Posted on 06/20/2002 10:33:09 AM PDT by Stand Watch Listen
Asia's question of the moment is how to deal with an economically rising China. A few years ago, Guangdong province picked up the moniker of "workshop to the world," but increasingly China's entire coastline lays claim to that title. The Japanese feel comfortable investing in Liaoning, Americans and Europeans in and around Shanghai, Taiwanese in Fujian, and Hong Kong Chinese in Guangdong. In a stunningly wide variety of manufacturing niches, from the most menial assembly work to semiconductor wafer fabs, China seems to have uncovered comparative advantages, and it's impossible to avoid the conclusion that this is due in some degree to cultural factors.Now that China's membership of the World Trade Organization is part of the mix, Asians are starting to worry about a "giant sucking sound" -- the wonderfully piquant phrase coined by then U.S. presidential candidate Ross Perot in 1992 to demonize the North American Free Trade Agreement. The alarmist Mr. Perot feared that the migration of manufacturing jobs to Mexico would hurt American workers. As it turned out, the U.S. and Mexican economies were complementary, and free trade benefited both.
That's usually the case, and Japan, Korea and Taiwan will probably have a similar experience with China. Increased trade and investment flows with the developing mainland will further the natural evolution of these developed economies toward the service sector and more sophisticated manufacturing. The real question is what will happen to the less developed countries of Southeast Asia. Up until now, they have been magnets for foreign direct investment from Japan, Europe and North America, and the export of manufactured goods back to those markets has been their key driver of growth. China is now muscling in on their turf.
Free trade may be a marvelous thing, but it doesn't include a guarantee that every player will benefit every time a new market is opened. Just like within a national economy, when tax rates are cut or regulations are lowered, the overall effect will be positive, but the adjustment process may leave some individuals worse off. The opening of China is having a comparable effect on a global scale, with Southeast Asia bearing the brunt of the readjustment process.
There is disagreement over how serious the impact will be. Some argue that China will become a driver of growth within Asia, consuming enough goods from Southeast Asia and sending enough tourists out into the region to offset the share of developed country markets that Chinese goods will soon grab. It's certainly true that China and Southeast Asia are not locked in a winner-takes-all game. Despite the current perception, it's impossible for China to have a true comparative advantage in all manufacturing sectors, and there is room for the two to develop side-by-side, for instance by trading semifinished goods to take advantage of the efficiency gains from greater division of labor.
However, Asia's developing countries are particularly vulnerable to competition from China because they have deliberately pursued policies designed to promote exports at the expense of domestic consumption. To varying degrees, they have attempted to follow in the mercantilist footsteps of Japan, promoting a high savings rate and directing this capital to conglomerates picked by government to be national champions in the world's markets.
At least in the early stages of development this worked tolerably well, since their economies have been kept more open than in developing countries which embraced socialism, and industrial companies have been disciplined by the world market. But as the 1997 Asian crisis and Japan's slump have shown, this model creates an emphasis on expansion of production capacity at the expense of profitability which, combined with a tendency toward crony capitalism, eventually leads to disaster.
Southeast Asia was already realizing this and modifying its approach, but the arrival of China on the scene should drive the nails into the coffin of what Daniel Lian, an economist with Morgan Stanley in Singapore, calls the East-Asia Economic Model. He argues that if policy makers remain complacent, competition from China will reduce Southeast Asia's potential economic growth rate.
So what to do? Mr. Lian points to Thaksin Shinawatra's policies for Thailand as a blueprint. The Thai economy is currently undergoing a consumer-led recovery, and the government has shifted emphasis away from big industrial projects and toward creating an environment conducive to smaller niche players who can use their flexibility to provide extra value to customers.
It's not clear that Mr. Thaksin really has a firm grasp on the way forward, however. His economic policies have been uneven, and Thailand hasn't done enough to resolve the overhang of bad loans and corruption left over from the boom years of the early 1990s. Nevertheless, there are hints here of a more sustainable model.
If savings rates are allowed to come down to an equilibrium actually driven by the supply and demand for capital, domestic consumption would increase and Southeast Asia could pursue a less export-dependent and more self-sufficient form of development. Once the administrative guidance and implicit government guarantees designed to push capital toward big industrial firms are withdrawn, banks will have the incentive to lend to more entrepreneurial small- and medium-size enterprises. Not only do they grow quickly, but Taiwan's experience in 1997 showed that an economy led by these companies is less susceptible to a crisis of confidence.
Meanwhile China's mixed economy, with state-owned enterprises destroying value as quickly as efficient exporters funded by foreign capital can create it, looks increasingly dysfunctional. The upshot is that China could win a Pyrrhic victory in the mercantilist battle for export markets and end up losing the economic war. It may be set to benefit at Southeast Asia's expense in the short run, but as the smaller economies of Asia scramble to get out of the giant's way, they may set themselves on track for higher quality growth that promotes better living standards for their people.
no, no....
Ventura already left China.
Thus, direct labor is not always the cost factor. Nor projected (estimated) cash flow. Singapore labor may cost more than China, but the b.s. factor in China can be (not always) staggering.
Sometimes higher profits come from discovering how to avoid dealing with political governments. Home Depot in a crude kinda' way.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.