The Hindu Business Line : World economy: Made in China?

The importance of China for the global economy is reflected in many different spheres. That "wages in the US are being set in Beijing" is one reason why. Even the global interest rate is being determined by China and a few other Asian countries. For how long will China maintain its hold over the global inflation rate, the wage rate, the profit rate, the interest rate and commodity prices?

TODAY India's imports from China exceed those from the United States. It is estimated that, at the current rates of growth of exports from India, China will soon overtake the US as the top destination.

This is another reminder to the world that China is replacing the US as the global growth engine. In fact, the 21st century may very well be China's, as the last was Japan's.

The importance of China for the global economy is reflected in many different spheres. That "wages in the US are being set in Beijing" is one reason why. China, as the leading supplier of an increasing variety of consumer goods at low prices, is forcing the wage rates in competing countries to come down.

Like China in the manufactured goods sector, India is being viewed as the emerging leader in the supply of services. This, in turn, is threatening wage rates of service workers (specially in software and IT-enabled services) and those in Research and Development in the developed world.

An American student, in his feedback form following the end of the course that this author taught at a US university wrote: "After outsourcing jobs to India, our universities have started importing `cheap' professors from India. This must stop in the interest of protecting our jobs."

This is not an isolated outburst. Many American students are concerned about losing high-paying jobs to Indians, just as factory workers are of losing manufacturing jobs to China.

According to Mr Richard Freeman, a Harvard professor, the entry of China, India and Russia into the global economy has effectively doubled the global labour supply. The consequent increase in the global labour-capital ratio is bound to reduce the global wage rate while raising the returns to capital (or the rate of profit) throughout the world economy. So, it is natural that the real wage rate in the developed countries will come down, while the rate of profits of MNCs (that are shifting their factories to low-wage countries such as China and India) hit all-time highs.

Further, the entry of China in the 1980s is qualitatively different from that of Japan's in the 1950s. China combines an army of cheap labour with an economy which is much more open than Japan.

Currently, the sum of exports and imports of China as a ratio of its GDP is around 75 per cent. That for Japan (also for India) falls in the 25-30 per cent range. So, the impact of China's entry into the global market is unparalleled. Naturally, the increase in global resources is raising the global growth rate. But the distribution of income is going against labour and in favour of capital in the First World.

According to The Economist, in most developed countries, the share of wages in national income (which over a long period in history had remained fairly stable) is now close to their lowest level in decades. For the same reason, the share of profits in the US, Europe and Japan is at the highest level in 25 years.

The entry of Communist China into the global economy is impoverishing the working class and fattening the capitalists in the industrialised nations!

It has also contributed to keeping the global inflation rate low, despite surging prices of commodities, such as oil and steel. Both the rise in the global commodity prices and the low inflation are primarily due to the China factor.

The return to profitability of many steel and cement companies is largely attributed to the construction boom in China.

The rapid rise in the use of cars in the newly affluent China (and India) is often held responsible for the recent surge in oil prices. The scope for further rise in the demand for cars and oil is enormous in China.

In the US, there is an average of one car per two individuals, the corresponding figure in China is one per 70. Thus, the future profit of the major global car manufacturers is inextricably tied up with the growth in the Chinese market.

Yet, the global inflation rate remains low because of the continuous fall in the prices of a bewildering range of consumer goods exported from China. If China eventually re-values the yuan by 20-30 per cent, as the US is demanding, the inflation rate in the US, Europe and Japan would go up significantly.

Even the global interest rate is being determined by China and a few other Asian countries. China's huge foreign exchange reserves (more than $700 billion) are largely invested in US government securities.

This is keeping the US interest rate low, thus enabling American consumers to maintain their artificially high standard of living with cheap credit.

The real-estate boom in the US is also built with cheap money. If China changes its global investment policy, the US interest rate will go up, much to the peril of America's prosperity.

For how long will China maintain its hold over the global inflation rate, the wage rate, the profit rate, the interest rate and commodity prices? Some analysts believe that it will take at least two decades for China to absorb its surplus labour into the industrial sector. Till then, China rules.

What about India?

It is being viewed by many foreign investors as the next best growth story in the world. As the Chinese Prime Minister put it, China is becoming the global factory while India is poised to become the global office. Many well-known multinationals are in the process of shifting at least a part of their R&D centres to India.

In fact, some analysts (including the much quoted BRIC Report by Goldman Sachs) believe that India has one advantage over China — the percentage of population in the working age group will remain above China's in the coming decades.

But, unfortunately, that by itself is no guarantee of superior economic performance unless India upgrades its skill levels and the productivity of workers.

Whether we will accomplish that will largely depend on the reach and quality of the education system and the level of efficiency in the public-private economic partnership that can foster a globally attractive investment climate.

(The author is Professor of Economics, Indian Institute of Management Calcutta, and visiting professor of Economics, University of Rochester, US. Feedback may be sent to alokray15@yahoo.com)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Cotton up, oilseeds down

World economy: Made in China?

India and China: On a `global move'

Maharashtra sugar cane farmers — Bitter deal from weather, government

Managing oneself

Tolerance and train travel

Tackling economic fault lines