[economy] The (re)invention of Guangdong
Yannick
SOURCE : Harvard Business Review (HBR).
http://blogs.hbr.org/cs/2012/02/what_next_for_guangdong.html
"What's next for Guangdong ?
by Gordon ORR, February 15, 2012
There are news reports almost every day about factories downing their shutters in Guangdong, one of China's most populous and prosperous provinces.
Some are shutting down because the companies that own them are going bankrupt, while other corporations are moving inland. For instance, shoe-manufacturer Guangzhou Constant has relocated its manufacturing facility to Yongzhou in Hunan, lured by tax breaks and by the prospect of wage costs that are between 15% and 20% lower. Similarly, Foxconn, which opened a factory in Zhengzhou in north-central China last year, has moved thousands of jobs out of Guangdong. Several multinational corporations, such as America's Coach, are planning to move their production out of the province (and China) over the next five years, to other nations such as Vietnam and India.
This migratory trend is symptomatic of the long-term challenges facing Guangdong, which has become China's export-manufacturing hub over the last 25 years. Will the province be able to sustain its growth trajectory, or, like Michigan in the U.S., could Guangdong lose its manufacturing base before it can reinvent itself?
Look at the data. While Guangdong's exports accounted for as much as 37% of China's exports by 2000, its share dropped to 28% in 2011. The province's exports growth rate, which was 26% in 2010, fell to 22% in the first nine months of 2011, and it has continued to decline ever since.
That's why Guangdong's population of migrant workers declined by 3% every year between 2005 and 2010. The only positive fallout has been a modest diversification of the local economy, with exports as a percentage of the province's GDP declining from as much as 85% in 2005 to a still-high 66% in 2010.
Many officials in the Guangdong government believe that the state is well prepared to weather these changes. In 2008, after identifying the weaknesses of the economy, the provincial government drew up a plan to transform Guangdong by focusing on the development of the Pearl River Delta.
Manufacturers' relocation will free land for commercial and residential development, they believe, which will result in the urbanization of the province. The rather optimistic underlying assumption is that toxic materials haven't poisoned the land and made it unlivable for human beings.
Officials also argue that many factories added little value; paid minimum taxes; and created few jobs. Closures and relocation will have a negligible impact on employment; only migrant workers, who make up 35% of Guangdong's population and contribute 25% of its economic output, will feel the pinch.
The movement of low-tech manufacturing out of the province will also result in greater social cohesion, some argue, because the region's rural areas will endeavor to close income, development, and education gaps. In fact, the government has been planning an orderly transformation to an economy characterized by modern manufacturing — more R&D as well as more skill-intensive industries — and services.
Can Guangdong manage such a transition before its current manufacturing base is eroded? It's difficult to say.
The pressures are evident. As the province becomes less central to Chinese exports, foreign investments have started to decline. Foreign direct investment in Guangdong grew by 24% a year in the 1990s, but rose by only 5% annually thereafter, compared to China's 10% a year.
Guangdong will need highly trained workers to cater to more advanced sectors. But it doesn't seem to have people with those skills. Only 9% of Guangdong's population — a smaller proportion than the national average of 10% — has a college degree. There aren't enough people in Guangdong who can work in the industries that the government has prioritized, such as pharmaceuticals, high-tech, and renewable energy.
Moreover, the proportion of people under the age of 15 in Guangdong has fallen to 17% compared to 25% in 2000. That means there will be fewer young people entering the workforce in the next 10 years. The government will have to turn older workers into lower-skilled service providers, which will require a lot of retraining. Besides, older workers are harder to retrain and retain.
Guangdong may well be able to ride out the fluctuations in the global economy, but it's far from clear that it will be able to sustain its growth through the structural transitions of the local economy.
Does that sound familiar ?"
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Jacques Theophile
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Yannick -Ed
I agree with you : China is no more (already !) the manufacture of the
world. Indeed strong habits take a long time to shift away, so the
West is still ordering its 'stuff' in the Middle Kingdom, not
understanding this 'stuff' is increasingly being manufactured
elsewhere.
China itself is looking for cheaper places to produce, either within
its vast territory (hence the decline (?) of Guangdong) or abroad in
the Asian/Southeast Asian region.
From a long term point of view this will benefit to theses places, by
redistributing the wealth to even poorer countries or regions. Please
note i am very aware that this redistribution usually begins with a
brutal exploitation of the resources and employees...
Nevertheless, by 2030 i could very well envision Indonesia with a B or
A as they are awarded by rating agencies, Moody's or S & P.
Meanwhile, in Europe, we'll struggle not to fall behind the C or even
not to tear down the Union.
