"Soybeans are the currency.''


Following my series of posts on the raw-materials impact of Chinese growth, this news from Bloomberg about the soybean impact in Brazil and Argentina is very much to the point. Even though it's long I'm posting the article in full in case the link goes dead. It's the story that has everything: the distorting impact of super-rapid growth from a giant, the ecological impact in Amazonia, genetically modified foods, industrial agriculture, subsidies, our move up the food chain. It's all there. Incredible! Thoughts please.

Vicente Luiz Costa Beber cleared 700 hectares (1,729 acres) of tropical scrub on the edge of Brazil's Amazon to double the size of his soybean farm in five years. This month, he is planting an additional 250 hectares on farms bought from neighbors, encouraged by surging demand from China and the highest prices in six years. "I can sell anything I plant, and that's hard to pass up,'' Beber, 42, said in an interview at his farm in Nova Mutum in Brazil's Mato Grosso state. Farmers from Brazil's rain forests to Argentina's pampas doubled soybean production since 1997 as China boosted soybean imports more than five-fold. At the same time, a shortage of suitable land restricted expansion in the U.S., the world's biggest soybean producer, to 2.2 percent. The U.S. predicts Brazil will surpass it as the No. 1 exporter in 2004. The growth in soybean production in Brazil, where farmers this year increased plantings by an area the size of Israel, means agriculture and related businesses now account for 29 percent of gross domestic product, 46 percent of exports and more than a third of jobs, according to government figures. While the expansion helped boost Brazil's trade surplus and the real to strengthen 24 percent against the dollar, it also makes South America's biggest economy vulnerable to declines in global prices and demand for soybeans, said Zeina Latif, an economist at HSBC Holdings Plc's Brazilian unit in Sao Paulo. "It's a problem for Brazil,'' Latif said in an interview.

On Thursday, Brazil said foreign sales of soybeans will reach $8 billion, or 13 percent of exports, this year and probably rise to at least $8.8 billion 2004. In Argentina, expansion in soybeans accounted for a fifth of the country's 7.6 percent economic growth in the first nine months, according to Luis Secco y Asociados, a Buenos Aires research firm. The boom also boosted revenue of Bunge Ltd., Cargill Inc. and other companies that trade and process soybeans in the two countries. China, which expects to boost soybean imports 10 percent to 22 million metric tons in 2003, on Wednesday bought 454,000 tons of U.S. beans, pushing soy futures prices in Chicago to their highest in more than six years. China's purchases and a drought in the U.S., where this year's harvest is the smallest since 1996, have boosted prices 47 percent since the end of July. China, whose economy is growing at an annual rate of 9.1 percent a year, needs soybeans to produce meal that fattens livestock and oil used to make processed foods such as potato chips and margarine. Soybeans, cultivated in China as far back as 1000 B.C., were introduced in Europe and the U.S. in the 19th century.

"As Chinese become richer they are moving up the food chain and consuming higher protein food, especially more animal protein,'' said Lester Brown, president and founder of Washington- based Earth Policy Institute. ``That requires ever-expanding imports of soybeans to produce soybean meal to supplement grain in livestock and poultry rations.'' Brazil and Argentina have become dependent on soybeans after a record $95 billion default by Argentina caused both nations' currencies to tumble. To achieve higher prices and greater access to world markets the two countries have made ending farm subsidies in the U.S. and Europe a deal-breaker in World Trade Organization talks to reduce barriers to investment, services and commerce. In Beber's town, soybeans lured so many workers that local officials are building three new schools and carving four boulevards leading to new housing developments. In Pergamino, a soybean farming town 300 kilometers (186 miles) north of Buenos Aires, Carlos Genoud's furniture factory, Pergamino Maderas SA, has a three-month backlog of orders from farmers flush with cash.

``This soybean boom has been like Christmas and the lottery wrapped into one,'' Genoud, president of Pergamino's chamber of commerce, said in an interview.

Bunge Ltd, the world's largest oilseed processor, has benefited from rising production, said Raul Padilla, who runs Bunge's business in Argentina. "The soybean boom in the region is very positive for Bunge,'' said Padilla. ``Given the huge interests we have, this allows us to maintain a high level of utilization of our crush capacity, helping reduce costs and maximize the return on our assets.'' Cargill Inc.'s public affairs director in Buenos Aires, Hugo Krajnc, declined to comment. The surge in soybean output has been helped by Monsanto Co.'s genetically modified seeds. In Argentina, 90 percent of the crop is from such seeds, which allow farmers to produce at lower cost by reducing the need for herbicides and increasing the amount of unspoiled soybeans.

