August 03, 2005

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Made in Zimbabwe

As far as Oregon weather goes, the last two weeks have been hot with temperatures in the 90s and no clouds to speak of. Between our house and the ocean is the Coast Range, a largely wooded expanse about forty miles thick where we live. In the evenings at the beginning of summer, when the weather was more unsettled, a bank of clouds would often loom above the hills that start a mile west of our house.

This past weekend, my sister, niece, and I drove our winding way through the hills to Lincoln City to do some shopping at an outlet mall there. The drive was sunny throughout, but helpless clouds wisped over the last hill before the ocean should have appeared. The marine layer managed to stop exactly at the top of the beach: driving on the Pacific Coast Highway you were in the sun, the moment you drove into the parking lot next to the beach the sun faded away, and looking across the parking lot's edge to the ocean the surf disappeared into the fog.

After doing our shopping we tried to make it to the beach, but in the end we couldn't find a parking spot and so drove back home, stopping at The Otis Cafe, a pleasant eatery ten minutes from the coast, for a late lunch. I bought a couple of shorts from Eddie Bauer and some socks from Jockey. I can't remember where the socks were made, but the shorts were made in Zimbabwe.

It reminded me of what I found two Christmases ago: everywhere I went shopping for clothes in Peoria the tags told me that the items were made in Cambodia, Indonesia, Vietnam, Bangladesh, the Philippines, and sometimes China. For someone who hadn't questioned much the notion that China was increasingly the world's factory, it was a fly in the ointment to see so many other places also vying to supply America's clothing market.

For over twenty years now China has managed to benefit from a fortuitous set of circumstances. It has a relatively educated and low-wage workforce. It has set up a legal regime very friendly to foreign companies. It has actively sought out foreign investment. It has actively sought to import foreign technology. And it has not had to compete against other countries for that investment or technology.

Reasonably though, how long can that last characteristic of China's success continue? How long can it depend on the incompetence of other countries' leaders for its own success? China's growing heft in East Asia and the world more generally is real enough, but I can't help but think that this weakness will grow more dangerous as time goes on.

The scale of China is often too shocking to completely comprehend. I can't imagine all of the problems its leaders face: agrarian unrest as urban centers rapidly modernize, the East/West economic divide, managing all of the nationalities of Beijing's empire, finding an international role conmeasurate with its clout. And of all of this without even pretending to have the legitimacy of being democratically elected.

For these twenty and more years what Beijing has had was the legitimacy that economic affluence can buy. Only once has it dropped the ball, allowing inflation to careen out of control at the end of the 1980s, one of the reasons why Beijing's citizens decided to support the university students at Tiananmen rather than stay indoors. Since then Beijing has managed the economy relatively well.

This success fosters admiration, which is always nice to have, and emulation, which is always dangerous to have. Vietnam has begun to open its economy and is attempting to enter the WTO. India in the last fifteen years has finally turned away from its failed socialistic economic experiments and found the better friend of the poor is capitalism. And Japan has long moved many of its factories to Southeast Asia, to countries such as Malaysia and Thailand that have similar economic characteristics as China.

None of these countries would have been competitors for China's manufacturers twenty years ago, but they are now. And I don't think this is fully appreciated by many within China. The sun is setting on the "easy" part of China's modernization.

Most of these economies are found in Asia. Perhaps because of proximity or necessity they cannot allow themselves to forever trail China. There are, however, a whole host of economies in Africa which could compete with China if only they would set their internal houses in order. (Why, if even Zimbabwe can now export textiles considering the mess it is in, then what of other countries less maliciously run?) And they have the benefit of largely English-language educational establishments, something which could ease their entry into world markets.

I do not see all of these countries forever remaining mired in poverty. Who wants to always be poor, especially when they see a fellow undeveloped country race past them into modernity?

Investments will not necessarily flee China and move to other countries: the world's economic pie is not static and not a zero-sum game. However, future investments will be made across a greater number of countries, China will cease to suck up so many foreign dollars, and the greater competition offered by other countries will cut into the margins that allow China to use its profits to solve its other pressing problems, whether they be an inadequate transporation infrastructure, agrarian reform, continued expansion of educational opportunities, or many others.

