February 12, 2003


China boom argument ignores the golden rule (Jake van der Kamp, February 13, 2003, South China Morning Post)
The key to a successful industrial boom is not primarily low wages and the application of new technology. It is first of all money - the raising of it, the right application of it, the judicious control of how it is spent and the return on investment of it. For this you need a financial system that operates on market principles.

But the mainland has no such thing. Most of the money its banks raise from the public is invested into a growing fiscal deficit, construction of public works of questionable usefulness and the propping up of loss-making state enterprises that should have long been shut down. A good proportion of it is also simply "misplaced". There is not much left over for financing of private sector industrial enterprise. [...]

If Beijing welcomes foreign corporations such as Wal-Mart to source low-cost quality goods in the mainland at low operating costs then the United States retail giant is only too happy to extract all the profits for itself and book them elsewhere.

Take note that this is not how the Industrial Revolution worked in Britain or America in the last half of the 19th century. Both of these had as sophisticated a financial system as was possible at the time and could apply it to new technologies on their own. They grew wealthy by being the investors in their industries as well as having the workshops of those industries located in their territories.

So when our headline on Mr Xie's piece says that China will dominate the world economy for a decade we need to refine things a little. If China's capital account remains closed and Beijing continues to dictate where money raised domestically will go, then it is more likely that foreign invested enterprises will come to dominate the Chinese economy. In fact they do so already.

What difference would it then make that the workshops are located in China? How does that constitute domination of the world economy?

Things would actually be the other way round. The word you are looking for here is "exploit" in its full unhappy sense of take advantage of hardworking people whose wages are suppressed and of a government willing to make big tax concessions and then laugh all the way to the bank, a foreign bank.

China is in effect a modern colony of the West. Once imperialists sought colonies so that they could extract natural resources and ship them home to be manufactured into finished goods by a domestic labor force. Today the natural resource that we're looking for is the labor force itself, any that's relatively skilled and will work for less than the rate that our own asks. This fact hides a number of great weakness in those countries that do manufacturing, chief among them that the products being made are designed, marketed, etc. abroad. The brain work stays in the imperial nations. Only the scut work is done in places like China. And every few years some other country comes along with a population willing to work cheaper than yours, so unless you've really taken advantage of your little boomlet to diversify and modernize your economy and to learn the culture of the imperial
powers, you're soon left in the dust, as witness Japan. So far there are few signs that China is learning anything. Posted by Orrin Judd at February 12, 2003 11:22 PM

Japan is in the dust, not because it's exploited by foreign companies - on the contrary, Japan has developed many companies that do a lot of exploiting abroad themselves - but because it has created an even less flexible version of a continental European economy.

Don't mix up the Chinese and the Japanese problems.

Posted by: Peter at February 13, 2003 7:51 AM

The great question in the industrializing and post-Communist worlds is whether economic ontogeny must recapitulate philogeny. My guess, but it is merely a guess, is yes. If so, then the attempt to duplicate current western financial markets and regulatory schemes will stifle these new economies, rather than help them to develop.

Posted by: David Cohen at February 13, 2003 9:14 AM


Japan never figured out how to change its culture to make people more creative. It invents nothing, merely adds googaws to stuff we invented.

Posted by: oj at February 13, 2003 9:58 AM


Agreed--they should duplicate the regulatory scheme we had when we industrialized.

Posted by: oj at February 13, 2003 10:00 AM

Japan beat the socks off the U.S. in quality control, made a minor deity of W. Edwards Deming and is still the second-largest economy in the world. Its position is similar in some ways to Britain's in 1871, when leadership in the emerging electric and organic chemical industries was about to pass out of her hands.

It looks as if Japan has chosen stagnation and will be caught up on (but not surpassed in my lifetime) by others. But Japan will still be rich.

That's not optimal, but to call it failure is an exaggeration.

Some people have been saying what this little essay says about China for a long time. One was in a book whose title and author I cannot recall about Chrysler's pathbreaking joint venture in the '80s to make Jeeps in China. Chrysler -- a lumbering oaf in N. America -- ran the Chinese ragged and walked off with all the profits.

The Chinese never knew what hit them. Something similar happened to the Arabs after the oil embargoes of the early '70s. The total pumpage of dollars went way up, but more of it ended up in western financial institutions than in Arab numbered accounts.

Posted by: Harry at February 13, 2003 1:12 PM

Play some Japanese video games for a lesson in creativity.

Posted by: M Ali Choudhury at February 13, 2003 1:12 PM


Their population is in absolute decline. They have more abortions than live births per year. The elderly will soon be sucking down all that the young can earn. Explain how they stay rich?

Posted by: oj at February 13, 2003 3:05 PM

Guest workers. Robotics, Productivity.

They have some serious problems, but USD 5 trillion will buy a lot of balm.

My brother identified Japan's three main problems 15 years ago as aging population, lousy housing and low status of women. Everybody else was saying Japan was the wave of the future. Bro' was right, as usual.

Declining birth rate is the one problem they might not be able to solve even if they decide to try.

Posted by: Harry at February 13, 2003 6:54 PM

Bill Emmott's book The Sun Also Sets put the idea of Japan's inexorable rise to bed around then.

Posted by: oj at February 13, 2003 7:39 PM