John RapleyTREMENDOUS ENTHUSIASM has greeted China's re-entry to the world economy over the last number of years. With more than a fifth of humanity coming into the world market, Western businesses saw vast new opportunities for sales. It is only now, though, that we are starting to see the unanticipated ways that China is altering the world economy.
A sign of the extent of this impact can be detected in the fact that China has already emerged as a central issue in the United States election campaign. This time, though, the issue is not China's communist threat. On the contrary, it is China's very capitalist threat: the competitiveness of her labour market which has occasioned a fierce debate in the U.S. as to whether or not China is stealing U.S. jobs.
China is taking away low-cost, unskilled jobs from the U.S., but she is also stimulating demand for higher-skilled employment. So it is understandable that the White House's chief economist recently wondered aloud what the fuss was about. But while the U.S. may end up a winner on paper, an awful lot of people will lose their jobs along the way. Not surprisingly, they are understandably angry at being reduced to figures in economic-theory articles.
Here are two other ways in which China is unsettling the world economy. First, the dramatic expansion of her industrial sector is flooding the world with manufactured goods. The resultant over-supply has caused price deflation, which is hurting the industrial sectors of many Western economies. Second, China's economic boom - her economy is presently doubling every seven years or so - have given her a ravenous appetite for primary inputs. Consequently, commodity prices have begun surging across the board, and look set to continue rising for a while.
AN INTERESTING SHIFT
This is causing an interesting shift in the world economy's balance of power. For a long time, economists believed that the terms of trade were tilted against exporters of primary goods, namely Third World countries. For much of the 20th century, the prices on manufactured goods rose relative to those on primary goods, making it necessary for poor countries to increase their exports just to maintain their purchasing power. It was this trend which led Third World governments to eagerly promote the development of industry in order to lessen their import bills.
However, China's weight in the world economy has altered the terms of trade. Now, commodity prices are rising while the prices on finished goods are falling. This is a happy time to be in a position like Jamaica's.
That's the good news. There has to be bad news, right? Unfortunately, it seems unlikely this trend will continue indefinitely. The world supply of most primary commodities is likely to catch up to demand as producers increase their output. The next few years may therefore see a burst of growth in the Third World, but it is unlikely to be sustainable.
FIERCE COMPETITION
When it ends, the fierce competition from Chinese industry will have made it even harder for manufacturing sectors in developing countries to gain a toehold in the world economy. When we speak of the economic damage done to Jamaica by the outside world, we still tend to focus on the past, on British colonialism or American trade policy. But in the future, a far greater threat will come from Chinese growth.
One question is whether China's current growth rates can be maintained for much longer. It is true that the country's financial sector is fragile, and a Japan-style crash is not out of the question. Even in the absence of such a catastrophic end, though, China's growth will eventually slow if the country does not speed up its rate of human capital formation. Investment in education remains rather low by international standards. When China has mopped up the remaining demand for low-skilled labour, she may find it hard to shift to knowledge-intensive production very easily.
For us, this means the best way to position ourselves for the future is to shift our own focus to human-capital formation, and abandon the dream of becoming a reservoir of cheap labour. But that may require a new approach to education. Even here, we are feeling the shockwaves of China's roaring entry to the world economy.
John Rapley is a senior
lecturer in the Department of Government, UWI, Mona.