So, here is another article from Stanford Business magazine, which i
copy below entirely because i'm not sure our fellows in mainland China
could access it through the filtered local internet.
SOURCE : http://www.gsb.stanford.edu/news/bmag/sbsm1201/spence.html
"The Influence of Emerging Giants
by Rachel Beck, Winter 2011 - 2012.
In this third phase of the industrial revolution, developing economies
are growing at three times the rate of their predecessors, says Nobel
Laureate Michael Spence. Their power will matter to all of us or our
children.
In 1978, Chinese leader Deng Xiaoping and his advisors began a bold
experiment: They permitted farmers to sell surplus production at
market prices. It was a radical idea at a time when China's centrally
planned economy required farmers to meet quotas and sell at controlled
prices. Food and other farm output increased along with farmers'
income and prices. Seeing the results, Deng contacted Robert McNamara,
then president of the World Bank, not to ask for money but for advice.
Advisors from the West followed, sometimes meeting semi-secretly with
Chinese leaders on Yangtze River boats, according to Michael Spence,
Stanford Graduate School of Business dean emeritus. Spence, who is
also a Nobel laureate, was not part of that original group, but he is
a trusted advisor to China's national leaders today.
"Deng sat them down and said: You know we are embarking on this new
course. It is more promising. To be honest with you, we do not know
much about running a market economy and managing it and you are a
bank, but we do not think we mainly need money," Spence told Peter
Robinson, MBA '90, in an interview for the Hoover Institution.
The restructuring plan worked. The powerhouse that China would become
ultimately revolutionized not only its own economy but the world's,
too.
Spence is the author of the 2011 book, The Next Convergence: The
Future of Economic Growth in a Multispeed World, in which he sheds
light on how Chinese leaders think as well as on his own views of the
changing global economy. "Once you are a trusted advisor, they are
extremely open with you about what they are wrestling with, what they
are worried about, and what is going on in the rest of the world," he
said in an interview for this magazine.
For the last six years, Spence has worked with the Chinese on their
strategies for growth. He helped provide external advice and
experience as Chinese leaders developed their Twelfth 5-Year Plan, an
economic blueprint that was adopted in March. That plan sets forth
another radical change for the Chinese economy because it calls for it
to move away from the export- and investment-led structure of the past
30 years toward a pattern of growth in which domestic consumption has
a much expanded role.
As China shifts its economic drivers, its leading role on the global
stage will only expand. In fact, China and India, which has also seen
consistent explosive economic growth in recent decades, are at the
forefront of the rapidly changing and increasingly important
developing world. Some 13 developing economies have grown by more than
7% for at least 25 years, Spence says, a pace never seen before and
one that may continue for another 20 years, with other countries
joining the group.
By the middle of this century, Spence forecasts, China and India
together will account for 40% or more of global income, a dramatic
climb from their 15% share of the $60 trillion in annual global income
today. That also will mean a dramatic reversal of economic power for
the United States and Europe, which today account for 47% of global
income but will account for about 20% — or 10% each — by then.
"Twenty or 30 years from now, we will have China and India, and we
won't be dominant any more, but we will be doing fine as long as we
educate people, remain innovative, and so on," Spence said during
Robinson's interview in June for the Hoover Institution's Uncommon
Knowledge web program. "We are going to have two economic giants, and
between them, how they interact and how they discharge the
responsibilities that go with their size and power will have a great
deal to do with how the rest of us do."
World economic power has been shifting for decades, but the recent
economic struggles of both the United States and Europe have speeded
up the process, Spence says. While the Western world faltered over the
last three years, the largest developing nations managed to mostly
bypass trouble.
"Right now, the emerging economies that are trading with each other
are self-sustaining. They can grow even if major industrial powers
just plug along," Spence told Australia's Sydney Morning Herald in
August. "If you go back 10 years that wouldn't have been possible.
Weak growth in Europe or the United States of 1 or 2% would have
dented growth in China and associated emerging nations. But not now.
China will become increasingly decoupled as time moves on. Its own
emerging middle class will drive its own growth."
The kind of growth seen in the developing world represents, in
Spence's view, the third century of the Industrial Revolution. In his
book, he lays out how economic growth was negligible worldwide for
several hundred years. Being rich typically coincided with being in
power, but most people were poor until England began its industrial
revolution about 1750. Industry drove incomes higher and, as a result,
consumption. National income rose and the rate of gain was sustained.
Eventually, the pattern of growth driven by technology in England
moved to continental Europe and the European offshoots — Canada, the
United States, Australia, and New Zealand. By 1950, Spence says, the
average incomes of people living in those countries had risen at least
20 times, from about $500 a year to $10,000 or more.
