China Is Either Part of the Problem Or Solution

In part, hope for the world's worker is dependent upon the actions of the Chinese government. As Thomas Palley puts it, the global economy is now driven by exports. Wages and prices worldwide are in a "race for the bottom" where workers will be even less likely to purchase their own goods of production.

The implication is that the global economy must shift from export-led development to domestic market-led development. In an export-led world, higher wages undermine employment. In a domestic market-led world, higher wages can promote employment. This is where labor standards and unions enter. The challenge is to establish a system that has wages rising with productivity so that workers can buy what they produce, rather than dumping it on world markets. Setting wages by government edict does not work, as evidenced by the former socialist economies. Instead, labor standards and unions are the way forward, since they provide a decentralized mechanism that links wages and productivity through bargaining. History supports this. Every country that has ever made the transition to developed industrialized status has traveled this route.


China is the poster-child for export-led manufacturing growth. It has the most under-valued exchange rate, the worst labor repression, and is by far the largest developing country exporter. As such, China is the gravitational attractor for the race to the bottom. Other countries must change too, but they can only do so if China changes so that none lose relative competitive advantage. If China revalues its exchange rate, other East Asian countries can also do so. Likewise, if China raises wages, so too can others.


One area where China is showing leadership is its stated commitment to increase social spending. This will be good for China’s citizenry, and it will also contribute to incomes and domestic demand in China which will be good for the global economy. However, there is also a problem that is unique to China. Labor standards and trade unions are key to domestic market-led development, but China’s political system prevents them. That creates an additional political roadblock that must be solved. Democratic reform in China is not a nicety. It is a necessity for the global economy to work.

Now how likely do you think this is in the near future? And you wonder why I'm so pessimistic about the future of the world economy and in particular the American worker?