China's current social stability is a precarious thing, not least because unrest has no formal and legitimate channels to go through. Protest sheets sent to Beijing or riots in Zhejiang are not effective ways for a society to regulate itself. Democratic elections are: they provide a way for citizens to take responsibility for themselves. Quite simply, no other method of choosing a government is now considered more morally legitimate by most people in the world.

As long as China's economic performance benefited more people than it hurt, this has not developed into a serious issue. However, now as the world economic environment changes and one of the key ingredients to China's economic success, a lack of competition, slowly disappears, it seems to me only a matter of time before economic pressures translate themselves into social ones which the political system is ill-equipped to handle.

The Olympics in Beijing and the World Expo in Shanghai are the pinnacles of China's current economic and political model. Whole neighborhoods in both cities are being bulldozed by their respective municipal governments and literally millions of residents are being moved to make room for the roads, subways, and venues necessary for both events. Billions of dollars are being spent to make everything look good and indeed, for the duration of both events foreigners are likely to be beguiled by how nice everything looks. These are not insignificant achievements, but neither are they much help for discerning China's future.

People may be willing to have their lives upended for the sake of their country's international glory. They may be willing to not express their true opinions if they are spending all their time working hard to improve their family's economic well-being. However, after the glory has passed and if it proves increasingly difficult to get ahead in life because factories in other countries are cutting into your salary or profits then it is not unreasonable to see social cohesion, to the extent that China has it, fray and then unravel. And without elections to channel that anger and provide an opportunity for bad policies to be replaced by new ones, it is hard to say that some unexpected clouds are not appearing on China's horizon.

posted by Andres on 08.03.05 at 08:25 AM in the China economy category.


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Progress and Friction
Excerpt: How will China handle its economic and political growth, while dealing with social and infrastructure challenges that range from "considerable" to "critical". I've always appreciated Andres Gentry's thoughtful approach, and I just found this on Simon W...
Weblog: ShenzhenRen
Tracked: August 3, 2005 09:40 PM


Your economic arguement of China's economy is flawed for a number of reasons both historical and theoretical. Southeast Asia was actually a manufacturing center well before China was. In fact, per capita incomes are still slightly higher in Malaysia and Thailand than they are in mainland China. You are under the mistaken impression that manufacturing industries in these countries can become competitive now when they were not decades ago. This is actually backwards as 20 years ago, modernization in China was just beginning and SE Asia was the primary competitor. The reason why I do not expect individual SE Asian states or African states to be very competitive (excepting in specialized areas) against China is because of one fundamental economic principal, economies of scale. Simply put, China's mass and own internal market gives it an (perhaps overwhelming) advantage in keeping costs down. It is not simply the price of labour that is attractive to economic investment but also overall efficiency. There are already a number of developing nations that have lower wages than China but whos infrastructure is subpar thus cannot remain competitive. Another reason why the China model cannot easily be emulated is because of it's simple size. You yourself made mention of it, but China's economy provides an advantage for Chinese business interests when negotiating for foreign investment. This manner of leverage can hardly be acheived by Vietnam let alone any of the myriad of developing African states. I for one cannot see Zimbabwe having the clout to coerce GM to invest in joint-companies and technology sharing. Perhaps I am being morbidly pessimistic, but I've come to view most of Africa as essentially a lost cause for the near and mid-term future. Also I've come to the conclusion that English language proficiency in aiding economic progress is largely exaggerated. Emperical observations suggests no consistant pattern of correlation and I suspect that the issue is irrelevant to modernization as long as the fundamentals of economic development exist.

posted by: Jing on 08.03.05 at 09:15 AM [permalink]

Thought-provoking, Andres, though Jing has a point: Other Asian countries have been manufacturing centers for quite a while.

Say, China's been investing in Zimbabwe since Mugabe "created" so much unoccupied capital. Do you suppose those Zimbabwean shorts might actually be from a Chinese-owned factory?

posted by: Sam_S on 08.03.05 at 04:21 PM [permalink]

Hmmm, yeah, some SE Asian countries did start industrializing before China and entering world markets before China, but that doesn't stop them from being competitors today, and I don't think it rises to being a fatal historical flaw in my argument.

As for Africa, while sometimes I too think it is a lost cause, it's simply not reasonable to believe that a failed state will always be a failed state. If that were the case then we should have given up on China a long time ago.