In Brazil, President Luiz Inacio Lula da Silva in September waived a ban on the use of the Monsanto seeds and may ask the legislature to make it permanent. Currently, about 10 percent of the Brazilian crop is genetically modified, according to the Brazilian Agricultural and Cattle Farmers Confederation. Soybeans and their products now account for a quarter of Argentina's exports, up from 11 percent 10 years ago, generating foreign currency that helped increase central bank reserves by more than a quarter this year to $13.4 billion. It also helped the peso rise 18 percent against the dollar following last year's 70 percent depreciation of the Argentine currency. For Brazil, farming and agribusiness ``is the country's biggest industry by far,'' Agriculture Minister Roberto Rodrigues said in a speech to farm leaders in Rio de Janeiro on Oct. 21. "If it weren't for agriculture we could have had a recession,'' said HSBC's Latif.

For now, the boom is leading farmers from Para, Goias and other farming states to clear swaths of Amazon forest.

Mato Grosso Governor Blairo Maggi, who, with 113,000 hectares under cultivation, is himself the world's biggest soybean farmer, wants to build a highway from his state to a grain port in Santarem on the Amazon River to overcome what farmers say is the main obstacle to growth of Brazilian agriculture: the country's poor roads, railways and ports. Beber has to send soybeans by truck on a 2 1/2-day, 2,100- kilometer journey to the southern Atlantic port of Paranagua on a two-lane highway so riddled with potholes the size of bathtubs that he loses about 10 percent of each cargo along the way. Construction of the highway would make more of the Amazon vulnerable to deforestation, said Stephan Schwartzman, a Latin America specialist at Environmental Defense. In Acre and Rondonia states in the northwestern Amazon, for instance, farmers have cleared swaths of rain forest along highways to plant soybeans.

In their quest to increase output, Argentine farmers now grow soybeans in fields previously used for corn or cattle and even use patches of wasteland. The municipality of Pergamino is making extra money renting out highway shoulders farmers who want to plant more soybeans. "There isn't an inch of land that is not planted,'' Miguel Saadi, who runs a grain silo, said in an interview in Pergamino. As their soybean production expands, Brazil and Argentina are trying to force the U.S. and Europe to end agricultural subsidies they say reduce market prices and undermine the ability of developing countries to compete in world markets. World Trade Organization talks in Mexico collapsed last month after poor countries refused to discuss proposals to reduce barriers to investment and services such as banking unless the U.S. and European Union agreed to cut farm aid.


In talks to form a free-trade zone spanning the Americas, the U.S. this month accused Brazil of alienating other countries in the region by demanding an end to farm subsidies before negotiating lower barriers on services. Neither Argentina nor Brazil pays subsidies to soybean farmers, while the U.S. paid $671 million in soybean subsidies last year. In Argentina, the government taxes soybean exports 20 percent. "Argentina and Brazil are the most efficient soy production areas in the world,'' Bunge's Padilla said in an interview in Buenos Aires. ``Without the subsidies in the northern hemisphere, both countries could be getting even better prices.'' Beber, in Nova Mutum, produces an average 4.2 metric tons of soybeans per hectare (58 bushels per acre), almost double yields in the U.S., said Agmar Lima, Nova Mutum's agriculture secretary. ``And I do that though this land is really among the worst in the world,'' Beber said. Beber spreads 500 kilos (1,102 pounds) of fertilizer on each hectare of soybeans, a mix of minerals such as calcium and molybdenum that make the orange earth more productive. Like most Brazilian farmers, he plants without tilling the soil to preserve spent soy and corn stalks as organic fertilizer.

In towns such as Nova Mutum, soybeans dominate the economy so much that they have come to be considered as good as cash. The going price for a four-bedroom home with a pool in a new housing development on the edge of town is 10,000, 60-kilo bags of soybeans, each worth about $10. To buy a John Deere harvester, a farmer need only transfer 20,000 of the 60-kilo bags into the dealer's account at one of the silos on the edge of town. "Soybeans are the economy here,'' Lima said in an interview at the two-month-old town hall, which was built with a surge in tax revenue that resulted from rising soybean production. "People have forgotten the value of things in paper money,'' Lima said. "Soybeans are the currency.''
Source: Bloomberg
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Disappearing Manufacturing Jobs: A Worldwide Phenomenon


