Archive for July, 2010

Crying wolf on rising wages driving production out of China

NYT, April 2005 — China Feels a Labor Pinch:

“…a worker in a sneaker factory in southern China today is paid about 30 percent more than his counterpart in Vietnam and 15 percent more than a worker in Indonesia … Some big companies are moving production to Vietnam…”

NYT, June 2008 — Investors Seek Asian Options to Costly China:

“Canon is no longer building or expanding factories in China, but the company is doubling its work force at a printer factory outside Hanoi to 8,000… A long list of concerns about China is feeding the trend … [M]ost important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.”

NYT, July 2010 — Bangladesh, With Low Pay, Moves In On China:

“As costs have risen in China, long the world’s shop floor, it is slowly losing work to countries like Bangladesh, Vietnam and Cambodia…”

Now, as a partial defense for the NYT, this is a gradual process and is likely to unfold over many years, not all at once (and there’s more nuance to the articles than the quotes pulled above might suggest).  But still, there’s a limit to the number of times you can write virtually the same story over and over, without at least acknowledging the fact that you’ve been saying the same thing for five years.  And if this really has been going on since 2005, it’d be nice to see a little more real data, rather than the same anecdotes of companies claiming China’s gotten too expensive…

Is the era of cheap Chinese labor over?

That’s the title of the latest Economics by Invitation online debate over at the Economist, featuring excellent responses from Stephen Roach, Tyler Cowen, and Yang Yao, amongst others.  As regular readers of this blog (Hi Mom!) might imagine, it’s a question I have more than a passing interest in.  To grossly oversimplify, the majority answer to the title question seems to be ‘no’, an assessment I agree with.

I didn’t notice it in any of these responses, but a common mistake in this discussion is the assumption that if China’s exports are moving up the value-chain this is necessarily creating some breathing space for other low-wage exporters.  Consider, for example, the fact that between 2000 and 2008 the share of apparel in China’s total exports dropped from 13 percent to 8 percent, as the country moved into producing more high-tech goods like DVD players.  On the surface, such a statistic should be welcome news to apparel exporters in countries like Bangladesh and Vietnam, who hope to move in on global markets as China climbs up the value chain.

But that’s a fallacy, because what really matters to an apparel exporter in Bangladesh is not the share of apparel exports in China’s total exports, but rather China’s share of global apparel exports.  And the thing is, while apparel was losing ground in China’s export portfolio over the last eight years, China’s stake in the world apparel market increased dramatically — doubled, in fact, from 18 percent to 36 percent (data from UN COMTRADE).

When you’re a country of a billion people — 45 percent of whom still live in rural areas — there’s no reason you can’t  simultaneously move up the value chain *and* increase your competitiveness in low-value manufacturing.  So even as many Chinese are growing rich, the era of cheap Chinese labor still isn’t over…

The New, More Humble IMF

Being an economics nerd, I’m signed up to the IMF’s email list, so that when they release a major publication (like last week’s WEO update) I’m amongst the first to know.  The funny thing is, every email from the IMF that arrives in my Outlook inbox is tagged ‘Unimportant’.  Now you might not even know that Outlook had an ‘Unimportant’ tag, but as the opposite of the little red exclamation mark signaling ‘Important’, you can choose to send your email with a little downward-pointing light blue arrow, signaling ‘Unimportant’.  But of course nobody ever bothers to make the effort to tag something as unimportant; nobody, that is, other than the IMF.  Literally, of the 13,000+ emails currently in my inbox, the *only* ones with the tag ‘Unimportant’ are from the IMF.

So what’s the deal?  Is this the IMF trying to demonstrate a little modesty?  No longer pushing their policy views on the rest of the world, just meekly letting you know they have some new ideas, and, if you’re not too busy and once you’ve gone through all your other emails, maybe you’d be interested in checking them out?

The irony, of course, is that I receive tons of far, far less important emails than those from the IMF.  For example, somehow I got six separate emails explaining how we’re switching the code we use to charge long distance calls at work – count ‘em, six…

Our Last, Best Hope: Emerging Market Consumers

For any pessimists out there who can’t imagine what will drive global growth in the new, post-crisis environment, check out the below graph, from the IMF’s recently released WEO update :

We just had the worst global downturn since the Great Depression, and retail sales in emerging economies barely slowed at all.  They’re now nearly 60 percent higher than they were in January 2007.  Yes, this was starting from a small base, and consumption as a share of GDP is still too low in many emerging economies, but still, that’s pretty remarkable.

It also reminds me of one of my favorite survey data points: according to a 2007 McKinsey analysis, the average Chinese shopper spends 9.8 hours a week shopping, nearly three times as much as his/her American counterpart, and a full 41 percent of Chinese list shopping as a favorite leisure activity.

Just further evidence that the reason Chinese households don’t consume a lot isn’t because they’re afraid to spend, but because they’re poor.  But lucky for the global economy, they’re getting richer every day…

The G20 and the stock market sell-off

I wasn’t particularly enthusiastic about the outcome of the G20 summit.  But the Post’s attempt to link a less-than-ambitious summit communique to Tuesday’s dramatic sell-off on stock markets is pretty ridiculous:

“The worldwide drop seemed to be a verdict from investors on the results of the recently concluded Group of 20 summit in Toronto. World leaders’ pledge to cut government deficits and sustain economic growth will be easier said than done, the markets judged.”

Oh please.  We’re supposed to believe that investors were expecting some very specific new policies to come out of the summit, and when the bland communique was released on Sunday they read it, then to decided to wait one day, and then on Tuesday expressed their views on the summit?  Give me a break.

As a general rule, any time the media tries to give a causal explanation for movements in the stock market, I suggest you take it with a grain of salt.  Moreover, the trend of  treating stock markets as an instant judgement on economic policymaking – markets up, policy is a success, markets down, policy is a failure – is both misleading and inappropriate.  Beyond being fickle and unpredictable, stock markets are simply not a good proxy measure for the overall health of an economy.  When the market goes up, it is partial evidence that one segment of the economy is doing well, but that’s about it…



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