The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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July 16, 2007

China Skeptic

When it comes to Chinese economic growth, this is the type of story to which we have become accustomed...

Goldman Sachs said it is forecasting second quarter GDP growth for China of 11 pct year-on-year, overcoming the high base from a year earlier, with CPI growth of 4 pct for June.

... and this is the type of picture we have come to expect:




That sort of data is impressive -- even scary -- but Jeremy Haft, writing in today's Wall Street Journal (page A12 in the print edition), suggests there may be less to those pictures than meets the eye:

If you visited a typical Chinese factory, you'd see why. It lacks capital, technology and know-how. Its workers place obedience over quality. And it sits along an endless chain of middlemen.

On average, it takes China 17 separate parties to produce a product that would take us three. Unlike Japan in the 1980s, little companies drive China's economic growth, not big ones. China's industries are composed of hundreds of thousands of tiny factories and farms -- plus traders, brokers, haulers and agents, all of whom take control of the goods and materials but add little value to the product. With every additional player in the chain, the cost, risk and time grow. Effective quality control in this environment is difficult.

So is effective cost control. Despite cheap labor, making goods in China is often more expensive than in the U.S. Far from being a bottomless ATM of cheap consumer goods, China is a risky, costly and time-consuming place to do business.

Yet polls show a majority of Americans believe China has mastered basic manufacturing -- and it's now barreling into our high-tech backyard. That's false. As the product recalls demonstrate, China can barely make low-value goods reliably, much less higher-value ones. The problems are structural, not the result of a few bad apples.

To that last point, consider this not-long-ago assessment from the OECD:

China’s staggering economic growth rate has stood at almost 10% for the last 20 years. One cause is strong exports underpinned by low production costs. Information and communication technology now claim the lion’s share of China’s export trade, accounting for approximately 30% of its exports in 2005. The year before, China ranked as the largest exporter of IT products, outstripping the EU, Japan and the US. Since 1996, China’s IT goods trade has been growing at almost 32% a year...

That certainly sounds like some "barreling into our high-tech backyard," but the underlying reality is complicated:

Some 55% of China’s total exports are attributed to production and assembly-related activities, and 58% of these are driven by foreign enterprises, of which 38% are entirely foreign-owned. In fact, among the top 10 high-technology companies by revenue, not one of them is Chinese...

Although regarded as the world’s largest potential IT market, China has not reaped the full benefit of its large-scale IT output, particularly in terms of productivity. Apart from mobile phones, the vast majority of Chinese do not yet use IT. In general, IT spending is lower in China (about 4.5% of GDP in 2005) than in leading OECD countries (about 9% of GDP in 2005).

One paradox is that while low IT costs brought about by China’s competitive supply has helped OECD-based firms upgrade, reorganise and boost productivity, the actual uptake of IT within Chinese firms is lagging behind too. Notions like supply-chain management, resource planning or knowledge management software that are standard currency in dynamic OECD firms are still rather undeveloped in China.

All of which leads Mr. Haft to suggest that the Chinese century may take awhile to develop:

To compete head-to-head with the American economy, China will have to revolutionize the very way its industries are organized. It must shake out the thousands of low-value middlemen and integrate the tiny factories into larger, more competitive companies. It must train a workforce in modern technology and business practices. And, it must instill transparency and a uniform rule of law. Such an effort could span generations.


July 16, 2007 in Asia , Economic Growth and Development | Permalink


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Listed below are links to blogs that reference China Skeptic :

» China's product quality from Trade Diversion
Via David Altig, a WSJ piece that's skeptical of China's ability to ascend the product quality ladder: China's industries are composed of hundreds of thousands of tiny factories and farms -- plus traders, brokers, haulers and agents, all of whom take c... [Read More]

Tracked on Jul 18, 2007 5:26:46 PM

» China's Economic Growth: Grounds for Skepticism? from Businomics Blog
China's economic growth topped 11 percent in the first quarter, which is pretty darn fast. For comparison, we think that long-run U.S. growth is about 3 percent. (Both figures are inflation adjusted.) There are skeptics. Macroblog has a good commentary [Read More]

Tracked on Jul 21, 2007 2:53:10 PM


Personally, I was in China for a couple of years and I should say that the ideas in this article are very applying..

Posted by: Marius | July 17, 2007 at 04:07 AM

Per capita GDP in developed countries is characterized by fluctuations (normally distributed) around constant annual increment, as presented in my paper

Real GDP per capita in developed countries http://ideas.repec.org/p/pra/mprapa/2738.html .

Therefore, the growth rate is not a good representation of economic growth. The same annual increment in GDP per capita means very fast growth for relatively poor countries, as China, and for rich countries - slow growth. In past, developed counties had the same rapid growth, which corresponded to low GDP per capita.
Thus, economic trend for growth rate is proportional to the reciprocal value of the attained level of GDP per capita.

For the sake of consistency, the curves presented in your post have to be multiplied by the attained level of real GDP per capita. Then you can compare economic performance of poor and rich countries. I did it already and found that China and Russia are not so much impressive in annual increments as in growth rates - they are just catching up. There is no way for them, however, to really join the club of rich countries, the absolute gap, as expressed by per capita GDP, is not decreasing. The situation is similar for new members of the EU. Unfortunately for them, they are lagging further and further I term of absolute GDP per capita.

Posted by: Ivan Kitov | July 17, 2007 at 06:17 AM

Here is the link to the figure showing annual increment of real GDP per capita as the function of the attained level of real GDP per capita in China, Russia, and India compared to that in France.


Posted by: Ivan Kitov | July 17, 2007 at 08:11 AM

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