China's Labour Costs: How Low Can You Go?

Hot on the heels of my post on "The China Price" comes this new article in the World Economy (an excellent academic economics journal dealing with globalisation issues including a good selection of empirical and policy papers).

Note again that the exchange rate gets a mention - low wages as previously mentioned are not the sole driver of China's growth in exports and manufacturing production.

Library registration required to get full text PDF.

Just How Low are China's Labour Costs? by Janet Ceglowski and Stephen Golub

This paper provides a new perspective on Chinese international competitiveness in manufacturing using relative unit labour costs. We find that Chinese unit labour costs are about 25–40 per cent of US labour costs. They are also low relative to costs in the EU, Japan, Mexico, Korea and most other newly industrialising countries. However, China's relative unit labour costs indicate a substantially smaller cost advantage than that implied by a comparison of wages alone. China's cost advantage derives from large currency devaluations that preceded the establishment of a de facto peg around 1995, and rapid productivity growth in the period since 1995.

China and "New Development Economics"

Abhijit Banerjee posts on the future of development economics. This is an excellent article for anyone interested in Development Economics, more specifically the issue of "property rights".

The China quotes have been extracted (from the Boston Review):

Inside the Machine: Toward a new development economics

On the topic of WHY foreign direct investment in China is so high:

Is it all a matter of luck? Perhaps people are investing in China because everyone else is. Or is it something deeper? After all, despite being run by a party that calls itself communist, China offers a pro-business environment, security of property, and a docile labor force. Is this what investors are looking for? Or is it China’s ability to produce a seemingly endless supply of competent entrepreneurs who run China’s industry (including most of what foreigners nominally run)? Or should we entertain an altogether more daring possibility: that China’s is a healthy and relatively well-educated labor force, tolerant of the inequalities that markets produce because it has known equality—the accidental gift of 30 years of communism?

The truth is that the Chinese machine has so many potential drivers that it is anybody’s guess why it runs. Moreover, no one really knows why all the forces that should have pushed China the other way—a corrupt and opaque system of governance, a decrepit banking system, dwindling natural resources—have not done more damage. But, then, explaining what happens in a country by examining it in isolation is always an unfair challenge. It is easier and also more useful to look for patterns that hold across a large number of countries.

"Chindia" - China and India's Growth and the Environmental Impact

This post is simply a direct link from Ecological Economics. No further comments required - the links speak for themselves plus I am still suffering from post-censorship shock (see previous post).

Willem Buiter's Doubts on Continuing China/India's Meteoric Rise

After airing his positive Morning Coffee spin on China and India's remarkable growth, Brad DeLong highlights Willem Buiter's pessimism re: China and India's recent stellar rise. Buiter identifies financial "credit boom" risks, political risks, and most importantly environmental risks going forward. In follow-up commentary, DeLong adds a fourth, intertwined with Buiter's first: "The People's Bank of China is acting like the world's most enormous hedge fund in reverse."

Willem Buiter
[comment following Ft.Com Economists' forum post, 3/20/07]
Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however.

Second, a domestic political question mark… political risk to growth is seriously under-priced by the domestic and global communities of investors. In China economic liberalisation is proceeding side by side with continued political repression through the monopoly on political power of the Communist Party…. The sustainability of such a social-political-economic configuration has never been tested. India has had an open and representative form of government for sixty years. I believe this to be an important socio-political safety valve….

Third and probably most importantly, an environmental question mark. Environmental supply-side constraints on growth in Chindia… invalidates the growth accounting exercise by Bosworth and Collins, reported by Martin [Wolf]…. [O]utput is seriously mis-measured and a key input - the services yielded by the stock of environmental capital - is ignored completely. For Chindia, this omission matters even in the medium run…. It is the local (national) natural resources of clean fresh water and fertile land (some would add clean air as well) that are not only important domestic 'consumer durables' but also key inputs into the production of the goods and services that are captured by conventionally measured GDP indices…. The water constraint is likely to be the first one to become binding in both China and India, certainly within 10 years. It will impair even the production of those goods and services included in conventional GDP measures….

Chindia urgently needs to re-orients its growth policies towards environmental sustainability. Pricing all water and power use (including agricultural) at long-run marginal social cost would be a good start. Without such a radical re-orientation, the 21st century may well become the century of China and India for a very different reason from the one prophesied by the current uncritical Chindia cheerleaders…

Brad DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:

Brad DeLong
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk.

Finally, a DeLong reader points to Bill McKibbon's recent Mother Jones commentary, Reversal of Fortune, and highlights:

Bill McKibbon
… If we do try to keep going, with the entire world aiming for an economy structured like America's, it won't be just oil that we'll run short of. Here are the numbers we have to contend with: Given current rates of growth in the Chinese economy, the 1.3 billion residents of that nation alone will, by 2031, be about as rich as we are. If they then eat meat, milk, and eggs at the rate that we do, calculates ecostatistician Lester Brown, they will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. They will use more steel than all the West combined, double the world's production of paper, and drive 1.1 billion cars—1.5 times as many as the current world total. And that's just China; by then, India will have a bigger population, and its economy is growing almost as fast. And then there's the rest of the world.

Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways ….

So many environmental concerns, so little time!

China Economics Blog Blocked in China

It was rather a shame yesterday to discover that "China Economics Blog" has been blocked in China.

The aim of this blog is to report on economics issues and to actively help Chinese students considering further education in the UK (by means of supplying links to University rankings, MSc Economics courses, British Council etc.)

Whilst we acknowledge that we may cover subjects that are politically sensitive such as corruption and environment degradation we aim to report the economics and not the politics in which we aim to maintain a neutral position.

This website seems to be the place to test whether your site has been blocked or not.

The Great Firewall of China

Putting in my website confirmed my initial fears. Of course there is the problem of a loss of potential readers but more importantly this censorship, by removing access to important information on students future educational choices, has a cost in the long run to the Chinese economy (a very small one granted but you can see the point) and to the individual student.

Any information on how or if such blocking is ever lifted would be useful or any other comments on those sites that have suffered a similar fate.

Although I will not say which ones, slightly less than half of my China Blog Roll are currently blocked. How did the others escape? Are google blogspot blogs more liable to be blocked (it would appear so)? Who grassed me up ;-)

This article from earlier in the month may provide some explanation:

China ramps up blog censorship

China will intensify controls of the growing numbers of bloggers using the internet to lay bare their thoughts, politics and even bodies, the country's chief censor has announced.

The director of China's General Administration of Press and Publication, Long Xinmin, said the administration was forming rules to further regulate internet publishing, including the country's legions of bloggers, the Beijing Morning Post reported on Tuesday.

"We must recognise that in an era when the internet is developing at a breakneck pace, government oversight and control measures and means are facing new tests," Long told members of China's national parliament on Monday, the report said. Long singled out bloggers as one challenge.

Long said "citizens' freedom of expression would be fully protected".

But China's restless blogging population has been a headache for the ruling Communist Party, which has sought to extend long-standing censorship to the country's fast-growing internet.

By last September, the number of blog sites in China reached 34 million, a 30-fold increase from four years before.

Chinese bloggers have detailed their political views, hobbies and grudges. One famed pioneer, Mu Zimei, a young journalist, attracted a storm of publicity in 2003 by chronicling -- names and all -- her complicated love life. Another blogger, calling herself Liu Mangyan, published nude photos of herself.

More sober-minded bloggers publish combative investigative journalism and punditry on current affairs.

The press and publishing administration and other authorities would be casting new rules to cover internet "publishing activities", Long said.

"The publishing administration authorities have been paying attention to this new mode of Internet dissemination," Long said.

China does not lack rules controlling the Internet; an army of competing agencies often issue regulations.

Last year, China's Ministry of Information Industry issued rules on Internet news content that analysts said was aimed at extending regulations governing licensed news outlets to blogs and Internet-only news sites.

Reuters

UPDATE: It appears that China has blocked all "blogger" sites and that now we are back up and running in China. It is good to see sense prevail. I assume this means that google have been on a charm offensive.

China: purchases of yen not a real option

I have been reading quite a lot recently about Professor Peter Navarro (University of California), specifically his Economist's Voice article "Deconstructing the China Price" - [access free I think, certainly it is for academics]

I was about to post a review on this article - which is well worth reading - when I noticed that Navarro had an letter to the FT published today which also makes excellent reading on the whole "China Surplus" and what to do with it question. A brief article review is now included below.

FWIW I tend to agree with this letter wholeheartedly.

China: purchases of yen not a real option

Sir, Fred Bergsten's recommendation that China should diversify its foreign currency reserves into the Japanese yen shows a fundamental misunderstanding of the current monetary policies of both the Chinese and Japan ("The yen beckons China's dollar billions", March 13).

China directly manipulates its currency by maintaining a fixed dollar-renminbi peg through the recycling of large sums of US dollars back into the US bond market. The broader goal is to sell as many exports as possible to the US so as to create jobs in China, where the unemployment rate remains stubbornly high. As a defensive measure, Japan, as well as Taiwan and South Korea, must likewise manipulate their own currencies in order not to lose competitiveness or market share to China. However, in a floating exchange rate system, Japan achieves manipulation indirectly through maintaining artificially low short-term interest rates and tacitly supporting the so-called "carry trade", which helps to keep the yen low.

Any attempt by China to prop up the yen through currency purchases would be interpreted as a wildly provocative and mercantilist act by the Japanese as it would enhance China's ability to take US market share from Japan. The more likely scenario is that China will increasingly use its foreign currency reserves to buy equity shares in US companies and, over time, the US companies themselves. By gaining control of US companies, China will therefore gain more control over the decisions of US companies to offshore and outsource to China. Such a strategy will also accelerate technology transfer from the US to China.