Bloomberg's Caroline Baum re-iterates a fair point here. Manufacturing jobs aren't being stolen from anywhere, since technological change means that even with rising output employment is gowing down: globally. This is why there's no 'lump of labour' to share out. Of course this isn't quite the same thing as saying that articles which were previously made in the US are not now made in China (there is a little slight of hand somewhere here), but still, the reductions in China are impressive. This is why the global impact of China is still likely to be deflationary: all the surplus labour continues to exert downward pressure on wages. On the productivity numbers, we are bound to get the 'usual arguments' that always surround these, but please not the low (very low, and continuingly low) Italian performance:

Last month, in a Labor Day appeal to union workers, President George W. Bush announced the appointment of a new manufacturing czar. He could have saved himself the ridicule. The government doesn't create jobs; the private sector does. A domestic manufacturing czar isn't going to bring back the 2.6 million factory jobs lost on Bush's watch, or stanch the losses, when the problem is global in nature.

So while a figurehead czar will do far less damage than any of the protectionist measures wafting through the Capitol, it won't fix the problem. Manufacturing jobs are disappearing around the world, according to a recent study by Alliance Capital Management, reported in this column two weeks ago. No one is stealing jobs from us. Something -- productivity -- is. Nowhere are manufacturing jobs vanishing more rapidly than in China, the presumed villain in this tale. The study by Alliance's global economic research department, headed up by Joe Carson, created a flurry of interest when it was reported in the Wall Street Journal last week because the results were contrary to what was commonly believed. The Commerce Department, the Treasury, Federal Reserve District Banks, manufacturing trade associations (national and state), lobbyists and the media all wanted the results of the study. (Aren't some of these folks the ones who should be producing the data?)

Prompted by intense interest in what's quickly becoming the No. 1 myth (China is stealing our manufacturing jobs) and what could become the No. 1 problem (protectionist trade sanctions), Carson's group mined international industry data on manufacturing production workers (the folks who actually make things). The economists found that China is even less of a thief than previously thought.

The initial study found a decline of 16 million manufacturing jobs in China from 1995 through 2002. Further digging unearthed a total loss of 25 million. The initial finding of a 2 million increase in manufacturing jobs in China since 1999 morphed into a loss in every year since 1995. "All of China's 28 industry categories showed losses between 1995 and 2002,'' Carson says. ``Only two industries -- garments and electrical and telecom equipment -- experienced positive job growth since 1999.'' China's huge contraction in manufacturing jobs is largely the result of shuttering inefficient state-owned enterprises. Employment at SOEs, both manufacturing and non-manufacturing, fell by two-thirds since 1995, Carson says.

Employment in private enterprises has risen sharply as many workers from the defunct SOEs are absorbed. However, neither China's rapid economic growth -- 9.1 percent in the last year -- nor growing ``number of private sector enterprises has been large enough to offset the drop in factory jobs at state-owned enterprises,'' Carson says. ``Productivity is killing inefficient industries in China in the same way it is here.''

The results of the second Alliance study found more global manufacturing job losses than on first blush. Over 31 million manufacturing jobs vanished worldwide from 1995-2002, versus an initial estimate of 22 million. Factory employment declined in every year in the biggest 20 economies in the world and in almost every year in the three major regions (North America, non-Japan Asia and Europe).

Europe ranked No. 1 -- in terms of the fewest number of manufacturing job losses (2 percent) in the seven-year period of the study. No surprise there: The continent's rigid labor laws deny businesses the flexibility to fire workers during lean economic times.

When it comes to things that really matter, such as the standard of living (an outgrowth of productivity growth), Europe loses its star ranking, based on international comparisons of manufacturing productivity in 14 economies by the U.S. Bureau of Labor Statistics. While the BLS doesn't aggregate country data, Germany, Europe's largest economy, saw output per manufacturing hour increase an average 2.4 percent from 1995 to 2000 and less than 2 percent in 2001-2002. That compares with an average rise of 4.5 percent (1995-2000) and 3.4 percent (2001-2002) in the U.S. One European country, Sweden, topped the U.S. in manufacturing productivity growth, but its weighting isn't big enough to raise the European average by much.

