Dispatches From the Moderate Left

Wednesday, September 28, 2005

Book Review: China Inc.

I am not a globalisation skeptic. Even if the nay-sayers are completely right and that globalisation merely represents the transfer of low skilled jobs from the first to low wage third world countries which results greater unemployment in the first world (and cheaper goods and bigger profits), I would say that this is, generally, a good thing. The people who are working these factory jobs are paid a pittance, by our standards, but for the vast majority of workers these sorts of wages represent a great improvement in living standards – for them and especially their families. And these people are far, far more needy than anyone in developed countries is. To say that a massive increase in employment and opportunity for the poorest of the world's poor is a bad thing is frankly immoral.

Anyway, I just wanted to get that out of the way. The beauty of this book is that it doesn't actually push that line. Nor does it push an anti-globalisation line. It just describes. This book, which was released earlier this year and so, thankfully, has up to date statistics, is refreshingly ideology free. It also presents very few opinions, except the one at the heart of the book – China's economy is big, growing and can't be ignored. He notes that if one uses a purchasing price parity measurement (ie. Looking at the purchasing power of the Yuan in China compared to other countries) China's economy (GDP of about $6 trillion) is already the world's second largest and it is two thirds the size of the US.

The pace of development he describes is electric. Massive urban construction, an incredibly large workforce (the total workforce is larger than the rest of the developed world and there is a roving unemployed group estimated at 200 million – larger than the US workforce) and an enormous home grown entrepreneurial class. He describes the rise of this latter group in some detail. Much of the transformation of China's economy was started by rural entrepreneurs who had been stifled by previous government policies. Their rebellion and their corruption of the enforcers of these laws, as I described in an earlier post, was the catalyst for China's current growth – capitalism 'with Chinese characteristics'.

What most interests me about this book is the description of the effect of this on the rest of the world. Confirming the conclusions of macroeconomics 101, China's rise demonstrates the substitutability of labor and capital. Chinese labor is so cheap that most manufacturing tasks are done by hundreds of people rather than machines, as in the rest of the world. Jobs like the filling of small plastic woulds for the leaves on fake Christmas trees are done by individual workers, one section at a time and cheaper than anywhere else in the world. The rise of China has created a global 'China price' which manufacturers the world over are being forced to match.

Some of the western manufacturers described are able to do so for now, thanks to extremely advanced and specialised capital and, to some extent, a quality advantage. But both these advantages are being eroded as more and more of the world's advanced manufacturing machines (once the near sole product of Germany) are being made in China, giving them access to this technology. And the quality gap between Chinese products and the best the developed world can make is getting smaller and smaller thanks, in no small part, to the theft (either directly or through economic blackmail) of western firms' intellectual property.

I think an irreversible long term trend is described here. China's rural poor population is simply so vast that a very large percentage of the world's low skilled manufacturing jobs are going to go to China and the manufacturing which is done in the western world will be increasingly specialist and capital-intensive. But people focus too much on this short term effect. Think about the bigger picture. This manufacturing is creating massively lower prices for all sorts of consumer goods. Wall Mart and the like, thanks to China, sell high quality products at incredibly low prices, reducing the real cost of living and producing massive savings for households worldwide. To take one example the real price of an equivalent model car has fallen since the early 90s, but there has, of course, been an enormous increase in quality in that time.

So what does this mean? People have more disposable income because their basic household goods like computers, cars, furniture, white goods etc. are enormously cheaper. This money doesn't just disappear, it gets spent on what were once luxury items. Increasingly in developed countries we see the middle class employing workers to do jobs which once would have been done by household members and spending more time eating out and shopping. Further, this book describes the globe trotting habits of China's new middle classes. And there's a whole lot of them. These jobs, service, tourism retail and hospitality, are exactly the same sort of low skilled, low barrier to entry jobs which have been lost from the manufacturing sector. But they cannot be exported (although McDonalds has found a way of outsourcing drive through order taking).

The big problem here is that these jobs, for the most part, don't pay anywhere near the level of these manufacturing jobs and, often, not even a living wage. But the solution to this is not, as some bizarrely claim, to discourage the creation of these types of jobs. It's to find a way of making them a viable way of earning a living. Market forces aren't sufficient to do this job. The reason these jobs pay low wages is that they are incredibly hard to unionise. Manufacturing and large-scale construction jobs, with large, static, concentrations of workers have been historically easy to unionise meaning that they can support a decent living standard for these employees. The same is not true for the service industries, with highly decentralised workforces and high turnover.

What would be the effect of government intervention in the wages of these sectors? It would not cause the jobs to go overseas because they can't. It would also not cause much increased unemployment because it is very difficult to find a capital substitute for, say, a waiter. Yes, some unnecessary jobs might simply be eliminated (eg. Bag packers at the end of supermarket aisles), but for the most part the effect of increased wages would simply be higher prices. And that is not a bad thing. Unlike higher prices from protectionism which prevent products being made in the cheapest location where workers most need the jobs (eg. China), these higher prices simply reflect a different, but equally efficient, distribution of resources towards workers from consumers (for those who know economics, it's taking a different point on the contract curve in an Edgeworth box). The key to this not being an efficiency loss is that the jobs must be done locally.

I say this to point out that with the correct government policies – ones which allow people working in service industries to be paid at a comparable rate to those currently working in manufacturing industries, or ones which would facilitate collective bargaining by workers in these areas – globalisation could create a pareto improvement (ie one where everyone is better off). As it is, what will most likely happen is that these sorts of policies won't happen and China's increased prosperity will accelerate the entrenchment of the working poor in Western countries as they are forced to take low paying service jobs. This is unfortunate, but remember that even if this happens there are two good things which will come from China's rise. First, we'll all get cheaper products, which increases our wellbeing. And second, and it is very important to remember this, hundreds of millions of Chinese will have their lives improved in a material way - and their current poverty makes that of our working poor look like luxury.

Well, I got a little side tracked there. This is already too long so I won't go into details of the rest of this book. It covers topics such as intellectual property, bioethics, Chinese universities, the massive rise of engineering skills among Chinese graduates, corporate espionage, discontent at urban clearing, working conditions of factories, transfers of money from factory workers to their rural families, the gender imbalance caused by the one child policy/cultural preferences and environmental degradation. It does most of this very well, if occasionally too briefly. For once, this is a book I can wholeheartedly recommend. It's a good, fairly short, primer on China.


  • It's not just China, several other nations have been going through similar urbanisation / industrialisation processes, such as Turkey, Indonesia, Vietnam, India.

    The really interesting thing is the way parts of Africa are urbanising, but without much evidence of industrialisation. The big question for me is what happens in these cities, like Kampala, Nairobi & Lagos.

    By Blogger JP, at 9:43 PM  

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