Times 2

Economic woes: Why Egypt should worry china

By Barry Eichengreen

BERKELEY - A strictly economic interpretation of events in Tunisia and Egypt would be too simplistic - however tempting such an exercise is for an economist. That said, there is no question that the upheavals in both countries - and elsewhere in the Arab world - largely reflect their governments' failure to share the wealth.

The problem is not an inability to deliver economic growth. In both Tunisia and Egypt, the authorities have strengthened macroeconomic policy and moved to open the economy. Their reforms have produced strong results. Annual growth since 1999 has averaged 5.1% in Egypt, and 4.6% in Tunisia - not Chinese-style growth rates, to be sure, but comparable nonetheless to emerging-market countries like Brazil and Indonesia, which are now widely viewed as economic successes.

Rather, the problem is that the benefits of growth have failed to trickle down to disaffected youth. The share of workers under the age of 30 is higher in North Africa and the Middle East than in any other part of the world. Their economic prospects are correspondingly more limited. University graduates find few opportunities outside of banking and finance. Anyone who has travelled to the region will have had an experience with a highly literate, overeducated tour guide.

Chinese workers wait to board a train heading for Dongguan city of Guangdong province, at Hefei Railway Station, Anhui province, after the week-long Chinese New Year holidays February 11, 2011. Reuters

With modern manufacturing underdeveloped, many young workers with fewer skills and less education are consigned to the informal sector. Corruption is widespread. Getting ahead depends on personal connections of the sort enjoyed by the sons of military officers and political officials, but few others.
It may stretch credulity to think that a high-growth economy like China might soon be facing similar problems. But the warning signs are there. Given the lack of political freedoms, the Chinese government's legitimacy rests on its ability to deliver improved living standards and increased economic opportunity to the masses. So far those masses have little to complain about. But that could change, and suddenly.

First, there is the growing problem of unemployment and underemployment among university graduates. Since 1999, when the Chinese government began a push to ramp up university education, the number of graduates has risen seven-fold, but the number of high-skilled, high-paying jobs has not kept pace.
Indeed, the country is rife with reports of desperate university graduates unable to find productive employment. Newspapers and blogs speak of the "ant tribe" of recent graduates living in cramped basements in the country's big cities while futilely searching for work.

In part, these unfortunate outcomes reflect the inflexibility of China's education system. Students spend their entire four years at university studying a single subject, be it accounting or computer science. As a result, they have few skills that can be applied elsewhere if the job they expect fails to materialize. There has also been a tendency to push students into fields like engineering, even though the Chinese economy is now beginning to shift from manufacturing to services.

Thus, China needs to move quickly on education reform. It needs to provide its university students with more flexible skills, more general training, and more encouragement to think critically and creatively.
Moreover, there is the problem of less-skilled and less-educated migrants from the countryside, who are consigned to second-class jobs in the cities. Not possessing urban residency permits, they lack even the limited job protections and benefits of workers who do. And, because they may be here today but gone tomorrow, they receive little in the way of meaningful on-the-job training.

The migrants' predicament underscores the need to reform hukou, China's system of residency permits. A handful of provinces and cities have gone so far as to abolish it, without catastrophic consequences. Others could usefully follow their lead.

Finally, China needs to get serious about its corruption problem. Personal connections, or guanxi, remain critical for getting ahead. Recent migrants from the countryside and graduates with degrees from second-tier universities sorely lack such connections. If they continue to see the children of high government officials doing better, their disaffection will grow.

The ability of disaffected youth -- university-educated youth in particular -- to use social media to organize themselves has been on powerful display recently in Tunisia, Egypt, and elsewhere. Last month, it was still possible for the Egyptian government to halt all Internet traffic and for the Chinese authorities to block the Chinese word for "Egypt" from its Twitter-like service Sina. But in social media, as in banking, the regulated tend to stay one step ahead of the regulators. Such shutdowns will be increasingly difficult to enforce.

If Chinese officials don't move faster to channel popular grievances and head off potential sources of disaffection, they could eventually be confronted with an uprising of their own — an uprising far broader and more determined than the student protest that they crushed in Tiananmen Square in 1989. Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar.

Copyright: Project Syndicate, 2011. Exclusive to the Sunday Times.

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