Italy recorded average annual manufacturing productivity growth of less than 1 percent in the last seven years. The U.K. and the Netherlands got the booby prize in 2002 in the BLS comparison, with growth rates of 0.4 percent and 0.5 percent, respectively. Both countries had average annual manufacturing productivity growth of 2.5 percent in 1995-2000. Europe hasn't benefited from the innovations in information technology to the same extent as the U.S. in the past decade. Since the technology itself is available everywhere, the assumption is Europe's structural rigidities are to blame. Europe will have to liberalize its economy in order to reap the full benefits of productivity-enhancing equipment. If companies had more leeway to fire workers, shorten the workweek and cut generous benefits, maybe it would have been the bureaucrats in Brussels who dreamed up the idea of a manufacturing czar instead of President Bush.
Source: Bloomberg
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It's the Services Stupid


Following up on the last post, and pushing as hard as I can, Dutch free-trader and China blogger Fons Tuinstra is going for this from much the same direction that I am. For those of you who don't read the fistful comments section (shame on you!) he has a couple of nice pieces on China itself:

"Yet another signal that China will be hitting the services in a hard way. McDonalds asked Leo Burnett China to do the commercial of their new slogan in a host of languages, writes the Far Eastern Economic Review today. (not for free available).The paper writes: "In McDonald's history, all of our creative direction was led by America. But we now said: "Let the best ideas win'," says Larry Light, the global chief marketing officer of McDonald's. And in a competition for pitches from ad firms from around the world, China came top with half a dozen ideas. The competitors even voted the China team the most imaginative of McDonald's global network."
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"It's the services, you stupid!

While the US manufacturers keep on complaining about unfair competition from China, the real battle for jobs is taking place in the service sector, today again the HSBC shows. An article in the Wall Street Journal says that the banking conglomerate will shed 4,000 jobs in the UK over the next three years, because work is going to India, China and Malaysia. No low-end jobs, but data processing and call centers, mainly backoffice work.

I have visited in the past one of the HSBC data processing centers here in Shanghai. While the work in itself is very repetitive and even boring after say, ten minutes, you do need rather good English skills to grasp the meaning of the forms and letters you have to deduct the data from. Call centers seems more a thing for India, although I have heard stories that also neighboring Hangzhou has some of them."
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Chinese Government Debt Upgrade


This is a very curious one. According to one widely held theory, the Chinese financial system is supposed to be near to collapse, with bad debt and non-performing loans rife accross the board. This news seems to offer another picture, with rating agencies upgrading, and investors comfortable with Chinese government debt. Undoutedly somewhere in the middle lies the truth.

China made a spectacular return to the international bond markets on Wednesday with a combination $1.5bn dollar and euro-denominated issue at prices very close to those achieved by western government agencies. The strength of the country's foreign currency reserves means that China has no need for the extra funding, but the response to the issue demonstrates investors' appetite for Chinese debt. The issue of a "benchmark" government bond will also make it easier for Chinese companies to tap the global bond markets.

The issue came shortly after Moody's Investors Service, one of the top three rating agencies, boosted China's sovereign rating one notch from A3 to A2.

The 10-year $1bn dollar portion was offered at 53 basis points over US treasuries and the five-year E400m euro tranche at seven basis points above Euribor, the rate at which European banks lend to each other. The market had expected yields to be two and three basis points higher respectively. The spread is the lowest-ever for an Asian issuer apart from Japan, with the dollar tranche priced roughly at the same level as that of US agencies, which have an implicit government guarantee. Fannie Mae and Freddie Mac, the two federal agencies that fund US mortgages, were trading yesterday at 48 basis points and 53.25 basis points over US Treasuries.
Source: Financial Times
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Turning the Heat Up on Trade


Meantime on the trade front we may be in for another turn of the screw. Given then intransigence of Beijing on the currency issue, turning the heat up at the WTO may be a more politically viable strategy for the US. The bang per decibell rate could be higher, at least at the ballotbox. Of course, on another time-honoured theory, a good way to head-off problems is to position yourself at the head off the race and then lead the pack well away from main street by turning down the nearest convenient cul-de-sac.

The US is ratcheting up pressure on China to abide by its commitments in the World Trade Organisation in an effort to defuse domestic political demands to begin penalising Chinese exports to the US.


Robert Zoellick, the US trade representative, on Wednesday warned that Chinese access to the US market depended on "fair" two-way trade.

"I believe in open markets [and] I think the United States' market should remain open, but the only way that we can maintain open markets is if American exporters have an opportunity to export here," he said in Beijing.

That followed similar statements in Washington late on Tuesday by Grant Aldonas, undersecretary of Commerce, who arrives in China on Friday with Commerce secretary Don Evans to continue pressing the trade issue.

"We expect action from the Chinese," he told a hearing of members of Congress who were demanding stronger action. "The time has come to measure up," he said, stressing that the US had been patient in waiting for China to meet its WTO commitments. "There's a point at which the bill comes due and that point is now."

