(May 29, 2009) — In April last year I was privileged to be part of an SPE group invited by the Chinese Plastics Industry Association to come to Shanghai to provide a series of presentations relating to the rotational molding process. That was my first foray to China, and it was quite eye-opening.
Then earlier this year I joined my sister and several other U.S. corporate board members invited to China to observe evolving economic, political and social conditions in that country and determine whether there might be future business opportunities for their companies. The first four days were spent in Beijing, and the remainder of the week was spent in Shanghai. Mornings were devoted to presentations by Chinese and U.S. officials based in China and afternoons to touring places of historic interest (e.g., the Great Wall and the Forbidden City) and business interest (e.g., the Shanghai stock exchange and a tour of a factory in the Suzhou Industrial Park).
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 first visit to China, where the focus was squarely on plastics (e.g., 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 three 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 ultramodern 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 economics at the London School of Economics and wrote a path-breaking article in 1954 titled 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 nonprofit-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 their 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 Industrial Park, created in 1994, 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 been 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, investment, government and net trade, 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 in Sichuan 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 also introduced in January 2008 a controversial Labour Contract Law that shifts the balance of power from employers to employees. Under this law every employee works under the terms of a signed contract. This contract makes it extremely difficult to fire an employee. It also restricts the work week of every employee – from the general manager to the maintenance man - to 40 hours; beyond that limit overtime pay is mandatory. 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.
The consensus among economists is that the Chinese economy will recover from the global recession before those of the United States, Europe and Japan. Chinese banks and consumers didn't engage in the extreme leveraging of their trading partners. Yet I sense that the Chinese economy of the future will be quite different from the template of the past three decades.
It will be more inward-looking than outward-looking, more focused on bolstering internal consumer demand than satisfying external consumer demand. It will be less open to incoming foreign direct investment and more focused on its own investments in foreign assets and resources required to fuel future growth. It will continue to serve as a global growth engine, ironically through increased imports.
The resultant closing of its gaping trade surplus will contribute to a lessening of the global imbalances that have marked international trade over the recent past.
Mooney is president of Plastics Custom Research Services in Advance, N.C.