John Rapley
WITH ITS seemingly limitless pool of cheap labour, China has become the workshop of the world. The country's population is still largely rural, and the communist government keeps a lid on wage demands and prevents labour organisation. In consequence, a sea of peasants flooding into the booming cities, looking for factory jobs, has kept wages low. This, in turn, has attracted investment from around the world, helping to fuel the Chinese boom.
However, in recent months, a string of reports has suggested that China's current industrialisation strategy - of attracting labour-intensive manufacturing from higher-wage countries - may be nearing its limits. First, there is evidence that the rural-urban migration has been starting to slow down.
Adding to this is the fact that the Chinese government, with a watchful eye on the rising tide of rural discontent, is beginning to make concessions to Chinese farmers. If conditions for Chinese farmers - who have benefited little from the boom - begin to improve, the push to the cities may be further reduced.
SIGNS OF UPWARD PRESSURE
One consequence is that we are beginning to see signs of upward pressure on Chinese wages. Tellingly, some Chinese manufacturers have actually begun shifting some of their production from China to new locations in Southeast Asia, where wages are lower yet.
Now we get news that the Chinese central bank, fearing that the economy might be overheating, has begun raising interest rates. One effect of this move will be to raise the value of the Chinese currency. And given that one thing which made China attractive to foreign investors was the depressed yuan, the manufacturing boom in China may begin to cool a little.
This hardly means the Chinese 'miracle' is at an end. But it may mean that China is reaching a turning-point. Making the turn, moreover, may not be easy.
China will now have to do what other countries, which moved through the early stages of industrialisation by attracting investment in labour-intensive industries, have had to do before. Some, including some of China's neighbours, succeeded at this. Others have fared less well.
The key transition will be away from labour-intensive assembly towards more skill-intensive production. This will enable China to continue attracting investment as its wages rise. And if the country pulls off this tricky move, it will play an even more important role in the global economy. Chinese consumption, buoyed by a rising yuan, could pick up, enabling China to absorb some of the slack of an expected slowdown in the US economy.
SEAMLESS TRANSITION UNCLEAR
However, looking down the road, it is not clear that this will be a seamless transition. Some economists argue that Chinese investment in human capital formation, which will be necessary if ever more skill-intensive production is to become a reality, has been lagging.
Time will reveal if China is up to the task of shifting from a labour-intensive to a skill-intensive economy. In the short term, it probably won't make a difference to most of us. The fact that Chinese firms are able to continue finding cheap labour in the region means that the traditional development model - of moving up the product life cycle by starting with labour-intensive manufacturing - remains off the table. Caribbean labour costs are simply too high for this. We will have to continue searching for alternative ways to develop.
But over the longer term, China's future will affect us all. If she succeeds in shifting upwards, her continued growth will maintain much of the rising demand in the world economy. But if she stumbles along the way, it will not be long before virtually every part of the globe feels it.
John Rapley is a senior lecturer in the Department of Government, UWI, Mona.
