China and the new geography of global economic power: Brave New World or more of the same
Guyana and the wider world
By Dr Clive Thomas
Stabroek News
November 14, 2004
Last week's column explored the claim made by several economists that a 'new global division of labour' has arrived and that there is an altered geography of global economic power compared to what prevailed as recently as two decades ago. I had presented some of the data which are offered to substantiate this claim, and highlighted the unprecedented pace of industrialisation of the developing countries taken as a group and the breathtaking advances and contributions they were making to global industrialisation and trade. The main caveat that I introduced, however, was to stress that much of this achievement was due to the performances of the East Asian economies including China. This week I shall explore China's contribution further, because I believe it is the most staggering accomplishment of all, and may well in fact exaggerate the overall position of the developing countries in the world economy.
Enter the Chinese Dragon
To begin with, if one took into account China's size it should not be a surprise to discover that for some time now it has had the largest industrial sector for all the developing countries. What is truly remarkable has been its performance over the past two-and-a-half decades. Thus, whereas in 1980 China had accounted for just over 10 per cent of the total manufacturing sector of all the developing countries, it has since tripled that share and today accounts for just over 30 per cent of the total. The annual growth of its manufacturing sector over this same period has been just over 11 per cent. The significance of such a high sustained rate growth can hardly be exaggerated. It was double that obtained by the rest of the developing world as a group. And, further it was nearly five times the rate achieved by the industrialised countries, which as a group grew by just under 21/2 percent per year. With such disparities in growth rates over more than two decades China would have undoubtedly caught up with the more industrialised world.
In last week's column I had referred to the increasing quality improvements, technological sophistication, and complexity of manufacturing output and indicated that this can be reflected in four classes of manufactured goods which analysts have identified for these purposes. These are: 1) resource-based manufactures 2) low-technology manufactures 3) medium-technology manufactures and 4) high-technology manufactures. Products increase in their quality, sophistication, and complexity, as they move from class 1 to 4. Most of China's rapid growth has been in classes 3 and 4 - the medium and high-technology products. Overall, since 1980 its share today of the medium and high-technology products increased from 15 to 21 per cent of the developing countries' total, while for resource-based products it rose from 10 to 19 per cent, and for low-technology products it increased from 14 to 18 per cent of the total.
China and the WTO impact
A major recent development has been China's membership of the WTO. It would have been incongruous to say the least, if we had an international organisation like the WTO regulating global trade, and the world's major trading power was not a major part of it. From this perspective, China's recent admission to the WTO, despite initial opposition from the USA and to a lesser extent Europe, was inevitable. However, based on China's recent experience of exceptional trade performances, there is little doubt that its membership of the WTO will boost its trade considerably. Indeed, because the WTO is committed to more and more trade liberalisation, over the next two decades the world economy might well witness an even more dramatic transformation of China's economy. What this portends for the developing world it is difficult to say at this stage, but much of it will depend on whether China goes the route of all the other great economic powers before it, and simply settles down within the WTO framework to exploit the weaker economies, while paying lip service to the ideal of leaving no country behind.
Already we have had several practical examples of expressions of concern over China's trade and its effect on other developing countries. Included among these are those that had until recently been the stellar performers of the developing world! Thus Mexico has felt the force of China's competition. UNIDO reports that since 2001 about one-seventh of Mexico's maquiladora plants serving North America have been forced to shut down mainly on account of competition from China's factories. Remarkably China's export to the USA has been growing at 20 per cent per year (2002) when Mexico's, despite its membership of NAFTA, has failed to grow at all. It is anticipated that when final figures are out for this year, China will be found to be the second largest exporter to the USA (Canada is the largest).
'Awakening giant or monster'?
Concerns have also been expressed by China's East Asian neighbours, whose spectacular industrialisation and trade achievements in the 1980s and early 1990s had previously led the way in showcasing successes by developing countries. These focus on China's wage rate and productivity levels, which are considered to be much more favourable than theirs, thereby potentially spelling doomsday for many of their present manufactured exports. To take a well-known example, garments; it is expected that when the garment trade is liberalised under the WTO next year, China could end up supplying half the world's exports of garments by 2010. At present China is supplying 20 per cent. Such an increase will be largely at the expense of many of its Asian neighbours. Similar results have been predicted for a number of other consumer products, ranging from shoes to televisions.
These developments have led some analysts to draw comparisons between China and Manchester during the Industrial Revolution. Some even label China as the 'workshop of the world,' much as Manchester was in the heyday of the Industrial Revolution.
Competition from China puts enormous pressure on the profitability of firms in other competing countries, often driving many of them to the edge of survival. The increasing frequency of such occurrences has led one writer in The Economist magazine to ponder whether China is an "awakening giant or a monster." From the perspective of its competitors, China is clearly both. In truth, admiration and awe for its industrial achievements mix uneasily with fright and a sense of futility that China is just too big a competitor for far smaller economies to engage.