An English-language educational establishment does not guarantee in any way the economic success of a country, but having large numbers of English speakers will at least make it easier to connect with other international businesspeople for no other reason than because English is the accepted international business language. It's not key, but it doesn't hurt either.

Moving to your main point, I am unconvinced that size is all. If that were the case then China would have been the most developed country on earth since time immemorial. That's not the case.

While economy of scale is important, I don't think it alone determines the success of a nation. There must be other attributes, education, infrastructure (like you said), and a fair legal system, that give businesspeople confidence to invest in new factories. China increasingly has these attributes and that helps explain why it has managed to finally develop in the last thirty years.

However, there is no reason, in my mind, why other countries cannot also get those characteristics. In addition, while China, as a single country, will probably have an easier time building out infrastructure and writing a business-friendly legal regime, individual countries can work together to achieve the same goals.

The European Union is the most famous example of increasing economies of scale beyond national borders, but there are others. The maquiladora phenomenon on the US/Mexico border is one. The St Lawrence Seaway between the US and Canada is another.

In addition, there are increasing numbers of companies that have their manufacturing plants spread across many countries: they create their own economies of scale. Your example of GM is a good one: they build parts for their cars on practically every continent. Toyota car plants in America are another example. Japanese companies that have moved their plants to SE Asia are another example. In these situations, companies have looked at the various advantages to be garnered by working in different countries and adjusted their manufacturing strategies accordingly.

Just because China is big does not mean that these multinationals are putting all their plants in China. This is why I say that competitiveness between different countries is going to lead to some future investments to not go to China and thus affect China's economy. Being small is not a handicap, especially in an age where trade barriers between countries are getting lower and lower.

Simply, economies of scale are not dependent on national borders in an era of increasing international free trade, so I don't think my argument has an irreparable theoretical flaw. And this is without even talking about India, a country that shares a single sovereignty, like China, a population over a billion people, like China, and is making an effort to use capitalism and world trade to develop out of poverty, like China. If, as I believe, companies can be reasonably expected to invest in well-run smaller countries like they do in well-run larger countries, then this expectation should be more than met when comparing two well-run larger countries.

Whether China is competing against a smaller country or India, the result will be the same: competitiveness will put pressure on profits, thereby putting pressure on tax receipts and wage levels and making it more difficult for Beijing to meet the many needs of its population. And while that will not make the job of governing China impossible, Beijing's lack of democratic legitimacy will mean that it cannot afford to make any serious mistakes, a margin of error that a democracy does have.

posted by: Andres on 08.05.05 at 09:04 AM [permalink]

Being small is not a handicap, especially in an age where trade barriers between countries are getting lower and lower.
Being small IS a handicap! The only game of this world is BIG bully SMALL! Trade barriers persist forever.
posted by: lin on 08.05.05 at 10:49 AM [permalink]

Jing, I think you're right in many ways, but I feel you over-value China's economy of scale. If the system here were more efficient and "rational", for lack of a better word, it would be more important, but there are systemic issues which keep the large scale from being as important as it could be.

The lack of transparency (the tradition of jealously guarding information, to the point of blocking helpful information) is one of the biggest ones I can think of. I haven't worked it out eloquently, but I can give you a typical example:

One of my company's subs sells a specialized material (inside China), but it's a large market where normally supplies and prices would be efficiently handled, with clear alternatives available and known to all players. But since each of our corporate customers is a small fiefdom who won't divulge needs or plans, each sale is like reinventing the wheel.

It often takes several weeks and a few meetings to consummate a transaction, because all the factors in a deal have to be negotiated and haggled over, rather than operating as though we're in a liquid market. Emergencies come up because the customers won't tell us in advance what they might need, necessitating urgent air shipments of material from abroad. As a consequence, we have to build a 100% profit margin into our price because the deals are so convoluted and troublesome. The same deal in what I'll call a rational market (the US) would take 30 minutes, and can be done for a 10-20% markup because it uses so much less manpower, and less carrying cost.

Good roads, steady electricity, and a big market can't compensate for this kind of obstacle to business.

Then again, Vietnam may be even worse. That's one I don't know about, though I know the labor costs are lower there.

posted by: Sam_S on 08.07.05 at 01:36 AM [permalink]

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