China's reforms produce winners, but more losers

Downtown Dalian at night. The booming port city at the tip of the Liaodong Peninsula on the Yellow Sea has attracted overseas and domestic investors

By Rebecca MacKinnon
CNN Beijing Bureau Chief

(CNN) -- Forty-something Wang Zhirong has come a long way. In her prim, navy-blue business suit, sensible heels and power haircut, she walks regally down the corridors of her prospering empire, shop assistants fawning in her wake.

She is general manager of the Tian Bai department store in China's northeastern port city of Dalian.

"Without the support of our customers," she beams, "we could hardly have become what we are today."

The store is packed to overflowing with people inspecting nylon socks, testing children's toys and trying on shoes, taking advantage of the biggest blowout sale in the city -- called the "Big Thanks Sale."

For 2,000 days in a row, Tian Bai has not had a single customer complaint. It's the result, says Wang, of an aggressive customer service program granting full refunds to any unsatisfied customer.

The idea that the customer is king was unheard of when Wang came to work for Tian Bai as an ordinary shop clerk in the 1970s. Back then this state-owned department store -- like everything in China -- was part of a rigid planned economy.

The central government dictated what factories made. Just about everybody held his or her job for life. Food and clothing were rationed, and choices were few.

"It didn't matter how you did your job," says Wang. "When customers came they had to wait until the shop assistants were in a good mood before begging them for help."

Wang says very little changed at Tian Bai in the 1980s, the first decade of China's economic reforms, when the government's focus was on freeing up production in the countryside. But by the start of the 1990s, her universe was in upheaval.

Overseas investors and private Chinese businesses came to Dalian and put up glitzy new stores, attracting customers away from the stodgy old Tian Bai. As part of a government push to reform state-owned enterprises, Tian Bai's managers were told to get their act together: They could no longer count on the government to pay their salaries if they kept losing money.

Wang led the drive to overhaul Tian Bai's way of doing business. "We've learned the market economy can be very cruel," she says. "The pressure forces us to constantly improve our service."

The realities of a market economy

The cruel market is here to stay. Many Chinese are still coming to terms with the fact that market economies tend to have winners and losers. The winners are people like Wang -- those with the education, brains and opportunity to work their way into good management jobs.

This advertising-filled Shanghai street exemplifies the growth from China's economic reforms

They are China's new "middle class" -- millions of people (experts argue over exactly how many) who can afford buy their own apartment, go on seaside vacations, spend lavishly on their one permitted child, maybe even own a car.

Who are the losers? Millions more. Those with little education or skills. Those who grew up expecting they would never have to change jobs in their lifetime and who only know how to do one thing -- part of an estimated 100 million unemployed people in China's cities.

There are the elderly on meager pensions that don't cover the rising costs of medical care. And then there are the peasant farmers living in remote areas much too far away from the cities and their markets to reap much benefit from the reforms. More than 80 million Chinese peasants still live in poverty -- officially defined as earning less than $100 per year.

Embarrassed to plead for work

In the industrial northeastern city of Shenyang, laid-off factory workers desperate for new work gather every morning on street corners and in city parks.

In Shenyang, Liaoning Province, unemployed workers gather on street corners, holding signs that advertise their skills

"Will cook, clean, sew, or take care of children," says a sign held up by one woman who looks roughly the same age as the department store manager, Wang Zhirong. The woman covers her face with a scarf, embarrassed to be seen pleading for work on the street. Sources close to the city government say real unemployment in Shenyang -- the heart of China's rust belt -- is close to 30 percent.

Generating new jobs for these people is an urgent government priority. But it won't be easy this year. Economic growth is stagnating; economists don't expect China's economy to reach this year's growth targets. Consumer demand is at an all-time low because people worried about losing their jobs are choosing to save instead of to spend.

Prices too have hit bottom. Instead of producing fewer TVs, refrigerators and washing machines, however, factories have been churning out even more, with many state-owned factories driving themselves even further into debt.

Will government tinkering work?

Reluctant to cut loose all state enterprises to market competition and create a huge new wave of unemployment, the government instead has set strict production and price controls. It is throwing money into new job-creating infrastructure projects and is taking measures -- like lowering interest rates -- to encourage people to spend their money.

Many economists, both in China and overseas, warn that such government actions are unlikely to work.

"With the shadow of imminent unemployment ... hanging [over] many workers, people are not spending but rather saving for those unexpected future costs which were once underwritten by the state," says Laurence Brahm, head of the Beijing-based consulting firm NAGA Group.

"The 'Catch-22,'" he says, "is that unless those burdens of the state-owned enterprises -- housing, insurance, medical care, education and retirement -- are commercialized, then the enterprises themselves will not be able to ... operate in a commercial manner, service their debts -- in short, to reform."

But allowing the market to do its work unhindered could be painful to many people in the short run because it could mean more layoffs. As it is, labor unrest is a growing problem in several cities, and policy makers are reluctant to take steps they believe are not just bold but also risky. But if the enterprises are not reformed, the government will have to continue to subsidize them, and they could continue to drag the economy down in a cycle of inefficiency and debt.

One thing on which policy makers and economists agree is that the next two or three years could be the most difficult since China's economic reforms began. The tough measures needed to make the economy more efficient will inevitably produce more losers.

Leaders must find a way to make sure those people don't lose out so badly, or become so angry, that they bring down the government. They will also need to keep the majority of the Chinese people convinced that the cruel, competitive market will benefit everyone -- not just the lucky ones like Wang Zhirong.