Has China Kicked Away the Ladder from other Poor Countries?

December 19, 2008 Off By admin

China’s unique combination of vast workforce, rock-bottom wages, high literacy, good infrastructure and political control over labour makes it able to out-compete its industrial rivals. China has driven down the prices of most manufactured goods, to the benefit of consumers the world over, but undercutting other developing country exporters in the process. Although skill shortages have led to recent wage pressures in some areas, with 150 million unemployed constituting an effectively infinite reserve army of labour, China will probably continue to be the world’s factory without approaching full employment (at which point wages would have to rise and other competitors can enter the market).

That level of dominance leaves few crumbs for other developing countries. In ‘Bottom Billion’ , the largely free market economist Paul Collier even calls for Africa to be protected from China, for example through Europe granting preferences to help Africa retain some kind of edge.

So to borrow from another economist, Ha-Joon Chang, is China ‘kicking away the ladder’ for other poor countries, refuting the received wisdom that getting out of commodities into industry is the route to development? Booming Chinese demand has reversed the long-term decline in commodity prices and what economists call the “terms of trade” between raw materials and manufactured goods, sometimes presented as the number of bags of coffee (or barrels of oil) needed to buy a truck. For the moment, coffee and oil prices are high, and the price of trucks is falling. Opinions differ as to whether this is the start of an extended period of high prices that defies the normal rules of boom and bust and long-term terms of trade decline. The recovery in tropical commodities such as coffee has lagged well behind temperate crops such as wheat, and history suggests that the boom is unlikely to endure for ever, as high prices encourage new entrants to the market, or technology finds new, cheaper substitutes for existing commodities.

If the long-term decline in the terms of the trade has indeed gone into reverse, (at least for those that are not easily substituted), then developing countries’ growth strategies may come to look very different in future to the standard “subsistence agriculture to export agriculture to garments and textiles to electronics” sequence followed in the past. The rewards from commodity production will be higher, and from industrialisation lower; new technologies and globalisation will allow countries to capitalise on new forms of comparative advantage, such as services involving spoken English, or tourism, or culture; countries may have to focus on domestic and regional markets, rather than trying to slug it out with China in global trade.

So has globalization’s greatest success story destroyed the chances of other developing countries following its example? Over to you…