Why China Grows So Fast

I agree. Just last week I had a session with my MBAs with one of our finance professors on this very topic. He echoed the exact same thing.

When he went through his PhD program at UC Berkely, Japan was the "China" everyone was talking about. Now, of course, it's China and will likely be so for some time to come until labor then shifts to the next battleground.

Any body have any comment about the cost of such sustained development, especially when compared with the other 10 cases of high growth.

Mr. Wang --

I probably should have been clearer regarding Spence's article. It dealt more with what it takes for countries to continue growing, not so much with what it starts to spark the initial growth. I agree with you that stability and safety are usually key indgredients to get the ball rolling.

I know virtually nothing about Botswana. Has it always been safe and stable? What about Indonesia?

Spence says: "South Korea is not now a center of labor-intensive manufacturing, but it once was. The same is true of Japan, though one needs to be in an older generation to remember. Even advanced economies like Spain, Ireland and Italy were at some stage surplus-labor economies, and employed that in labor-intensive industries, or exported it, or both."

And Dan, you say: "Early on in a country's growth, the vast majority of people are in agriculture, where there is typically a surplus of labor."

Sure. But what happens when that country has 1.3 billion people (to peak at 1.7 billion by 2050) and 900 million of them, roughly 75%, work in agriculture? It's projected to reach 60% in urban environments by 2020, and China expects to add 8-10 million per year until 2050. That means by 2020 there will be roughly 840 million urbanites and 560 million farmers. I know Silicon Hutong has suggested they could move into modernized high-end organic food markets and such, I'd love to see that, but still: that's a huge pool for labor-intensive low-cost industries to continue to feed on. Remember, alot of those urbanites aren't going to be too picky what they're doing either.

Regional segmentation could play a role too. Imagine the East Coast of China will become a Korea or Japan, but other areas could become it's Mexicos and Eastern Europes. The idea being China is not one economy, but several.

I agree the changes that China is experiencing are not unique. But I wonder if the consequences of it happening to such a populous and geographically diverse country are.

Dan,

Vietnam for sure.

India is more of a mystery and wild card to me ... poor infrastructure, too many outdated labor laws, etc. I go back and forth on India. What do you think re: India?

I also often wonder why the Chinese are spending so much time in Africa; energy issues are an obvious reason, but I also wonder if/when low cost labor will shift somewhere to that continent, and do so en masse.

Dan: couple of other thoughts.

"What strikes me is how so many large swaths of China seem to barely (if at all) participate in China's growth. I guess that is to be expected at this point, but will it ever change?"

Well, wouldn't that be what China being the next China would be all about, that it will have to change? What I'm suggesting is that you'll have regional differentiation that will increase more with time, but at the same time growth will increase in other parts of China. In many ways, it already has, but it's not easily recognizable. The road infrastructure, the extension of telecommunications, the increased trade between various regions (I was just at a Yunnan tea shop here in Fujian). But you and I will not see the entire country become post-industrial, with Shanghais from coast to 'stans, in our lifetimes. There's the rub; there will continue to be places where a little capital will go a long way. The trick is to keep it all hanging together politically, especially when middle and upper class one-child couple can have two kids, buy fake birth certificates or simply pay fines. Fines that, if raised, would cause the political backlash the government most fears: an uprising of the middle class.

"I agree with you that the relative smallness of Japan and Korea make it different from China. Then you have Russia, where Moscow is like Paris and most of the rest of the country is like the third world."

Russia's population is 142 million, with a population density of 21.8 per sq. mile. China's is estimated at averaging somewhere around 344. It just doesn't compare.

Asian countries as China and India were the example for Ashwani Saith (1985) to formulate his thesis about the impossibility of a rapid structural transformation of an agrarian economy into a modern one with manufacturing and service industry (see Journal of Development Stduies, vol 22 nr. 1). Building on his work, I formulated the thesis on the possibility of development with a dominant influence of the peasantry (1992).

Saith�s simple equations helped me to calculate that a structural transformation of the economy, to pass from 45% working in agriculture to 5% of the working force employed in that sector, would take about 275 years. Yet, one could imagine that this could be done faster, even conserving the food and employment balance (which are the main equations of Saith�s simple model) when investment could be established at 45% of the GDP. My thinking at that point and for the case that I studied (Nicaragua) was that such a situation could only be envisaged when the country was chosen for a channel next to the Panama one (an option that probably will not come about as Panama is due to enlarge its Canal.) Interesting enough I see that China, enormous as it is, in fact seems to achieve an investment rate of the one needed for a swift transformation. Yet, conserving the food and employment balance still may be a difficult job, especially while up to now China has not given enough support to the voluntary association of the agricultural producers.

