Mooney

We spent the first four days in Beijing, and the remainder of the week in Shanghai. Mornings were devoted to presentations by Chinese and U.S. officials based in China and afternoons to touring places of historic interest (including the Great Wall and the Forbidden City) and business interest (for example, the Shanghai stock exchange and a tour of a factory in the new city of Suzhou).

Coincidentally the company hosting the factory tour in Suzhou was Rogers Corp., well-known to plastics industry participants as a long-term leader in the development of specialty plastics compounds for telecommunications equipment components.

In contrast to my visit to China last year where the focus was squarely on plastics (the extent to which Chinese rotomolders pose a competitive threat to their North American counterparts), I filtered all my observations on this second visit to the Middle Kingdom through the prism of economics. In the course of my doctoral program I had concentrated on the twin fields of international trade and economic growth and development.

Here I was in a country — not so long ago economically, if not culturally, undeveloped — that for the past 3 decades has been grafting principles of capitalism and foreign direct investment to its command economy model. In the process it has succeeded scoring spectacular gains in its export industries and generated double-digit economic growth year after year — a record unparalleled in recent economic history. What could I learn listening to these lectures and venturing out into Chinese cities and countryside?

Observing the ultra-modern Chinese airports, the stunning architecture of the skyscrapers, the steady stream of cars on the broad boulevards (1,000 new cars added daily to Beijing traffic), I thought back to the work of W. Arthur Lewis who studied at the London School of Economics and wrote a path-breaking article in 1954 entitled “Economic Development with Unlimited Supplies of Labor”. Lewis, who grew up in Saint Lucia in the West Indies, had first-hand experience with conditions in poor economies. He extrapolated from this experience, contending that poor countries suffer from a dual economy. On the one hand there is a small, well-endowed capitalist sector, and on the other hand there is a large, poor traditional (mainly agricultural) sector.

Lewis believed that it is difficult for undeveloped countries to escape poverty since the traditional sector will always be highly labor-intensive, marked by low productivity and non-profit-maximizing activities. Lewis also believed that poor countries would derive little to no benefit from international trade. They would be stuck exporting labor-intensive commodities and importing capital-intensive manufactured goods.

Any progress raising productivity in the traditional sector would lead to a global commodity glut and consequent deterioration in these countries’ terms of trade, yielding a dreary pattern of immiserizing growth. There would be a limit shifting labor to the more productive manufactured goods sector, and the country would therefore never ascend the economic growth and development “ladder.”

China’s recent pattern of economic growth and development contradicts almost every one of Lewis’s arguments. The Chinese have steadily moved up the economic development “ladder” by gradually transitioning from exporting products of agricultural and other extractive industries to light and heavy manufactured goods. They have organized the migration of millions of workers from the traditional sector to better-paying jobs in modern manufacturing industries and superior living quarters in the cities. Suzhou is a classic example. It already has 10,000 Chinese companies and 3,600 foreign companies operating plants, and it has far-reaching plans for more factories, more residential housing, medical facilities, even a university.

Be that as it may, the Chinese government, which orchestrates much of the country’s development, is well aware that it confronts challenges continuing along its strong economic growth and development path in the face of global recession. Already 70,000 plants in Guangdong province have closed, and migrant workers have been sent home. Chinese consumers, in the absence of a social safety net, have raised their historically high savings propensities even higher and cut back spending. Foreign investment has declined in reaction to rising wage rates and increased concern over the violation of intellectual property rights, and foreign consumers are increasingly concerned with the safety and integrity of Chinese food and non-food products.

Thus in terms of classical Keynesian analysis in which a country’s GDP is composed of consumption (C), investment (I), government (G) and net trade (X-M), the only factor sustaining Chinese economic growth at this stage is the government’s stimulus package. Government is normally a poor substitute for private sector planning. It is difficult envisaging Chinese productivity, which ultimately drives economic growth, improving in this scenario.

The Chinese communist party is acutely aware of the possibility of social unrest if the vaunted Chinese economic growth engine stalls. This is why they have been so quick to respond to recent crises (e.g., the destruction caused by the earthquake last year) and the loss of export business. They are attempting to shift the emphasis in economic planning from exports to domestic consumption, creating a larger and politically more complacent middle class. They have also introduced a new labor law that shifts the balance of power from employers to employees. This new labor law will surely concentrate the minds of U.S. and other foreign companies contemplating setting up either their own operations or joint ventures in China in the future.

Peter Mooney is president of Plastics Custom Research Services, a consulting firm in Advance, North Carolina.