Where Dr Bergsten does get it right is in his insistence that China let its currency "rise to a level that would no longer require intervention". In the absence of such a policy shift by the Chinese, the road ahead will be bumpy for both the US and Japan.

Navarro also has a project looking at the China Price - HOW can China undercut most other manufacturing countries by up to 50%?. This is something I want to return to, suffice to say, they identify 8 drivers of the Chinese low price for manufactures:

1. low wages (a large, disciplined (crucial) and generally well educated population).
2. network clustering

These 2 alone account for 55% of the China - US cost difference. So where does the rest come from?

3. export subsidies (17%)
4. undervalued currency (11%)
5. piracy (9%)

The rest include lax environmental regulations and health and safety (small effect perhaps surprisingly so) and FDI.

The surprise perhaps is the extent to which piracy is playing such a large role whilst the currency effect may not actually be that large - even if the currency were allowed to appreciate it suggests that China's comparative advantage would remain a strong one.

The West and the rest of Asia should therefore stop fixating on this issue and to try and address some of the other points - such as the positive clustering affect and the education of its population.

A full PDF of the report can be found here:

China Price Project

Peter Navarro's website is here (a bit of an ugly entrepreneurial site though).

Peter Navarro

The Pollution induced death of the Yangtze River

Quotes taken from:

WWF Says Pollution, Dams Threaten Rivers

China is already suffering from serious water shortages and desertification of certain regions. These quotes give a little flavour of the problems caused by China's break neck growth.

The Yangtze River gets more than half of China's industrial waste and sewage.

In China, pollution in the main stem of the Yangtze River has increased by more than 70 percent over the last 50 years. Almost half of the country's industrial waste and sewage is discharged in the river, the report said.

Garbage heaps, pig waste and discharge from factories, hospitals and mines -- possibly including radioactive waste -- lie at the bottom of the reservoir at the Three Gorges Dam, the world's largest hydroelectric project, the WFF said.

We will post regualary on the impact of economic growth on China's environment. For numerous articles on this topic see the China category on "Globalisation and the Envrionment blog".

Breaking Environmental news:

US's Paulson Sees More China Environment Talks

LIMA - US Treasury Secretary Henry Paulson said on Wednesday discussions about ways to improve China's environment will become a more prominent part of his US-China "strategic economic dialogue".


Paulson told reporters on a visit to Peru that a key focus for such discussions is clean coal technology that could help slow the rapid growth of carbon and greenhouse gas emissions from China's power generation sector.

"This is a key part of our dialogue and I think it will be increasingly clear to you," Paulson said.

The dialogue was launched in December to bring together top US and Chinese economic and finance officials, partly as a means to persuade Beijing to be more flexible in the valuation of its currency, the yuan .

But Paulson has also used the dialogue as a forum for promoting liberalization of China's financial services sector to open it to more foreign competition.

He said China in 2009 will produce more greenhouse gas and carbon emissions than any other economy and is the only one where the growth in such emissions is exceeding the nation's overall economic growth. Much of that is due to coal-burning power plants.

US President George W. Bush has taken a particular interest in improving the health of China's environment.

"Whenever I talk with him about the strategic economic dialogue in China, he pushes me pretty hard in terms of getting some results there (on the environment)," he said.

But Paulson also said that economic growth, globally, was important to sustaining the environment. Poorer countries that fall on hard times economically tend to put more pressure on their environments, he said.

Is China the environmental "Elephant in the Room"?

This post from John Elkington and Jodie Thorpe posted on ChinaDialoguetells us nothing new. However, as an overview of the general issues of climate change and China's place in that debate it is a useful starting point (with some good links).

A few choice paragraphs have been quoted here but the article is worth reading. For what it is worth I think that China is being taken seriously but I believe this article has a point - there are so many column inches and air time given to how us, as individuals, can save the planet by changing to energy saving light bulbs - many commentators are missing the point - such actions will be trivial if China and India continue on their current growth and energy consumption paths.

Does this mean we throw our hands up and give in?

Climate’s elephant in the room

The “elephant in the bedroom” is a phrase used to describe a problem that is looming large, but is too overwhelming to be engaged—and is therefore ignored. As the climate change debate goes into overdrive, one elephant in the global bedroom is China. The rate of growth in China’s energy demand is so intense that it threatens to wipe out much of what the rest of the world does. At the same time, however, there are those who predict that China, because its problems are likely to become so severe, will become an incubator for solutions that can be applied worldwide.

../

China and India, for various reasons, have been blowing hot and cold as they talk about tackling climate change, but both want accelerated transfers of clean technology to their emerging economies. Zhang Xiaoqiang, vice chair of China's National Development and Reform Commission, emphasized this need when he told one Davos session that cement producers in his country are only about half as energy efficient as Western competitors—at a time when the country uses something like 40% of world cement production.

More information on China and the Environment can be found on the "Globalisation and the Environment" blog (click the China category).