@ Davesgonechina:

In response to China being the next China re: boosting the quality of life for the peasant/working class, that may be difficult to do when Beijing will have to take away from the middle and upper class to do so. Just look at the debate raging in the US about "liberalizing" health care while the EU wrings its hands over weakening its social safety net to remain competitive. China needs its throngs of cheap, abusable labor to keep the economy humming. What company would come to China to pay western wages? Companies leave Mexico to come to China. Higher wages for labor and a more robust social safety net means that both foreign and domestic chinese companies will leave to go elsewhere in search of people who will work long hours for next to nothing. Chinese companies are already beginning to look at Africa while western companies rediscover Latin America and ASEAN because of the existing wage inflation in eastern china and the complete lack of suitable people, infrastructure and institutions in all but Xichuan and ChongQing.

Chris --

I know so little about India I really cannot comment. All I ever hear is "democracy, but poor infrastructure." I am big on Vietnam, which I see as a mini-China, economically.

Many years ago, I had a very good client who was looking very very closely at catching and processing shrimp in a tiny African country. He would have taken over an existing facility, but to make things more flexible, he would have done much of the processing on his own ship. We lined up everything. Getting the shrimp out of the river would have been like shooting pigs on a blanket (is that the expression?). The workers were good and paid $25 a month. The profit margins were eye-popping. Even getting the shrimp to NYC would have been surprisingly easy. Our "contacts" there were top of the line.

In the end though, my client decided against it. Guess the nationalization of the facility when it was owned by the three prior owners scared him off and the government's assurances that it would not do so again were not enough.

I think political stability and a certain level of government friendliness towards business is critical. Of course, not all of Africa is the same (Botswana for one is obviously different) but too much of it is just too difficult and risky.

davesgonechina --

I agree that we cannot expect China's heartland to become a bunch of Starbucks quaffers right off the bat, but I do think it is taking longer for there to be a real trickle down. I agree with you that it is a question of holding it all together long enough for it to happen. But, does it take hundreds of years for a country to achieve such wealth that even the majority of people outside the major cities are doing just fine?

As for Russia, I don't think you can dismiss its similarities to China just because its population density is so different. I see them as being somewhat similar in that the contrast in wealth between the cities like Moscow and Shanghai on the one hand and the provinces on the other, is so stark and it is not clear how much those in the cities really care.

nanheyangrouchuan --

Yes, but wasn't the same thing true of Korea 35 years ago?

I haven't checked what Spencer's 2001 Noble is for but every time I see his name, I see saving rate. Good growth? Because they have high saving rate! Bad economy? American need to save more! Saving rate too high? Danger! That's my first reaction when I see his name. Well, first time I heard him, it's his lecture on how US can solve the economy problem if American just save more. But how much of the world's economy is driven by debt base spending of Americans?

Economists are often good after the fact. They take the past data, try to extrapolate them or cluster them into a theoretical model. While the model doesn't work, they often blame reality. ;)

Anyone without a Nobel claims the model derived from Hong Kong of population 6 million can predict the future of China with 1.3 billions people have to be institutionalized. Well, come to think about it, the only useful and practical theory awarded Nobel in Economy is Nash Equilibrium but John Nash is certifiably crazy.

Speaking of China's heartland, I spent sometime in Sichun last year and it's booming. Domestic SME may not be going there but the Chinese (local and central) governments are herding foreign companies there. Intel was a big catch for Chengdu last year and Moto and other have all increased their investment there. And there are aggressive expansion of Taiwanese business going there as well. Much similar to the development model of the east coast, the foreign companies will likely to go first; somehow the "culture" barrier is much higher among Chinese then between Chinese and foreigners. Also, real estate are doing good in the region as well.

There are some efforts by the fly over states in the US to attract outsourcing. Oklahoma has made large effort in attracting IT outsourcing last year but had a little to show. You deal with American IT clients. What do you think they would react to the idea of outsourcing works to Oklahoma instead of China or Russia? I mentioned to couple friends looking for outsourcing to China about Oklahoma and I got this eye rolling of "red-neck hillbillies writing my computer codes!?!" look on their faces. They much rather send their codes half way across the globe.

@David Li: "somehow the "culture" barrier is much higher among Chinese then between Chinese and foreigners."

Oh yeah, I was going to suggest that stereotypes and distrust between local and provincial cultures in China might be a factor slowing inland growth. After all, you know how those Sichuanren can be, as many a friend has told me.

David, I think your points dovetail nicely with mine.

davesgonechina --

@davesgonechina: "What's the other side of it? A post-industrial east coast surrounded by half a billion pissed off people excluded from the boom. "Yikes!" (quote attributed to Hu Jintao)." That is the other side of it, but that's how it is in certain countries, including Russia. But I think the Russian masses are generally more accepting of their lot than the Chinese.

