17 June 2008

Limits to Growth: China and India

A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain. NYT
Both China and India are facing problems with shortages of workers, rising wages, corruption, and inflation, which are causing large western industrial companies to begin building new factories in other countries such as Vietnam and the Philippines.
Inflation in China — more than 8 percent in February, March and April and 7.7 percent in May — raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods exported to the United States.

China is also phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.

...A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.

But how long those analogies will hold — in a world where economies evolve from agriculture to manufacturing to services in a couple of decades — is unclear.

As foreign investors leap into each new country, they drive up the cost of workers and goods, a dynamic that makes it less likely that a shift in investment patterns will hold down inflation in American imports.

...even in India, workers with industrial skills or the ability to speak English are increasingly scarce — and their wages have been rising by 10 to 20 percent a year.

That has led to worries about India’s long-term competitiveness, even at companies investing heavily there, like Ford, which is planning to spend $500 million on factory expansion. __NYT
High fuel costs will soon enter the picture as well, perhaps inducing some western corporations to think closer to home when planning new factories. As automation takes over more of the manufacturing process, labour costs are less of a concern, and shipping costs take on greater relative importance.

China's remarkable growth rate has been part real and part bubble. Many analysts have been predicting an unlimited steep trajectory of growth in China for at least the next decade and a half. But the bloom may have partially gone off the rose. Chinese government duplicity has papered over much of the underlying instability in Chinese financial institutions and in Chinese society itself. Ham handed censorship of the internet and all public discourse, along with liberal arrest and harassment policies against perceived political dissidents, have projected a mirage of political stability to western analysts.

We will have to see how things look after high fuel costs, inflation, slower growth rates, less foreign investment, newer ways to circumvent government censorship, and less favourable international attention hit the CCP fan.

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Blogger Bruce Hall said...

Good post!

One of the things to consider is that production from U.S. or other companies' factories is not all destined for external markets. The fact that wages have increased and the job market is so strong is the beginning of a vastly expanding internal market in China.

While this may reduce the price advantage that China has enjoyed, it will allow Chinese plants to use the same technique that Japanese companies used for years: dumping goods to erode the competitiveness of other countries' manufacturers. While that is somewhat expensive, it is effective... it worked well in the U.S. and probably will continue to do so.

Wednesday, 18 June, 2008  
Blogger Snake Oil Baron said...

There will be more challenges for nations like China to make the transition from provider of cheap labour to middle class consumer economy.

The world might still be able to use cheap labour in Africa and central Asia but after those sources become used up the world economy will need to make a permanent shift to being productivity centered. The potential return on investment in the field of automation will rise significantly, especially if a labour shortage causes quick prosperity gains in the remaining third world nations and fertility rates drop as the have elsewhere.

Wednesday, 18 June, 2008  
Blogger neil craig said...

All of the problems except, arguably, new ways to avoid government censorship, apply to western countries too.

The path from sweatshop economy to developed one is a well trodden one - by Japan, Taiwan & in an earlier era places like New York. China has a remarkably large amount of electricity usage compoared to GDP (50% more than the USA's whereas India's is 40% less) & is building other infrastructure apace.

I think the problem is not that they are doing so well but that we aren't doing as well as we should. We could have the same rate of growth as them if we didn't have all this global warming/"environmentalsit"/PC/regulatory baggage holding us back.

I would prefer western civilisation to be the first to achieve the next stage in human history but if we blow it it is good for humanity that China is in a position to be the reserve team.

Wednesday, 18 June, 2008  

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