The language is the toughest yet from the top two trade officials in the US. Ratcheting up the pressure over WTO compliance would be the easiest way for the administration to show immediate progress with China, given Beijing's reluctance to revalue the renminbi. Several bills currently circulating in Congress would slap tariffs on Chinese imports unless China moves quickly to revalue. Mr Zoellick repeatedly linked US willingness to keep its market open to Beijing's willingness to resolve problems over such issues as intellectual property violations and controls on agricultural imports. "We need to make progress on [these issues] and we need to make progress soon," said Mr Zoellick.

The US has yet to bring any dispute cases against China since it joined the WTO in 2001, which has angered Congress, as the bilateral trade deficit ballooned to $103bn (€87bn) last year and $65bn in the first seven months of this year.

Mr Aldonas said that China could respond by eliminating its rebate of value-added taxes for exports, which Beijing announced last week would be reduced by an average of three percentage points. He also said the Chinese government should use only legally-purchased software as a way of combating piracy. In spite of all the strong words, the administration has been trying to discourage a congressional backlash against trade with China.
Source: Financial Times
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China's Growing Telecom Clout


The nascent China Teelecom industry is making its presence felt in Geneva:

China's leading telecommunications equipment makers are taking to the global stage in every sense. The ambition of Huawei and ZTE to expand internationally on the back of their success in a growing domestic market was displayed in the sizes of their stands at last week's ITU Telecom World 2003 in Geneva, the quadrennial showcase for the big telecoms companies. Measured by floor space, Huawei and ZTE could argue they were bigger global equipment players than Cisco Systems and Alcatel. Both stands beat Cisco's in size and scope, while France's Alcatel, which spent E14m ($16.3m) on its booth last time at Telecom World 1999, was nowhere to be seen, saying it could no longer justify the expense.

The dominance of Asian displays - including a three-storey tower block that took Samsung five weeks to erect - was seen as a clear message from the region that it had arrived as a telecoms powerhouse. In spite of a recession that has seen many European and American equipment makers and carriers go to the wall over the past four years, their Asian counterparts have survived and thrived. "We have the largest stand in the whole China booth at 526 square metres," said Richard Lee, Huawei's international advertising and promotions manager. "The Geneva show really helps us to build up our brand, not only in Europe but globally."

Until now, Huawei has been known outside Asia more for a patent row with Cisco than for its network equipment. "Cisco [litigation] did not slow us down. We withdrew our products in the US and now both sides have decided to stay litigation," said Mr Lee. With 2002 revenues of $2.7bn, Huawei figures in 16th place in Gartner's global top 20 of equipment makers - well behind number one Nokia on $28.3bn, Cisco at $19.2bn and Alcatel at $13.2bn. But expected 2003 revenues of $3.5bn should lift it above companies such as Panasonic and a restructured Marconi - another no-show in Geneva following its huge display four years ago. Much of Huawei's growth has been fuelled by its home market where a nation of 1.3bn people is quickly taking to mobile telephony and the internet, while fixed-line phone access is being extended in rural areas.

China is already the world's largest telecommunications market by subscribers, yet teledensity - the number of telephones in use for every 100 people - is still fewer than 40, compared with 50-70 in Europe. Spending on networks is expected to increase in China in 2004, according to International Data Corp, the research firm. China's telecoms companies are spending on their networks in the high 20s as a percentage of revenues, compared with an industry average of 10 per cent.

IDC predicted last week that China would account for 48 per cent - or $15.8bn - of the region's spending on network equipment compared with an estimated 44 per cent share in 2003. The figures excluded Japan. ZTE has enjoyed success selling to developing countries such as Nigeria, India and Zambia, as well as in its home market. Shi Lirong, vice-president, told a news conference in Geneva the company was earning 25 per cent of its revenues overseas and aimed to double this to 50 per cent by 2008, when it expected annual sales of $10bn. It is just behind Huawei in Gartner's league table with $1.4bn in revenues last year.

Both Huawei and ZTE insist their success is built on the quality of their products and research and development as much as the lower costs of labour and manufacturing in China. Huawei has research centres in Silicon Valley, Stockholm, Dallas and Moscow, as well as in China, where it is developing a 3G standard - TD-SCDMA - in partnership with Siemens. It was also number two behind Alcatel in the last quarter in the world market for DSL broadband equipment, while ZTE was promoting its "end-to-end solutions" for mobile networks at the show. "Huawei and ZTE are now spending a lot on R&D and are punching above their weight there," says Dean Eyers, worldwide director of telecoms at the Gartner research firm. "A lot of their focus has been on price and they are not ahead of the innovation curve at this phase. But [Geneva] has put them on the radar screen and they absolutely could have an impact on a global scale."
Source: Financial Times
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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
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