You are right though in saying Russia's economy is not comparable because Russian has not had the history of growth of a China or Japan or Korea and if it does get that history, it will be for very different reasons (natural resources).

Mr. Li --

Chengdu and Chongqing a booming, but there are still huge parts of China that are not. Good analogy to Oklahoma. I do not think Oklahoma (and places like that) suffer because of their culture, but more because of their costs. If Oklahoma really were as cheap as China, most businesses would be crazy not to be outsourcing there.

Hi there,

I thought the piece did a great job of conveying the essence of China's growth miracle: China is exceptional (for its size, pace) and yet not--it has the same fundamental economic features as the other development wonders.

What I found especially compelling was the way in which Spence celebrates the growth miracle without ignoring the tensions caused by sustained high growth in developing countries. For example, he notes that the 1% annual decline in China's rural population, instrumental for increasing productivity, represents 13 million people who are moving to cities and need infrastructure, education, and services -- not to mention jobs. And it gets stickier. The early movers are rewarded, the latecomers, less so; income inequality rises "for an extended period."

So, the downside of growth -- increased income inequality (albeit distributed in new ways) and social and political tensions -- are equally important characteristics of the story. There is a front-end and a back-end to high growth, and China must deal with both; it needs to maintain high growth yet it must mitigate against exacerbating inequalities and social tensions.

Dan, I suggest trial by drowning for the economists. ;)

Actually, I am pretty impressed by the new guys like Steven Levitt of "Freakonomics." They provide much interesting view points on things.

Speaking of Oklahoma, I often wonder if the cost is really not comparable with either India or China. China/Indian firms charge around $3,000/man-month on entry level programmers. The companies are likely to pay their programmers at $1,000 or less. That's a 60% margin. However, typically there are communication overhead from culture barrier and language proficiency. 50% for the overhead is common on a typical project of 10 persons plus having one or two high level engineers on the US side pulling their hair out trying to adjust the working hours. This would probably bring the per man-month of outsourcing to India/China to around $4,500/man-month. A firm in Oklahoma could get university graduate CS at about $30,000/year, even master degree at $40,000/year. I think it's possible to offer the customers competitive rate from Oklahoma.

However, I think two things against Oklahoma is the first high level talents, especially in pre-sales. For the same project, there are bigger room for bonus for the pre-sales to ship the projects oversea then to Oklahoma. Second, mindset problems: either it's costly because it's in America or the hillbillies stereotype making the pitch even harder.

The cheapest companies in the US is probably Wal-Mart which runs an internal IT team with service network of complexity only second to DOD right in Little Rock, Arkansas. Wal-Mart is no stranger to outsourcing but Linda Dillman (Wal-Mart CIO who controls over $1 billion annual budget in IT) said "We'd be crazy to outsource IT. We can do it much cheaper here."

David,

Regional stuff. Do the sums.

Most said that there were up to 400million redundant labour in the countryside9 though time, methods of production was never discussded to support a figure).

Those that migrate are young, and looking for the chance of a job and money (migration theory -Todaro etc.- and case studies), say 200 million in the frame, therefore.

But migrants are put at up to 200 million already.

So new migrants are limited to those entering the labour force, and those who can be persuaded to migrate from those in the countryside now.

Hence, the labour shortages on the Coast

Nick --

Thanks for checking in. Are you saying the migrant labor force is all tapped out, or just the easy pickings?

Dear David and Lawblog,

Thanks for responding.

The Todaro model is banal -people migrate depending on their chances of getting a good paying job compared with their prospects where they are (as I remember it, and it was a good time ago when I did that stuff)- but true for China. There are a lot of case studies etc. and they all more or less agree with the model, and note that migrants are young in general and have some, but not a lot, of education.

As Lawblog will know, Chinese figures have to be taken with a huge grain of salt, but I think that migration figures are likely to be underestimates rather than overestimates because because people have residence, huikou, problems and are likely to keep very quiet about their existence. So the figures of up to 200 million migrants, most often around 150 million have to be taken seriously.

So, yes, I do think that the early huge wave of migrants has been used up. Now its the annual total of those coming on to the labour market who are the potential migrants, but the number can be swelled if productivity in the countryside increases, thus increasing surplus labour, and if the attractions of a job in the town increases. This is not just money, its residency,urban benefits, and better working conditions. All the latter cost, and the sweatshops can't afford it, so maybe their days are numbered.

But I haven't been to China for twenty
five years, don't speak, or read, Chinese and sit in East Sussex,England, using books, libraries etc. to get my knowledge. So I cetainly don't claim omnipotence.