Next week I will spend a little time considering a couple of related questions: Can China maintain this stupendous growth or has its growth hit a plateau? And, if it has not, what options remain for small competitors in the global economy?
China's miracle growth: Will it soon bottom out? - Can the winner take all?
Last week I posed the questions as to whether China's explosive growth would soon reach a plateau and then bottom out. And, if it did not, what did this portend for much smaller developing states in the global economy. Will China's gain be every other country's loss? In today's article I shall respond to both.
Is there a plateau immediately ahead?
As we noted last week China has already overtaken the smaller East Asian tigers. It has also comfortably outstripped the performances of the Latin American giants like Brazil, Mexico and Argentina. With global growth at just lower than 5 per cent last year, the Economist has estimated that China and the USA together contributed about one-half of that growth. In this equation, while American consumers led the way in global demand, Chinese producers led the way in global production.
Although much of the data I had presented in earlier weeks focused on industrial growth and the manufacturing sector, it should be recognised that China is also a powerhouse in the services sector. Thus the World Travel and Tourism Council (WTTC) estimates that China's travel and tourism sector will contribute to its GDP a total of about US$184,000 million for 2004, making it the world's eighth largest tourism sector. The world's leader is the United States. Equally of note is that the WTTC estimates that in regard to employment, China's travel and tourism sector already employs the largest number in the world, with as many as 62 million persons working in the sector. When these and other similar achievements are taken into consideration, it is not surprising, therefore, that in terms of global GDP calculated at purchasing power parity (which is done in order to eliminate the effect of exchange rate differences), China is the world's second largest economy, again behind the United States. China's export boom that I reviewed last week has already made it the world's third largest exporter, and there is the likelihood that by 2015 it will become the world's largest exporter, ahead of the USA and Germany.
Because China is home to the world's largest population (accounting for about 20 per cent of the global total) its global achievements on a per person basis are far more modest than the absolute totals suggest. This circumstance however, is to my mind the best indicator/measure of China's capacity for future rapid expansion. From this perspective this is far from being exhausted, even though there will be cyclical ups and downs in its economic performance.
The indicator clearly suggests that China's growth will not bottom out in the foreseeable future. The fact that the value of China's per capita exports is only about US$300 and this represents only one per cent of Singapore's per capita exports, and less than one-tenth that of other neighbours like Malaysia and the Republic of Korea, indicate a massive scale for further growth. Likewise the real per capita value of China's manufacturing output is about US$400, which is again less than 8 per cent of Singapore's.
Furthermore, because much of present-day economic growth depends on skills, knowledge, know-how and R&D, China has undertaken massive investments in these areas over the past decade.
To take an example, China has doubled its R&D expenditure as a share of its GDP in this period, with that share, rising from 0.6 per cent in 1990 to about 1.2 per cent today. Significantly, about 60 per cent of this R&D expenditure is being undertaken by companies, and not as has been traditionally the case in China, the government. All this signifies in my view China's increasing orientation towards competitiveness, innovation, and the continuous upgrade in the products themselves.
My response therefore to the first question is that there is no immediate likelihood that China's explosive growth will soon come to an end.
Many lay persons (and I might add economists as well) seem to be unaware that international trade is not necessarily a zero-sum game in which one country's achievements are mirrored by other countries' losses. International trade does not operate on the principle that winner takes all. As China's economy grows, it will not only require more imports (that is some other countries' exports) but it will increasingly be in a position to exercise greater influence and control over global events and to play a major role in shaping global policy. The hope if not expectation of many is that, coming out of its socialist tradition, there may be a greater bonding on China's part with the aspirations of the developing countries. In which case, China could well exert its influence to build solidarity and resist the 'dog-eat-dog' and predatory characteristics of the present global trading economy. In this situation developing countries may discover that South-South trade can, at this time, take on a new and far more effective meaning than ever before.
None of these speculations I mention here would be possible if developing countries did not also begin to respond pro-actively to the competition they presently face. The intensification of this in the years to come is indeed inherent in China's rise. China undoubtedly benefits from low wage costs because of its high worker productivity relative to the wages paid. Developing countries with higher real wages and lower worker productivity will have to find new markets and new areas of specialisation in which they can raise their productivity levels. Of course, in the long run, China's wage payments will at some point outpace its growth in worker productivity. When this occurs there will be sustained increases in China's real wage costs.
China will then find that it needs also to pursue new areas of specialisation and competition opportunities will arise for other countries' exports to China and for competing with China in third markets.
When all is said and done a new geography of global economic power is being consolidated, but it is far too early to declare this a reality. China's economic emergence already makes that an irreversible outcome. The new global division of economic power, however, would involve not only the developing countries but it would also require the drastic restructuring of the economies of the rich countries in today's world. A challenging future therefore lies ahead.