Saturday, August 21, 2010

An interesting take on China's economy

There are many reports that China has become the second largest economy in the world.  If you count the goods that pass over its borders or the sheer size of the industrial output, this might in fact be the case.

But, there remains a very large question as to whether this means much to the history of industrial development.  The big actors have always built their industrial infrastructure with all the pieces in place.  That's how England, USA, Germany, France, Sweden, etc. did it.  And this is most especially true of Japan which institutionalized industrial self-sufficiency and made it the centerpiece of their national industrial planning--especially after WW II.  In fact, the easiest way to understand Japan is that they would never import anything they thought they could build themselves.  BTW, Korea has been following their playbook to the letter.

By contrast, China offered its massive work force at below-bargain prices to attract runaway industry.  Critics of this approach often call it "screwdriver industrialization."  How this works is you import sophisticated parts (like computer chips) and assemble them into more complex items (like an iPad.)

The problem is that because you didn't go through the stages of figuring out how to make the computer chips in the first place--what kind of schools? what precision tooling? how do you figure out production? etc.--you wind up with giant holes in your partially industrialized economy.  If all this sounds complex just think of it this way--lots of very nice things are assembled in China these days but she has no indigenous industry that can build a Lexus.  Stuff made in China still sports foreign brands.  There is no Chinese Hyundai or Sony or Nikon.

Now maybe this screwdriver-to-the-world approach will ultimately prove the right path.  You capture runaway assembly and learn backward to the parts of the industrial infrastructure you missed.  We will see.  I'll believe China has passed Japan industrially when some product, invented in China, by a Chinese company becomes must-have around the world.
China's economy as No. 2: How it's playing in Japan
Some Japanese hope the news that China's economy has bumped Japan's as the world's second largest will serve as a wake-up call. Most Japanese knew this day was inevitable.
By Gavin Blair, Correspondent / August 17, 2010
China finally overtook Japan and became the world’s second-biggest economy, according to data released this week in Tokyo, which showed minimal GDP growth in the land of the rising sun, while its huge neighbor continued its blistering rise.
While some observers say the change in the economic world order is “purely symbolic,” others say it should act as a wake-up call to both countries – Japan to get its economic house in order, China to become more politically responsible.
And although some Japanese may gaze across the East China Sea with a touch of envy at the growing economic might of the new kid on the block, most knew that this day was inevitable for a country with more than 10 times the population of their homeland’s 127 million.
“China’s domestic expansion is very positive for Japan’s economy,” says Takashi Shiono, an economist at Credit Suisse in Tokyo. “While some Japanese people might feel kind of envious, this is a huge opportunity for Japanese companies.”
It is a view echoed by Dr. Martin Schulz, senior economist at Tokyo’s Fujitsu Research Institute: “The faster China grows, the better it is for Japan.” more
China still a developing country: French economist 2010-08-17 11:53:41
PARIS, Aug. 16 (Xinhua) -- China is still a developing country with its per capita income ranking behind although the country has replaced Japan to become the world's "No. 2 economy," a French economist has said.
The economic model of China "is still mainly based on subcontracting, providing labor-intensive segments for re-exportation," Diana Hochraich was quoted by French newspaper La Tribune as saying on Monday.
"Actually, China continues to import 70 percent of what it exports and it is mainly the foreign companies that export sophisticated products from China," said Hochraich, an expert on the Asian economy who has worked with the Ministry of Economy for many years.
"China remains dependent on industrialized countries, both for value-added inputs and for market for its products," she added.
According to Hochraich, China is still far from catching up with the United States and Japan in terms of innovation. "Innovation is the result of cultural sedimentation through generations." more

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