Monday, August 17, 2009

Increased Worker Activism: Symptom of a Central-Local Issue?

For the second time in a month, local Chinese officials have been forced by workers to call off privatization of steel mills.

The first incident occurred in Jilin Province on July 27 during which thousands of workers protested the proposed privatization of Tonghua Iron and Steel. The manager of the mill was beaten to death by disgruntled workers who felt their needs were being ignored.

The latest incident occurred on Sunday as Henan Provincial officials, again, pushed by protesting workers, called off the proposed privatization of Linzhou Iron and Steel.

In both cases, the SOEs being privatized are owned by local governments, not the central government. The workers, on the other hand, are officially represented by the All China Federation of Trade Unions (ACFTU), which is a centrally-managed organization affiliated with the Communist Party.

While no evidence suggesting any corruption has been presented as of yet, local government officials have profited quite handsomely in the past from privatizations of local SOEs.

The focus of the Hu-Wen government -- in stark contrast with that of the Jiang-Zhu government which pushed for increased privatization -- has ostensibly been less on privatization, less on growth at any cost, and more on ensuring that China's common people get a chance to benefit from economic reforms.

There are a couple of apparent conflicts between central and local governments that we may see playing out in the steel industry (among others) right now. First, the ACFTU, according to the Wall Street Journal, "has been taking a more active role in trying to represent workers' rights", and as a result, their organization may have taken a role in encouraging workers, if not to protest, at least to demand their voices be heard. This is in direct opposition to the incentives to local officials who are highly motivated to privatize locally-owned assets.

Second, the central government has been adamant that China's steel industry, in its present state, is far too fragmented for any one company to become a major global player, not only as a steel producer, but as a negotiator with iron ore suppliers. While the central government's power to force locally-owned SOEs into mergers is questionable, further privatization of these assets would even further dilute the central government's power over this pillar industry.

As an aside, I also find it interesting that, the richer China's people become, the more rights they seem to demand. This connection between wealth and demands for rights has been pretty much debunked by economists and political scientists over the past decade or so, mostly because no one has been able to identify the causal mechanism connecting wealth and democratization -- this despite abundant empirical evidence pointing to a relationship* -- with (until recently?) one glaring exception: China.

*Robert J. Barro has called this relationship "an empirical regularity".

This is not to say that China's workers suddenly have rights simply because they've demanded it, but, while the ACFTU (with its access to the resources of the central government) is clearly in a position to help stop worker unrest, one wonders whether they may have been encouraging their organization.

At a minimum, we can identify clear conflicts between central and local governments here, and the workers seem to be caught in the middle.