Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Tuesday, October 28, 2003

Asia at the Crossroads

Stephen Roach yesterday, on a topic you've been hearing quite a bit about recently at China Economy Watch:

Asia’s wrenching financial crisis of 1997-98 marked a critical turning point for the region that we are only now beginning to understand. The ascendancy of China is the most obvious and important hallmark of the post-crisis era. But the awakening of India is not without potentially profound implications as well. The road has been considerably rougher for the so-called newly industrialized economies of Asia -- Korea, Singapore, Taiwan, and Hong Kong. Meanwhile, Japan has languished in its post-bubble malaise. The balance of economic power is in the process of shifting in Asia. Old Asia is floundering and a New Asia is emerging. That poses profound challenges for the region and for the broader global economy.

Relative growth disparities between New and Old Asia leave little doubt as to the shifting sources of regional economic growth. Since 1990, China’s economy has tripled in size in real terms, while India’s has doubled. Over the same period, 1990 to 2003, the Japanese economy has increased by only 15%. The math of economic development obviously makes it much easier for poor countries to grow far more rapidly than rich ones. Yet China and India still have a long way to go in catching up with Japan. While convergence in overall GDP terms could occur at some point in the next 20-30 years, on a per capita basis -- the most relevant comparison in terms of living standards -- it will take considerably longer. In 2002, real output per capita in Japan was still about 40 times greater than in China and nearly 100 times that of India. Based on an extrapolation of recent trends -- an heroic assumption, to be sure -- Chinese convergence with Japan in per capita terms is unlikely for another 40-50 years; in the case of India, it could take considerably longer.

Outsourcing itself is not the breakthrough. Offshore production options through normal trade channels have been around for decades. What’s new is the breadth and depth of such platforms. What’s also new is the Internet -- the means by which these platforms can now be connected to globalized distribution systems. Moreover, there’s also a new urgency to such outsourcing, driven by the heightened imperatives of cost-control. Lacking in pricing leverage and awash in excess capacity, companies in the high-cost developed world have made the global labor arbitrage a key tactic of competitive survival. In manufacturing, this manifests itself in the form of a massive wave of foreign direct investment into China; FDI into China hit $53 billion in 2002, making it the largest recipient of such flows in the world. In services, the Internet has been the ultimate enabler of technology diffusion and knowledge-based output -- central to new global platforms that open the door to vast legions of low-wage white-collar workers. Courtesy of the global labor arbitrage, the growing role of China and India arises out of shared necessity -- theirs as well as ours.

Nor is there really any effective limit to what the Chinas and Indias of the world can offer up as cost-effective substitutes to the high-wage developed world. Both nations, which collectively account for nearly 40% of the world’s population, have the functional equivalent of infinite supplies of excess labor. China has an urban workforce that amounts to about 400 million, and in India the nonagricultural workforce is estimated at 167 million. Both of these vast nations, of course, still have a large portion of economic activity tied up in traditional agriculture -- 15% of total value added in the case of China and 25% for India. At the same time, they also suffer from a huge deficiency in agricultural productivity; US farm workers, for example, are more than 125 times more productive than their Indian counterparts and 150 times more productive than those in China, according to the World Bank. In many respects, that only enhances the pipeline of candidates for the global labor arbitrage. As agricultural productivity rises and farm workers are displaced, the expansion of low-cost labor pools available for outsourcing platforms has no end in sight.

Wage comparisons are the obvious icing on the cake for the global labor arbitrage: Over the 1995-99 period, World Bank data put Chinese manufacturing labor costs on a per worker basis at about 2.5% of those in Japan and the United States; for India, the ratio works out closer to 4%. Moreover, China’s labor costs are only a small fraction of those in the newly industrialized Asian economies -- 3.5% of those in Singapore and 7% of those in Korea and Hong Kong. Not surprisingly, these wage differentials match up with comparable economy-wide productivity disparities. But that’s precisely the point: Outsourcing platforms are high-performance pockets in low-wage, low-productivity economies such as China and India. Foreign-funded subsidiaries in China now employ some 3.5 million workers, up more than 3.5 times over the past decade; the number is double that if subsidiaries funded in Hong Kong, Taiwan, and Macao are included. Similar trends are evident in services outsourcing. India currently employs about 650,000 professionals in IT services, a figure that is expected to more than triple over the next five years, according to one study (see The IT Industry in India: Strategic Review 2002, published by India’s National Association of Software & Service Companies with McKinsey & Co.). Courtesy of the global labor arbitrage, increasingly well-educated work forces in both countries have become agents of dramatic change in Asia and the broader global economy. Barring a breakdown in trade liberalization and globalization, all this paints a rapidly changing picture of Asia.
Source: Morgan Stanley Global Economic Forum