their prices, and they certainly will.

China is the world’s most polluting country as it emits 6,018 million tons of greenhouse gases each year. (Worldwatch).  There is a bounty of research documenting the pollution levels in Shenzhen and they range from scientists documenting black acid rain, acute smog and red tides and officials who report that little environmental change has occurred as a result of the region’s rapid growth. All have wildly varying data that influences me to question the accuracy of them all.  While visiting Shenzhen in January, it was foggy with smog, but my eyes didn’t burn as much as they did in Xi’an.  That is the extent of available trustworthy data. A report released by the United Nations Environment Program (UNEP) and Peking University in 2007, Shenzhen Environmental Outlook presents the pollution positively.  Shenzhen was the first city to volunteer cooperation (and funding) for this report, which may explain the negative data presented with a positive spin.  The document says, “Shenzhen enjoys good air quality, which meets national Grade ll standard. However, …particulates are high, threatening the residents health” (UNEP, p.128).  “…The overall up-to-standard rate of tap water remains very high” but “the quality of surface water fails to meet the needs of residents so more than 80% of water is supplied from outside of Shenzhen” (UNEP, p.129).  The report also fails to mention any of the well-documented incidents of black acid rain that has fallen in Shenzhen in the past decade.  Therefore, I focus on policy, detailing the history of China’s environmental policy to offer an understanding of the current environmental debates, and the call for reform of fossil fuel based industrial practices.

One such debate argues to maintain the status quo, promoting environmental policy as government interference in the free market.  The belief is that the market will demonstrate how environmental bads in developing countries will work themselves out, illustrated in the environmental Kuznets curve (EKC).  The EKC is an inverted U-pattern (similar to Kuznets hypothesis on inequality – see Appendix) that traces the supposition that a willingness to pay for environmental protection rises with income.  This hypothesis lacks convincing evidence and is not believed to have any connection to industrial pollution (sulfur dioxide, nitrogen dioxide) and particulate matter.  In other words, there is nothing to substantiate that environmental damage decreases with higher incomes, and just because one can afford clean technologies it cannot be presumed that one will purchase clean technologies (Todaro, p.487).  Yet this argument is commonplace, I presume for the simplistic appeal of its “do nothing” or business as usual (BAU) approach.

When considering Chinese policy it is important to note that China practices a communist form of capitalism (India is a liberal democracy).  Chinese SEZs are developed and managed by state owned enterprises (SOE) (compared to India’s public private partnerships, PPP).  This fact has contributed to their “success” in the sense that China maintains more control and wealth because less money is expatriated from Chinese zones (unlike the Indian government that has impeded SEZ growth with excessive corruption and bureaucracy).  I also learned in an interview with a Foxconn employee that the PRC (central government) receives all of the financial benefit from its SEZs leaving local municipalities without business tax income.  As a result, the municipalities resort to rent-seeking and collusion tactics in an effort to remain solvent.

The Environmental Protection Bureau of Shenzhen Municipality is the agency charged with enforcing environmental policy. According to UN Department of Environmental Protection (UNEP), this agency and its subdivisions “guarantee the stability and harmony of this city’s environment” (UNEP, p.92).  From 2006-2008, the city issued a comprehensive agency-wide plan aptly titled “Decision on Promoting Circular Economy and the Short-Term Implementation Scheme of Promoting Circular Economy of Shenzhen.”  It encompassed energy conservation, recycling and reusing renewable resources and received glowing reviews after six months of practice.  Firms saved energy while increasing production prompting the plan to be disbursed to other SEZs (UNEP, p.153).