Over those 200 years, overall economic growth in the industrialized
world rose about 2% to 2.5% annually. In today's developing world
economies are expanding at a rate three times that, year after year.
That is because they have the benefit of importing advanced countries'
technology and know-how, he says.
China's role in the global economic transformation didn't come by
accident. When it began its market-pricing tests, some 82% of China's
population worked in agriculture. That meant the benefits of its
experiment were widespread. The timing was right for a country that
had been struggling to lift its weak economy from a period of
negligible growth and episodes like the Great Leap Forward, where
millions of Chinese starved to death. The Communist Party recognized,
according to Spence, that it would lose credibility if the poor
performance continued.
"They said we have to do something different," he says. "We have to
open up. We have to start learning from the rest of the world."
When the Chinese turned to foreign advisors 30 years ago, they sought
out well-known economists and had them work with government officials,
social scientists, and central bankers. Among the featured presenters
were János Kornai, who had studied communist economies, and James
Tobin, who taught about managing the demand side of the economy, which
was totally new to the Chinese.
Since then, the Chinese have regularly looked to foreign advisors.
Spence was connected to the Chinese through Edwin Lim, a former World
Bank leader who had done extensive work in China in the 1980s and in
1994 helped set up the China International Capital Corp., China's
first international investment bank. Lim began including Spence in
meetings with the Chinese six years ago, and Spence worked with Lim on
policy issues that the Chinese identified as challenges for them, such
as pensions, urbanization, and their role in the global economy. Over
time, Spence gained a front-row view of how the Chinese approach their
plans for growth. As part of their preparation for the latest 5-Year
Plan, Spence and others first wrote papers on such subjects as social
policies, income inequality, and interactions with the global economy,
and then combined them into one synthesis report.
"For the synthesis report and all the papers, they wanted it published
in Chinese so the Chinese could read what they had heard from outside
as part of the process of putting this plan together," Spence says.
"It is now published in Chinese, and an English version is also on the
web."
The plan recognizes China's shift from what economists call a
developing economy to middle-income status. That typically happens
when a country's per capita income gets in the range of $5,000 to
$10,000 a year, and the industries that drive growth in its early
stages of expansion become uncompetitive due to rising wages. A
country becomes advanced when incomes rise above $20,000 a year. Only
Japan, Korea, Taiwan, Singapore, and Hong Kong have sustained their
high growth rates going from middle-income to advanced-economy status.
"As a result of 31 years of high-speed growth, China has a per capita
income now of $4,000, less than a tenth of ours," Spence says. "But it
is a lot better than $400, which is where they started." He believes
that the 9% growth rate that China has achieved since the economic
reforms 30 years ago is sustainable for at least the next decade, but
the Chinese will begin to slow it down on purpose. The Twelfth 5-Year
Plan set the future growth target at 7% annually. Spence says the
lower forecast gives China "space" to deal with issues such as income
inequality and the shift toward domestic consumption. Spence also says
that the Chinese want to devote resources to cleaning up environmental
problems and developing a lower carbon and less energy-intensive
economy.
"They will eventually slow down and become more like us," Spence says.
China's labor-intensive export sectors are losing their competitive
edge as wages rise. Largely concentrated around the coastal areas of
the country, those sectors must move inland to get cheaper labor.
Eventually, the export sectors will decline and move out of China to
other parts of Asia. They will be replaced by sectors that rely more
on technology and human capital. As domestic demand rises, the Chinese
are also producing more for themselves, and sectors that serve the
domestic customer are expanding. Services will grow, global brands
will start to appear, and the government's ownership will decline. On
his visits to China, Spence says, he has seen a boom in businesses
targeting the growing middle class, including construction,
transportation, and even dry cleaners and hair salons.
India's economy, on the other hand, trails China's development by
about 14 years, he says. Economic reform began in the late 1980s, and
per capita income is now about a third of China's. About 70% of the
population lives in rural areas, but a significant shift to urban
areas is expected over 20 years. For that to happen, massive
infrastructure needs to be built, including everything from housing
and transportation to sewage, water, and energy systems.
While labor-intensive products for export drove China's economic
growth, India lacks a strong manufacturing sector. Spence points out
that India has invested in education and technology, which has allowed
its service sector to flourish, and its trade in services is expanding
rapidly in size and scope. India is known as a hub for information
technology outsourcing, and more service industries are finding their
way there. Expert medical services, film editing for television, and
grading exams for teachers in advanced countries are services all
being outsourced to India right now, he says.
Population growth is another distinction between the two countries.
Right now, China's population is 1.3 billion compared to India's 1.2
billion. But, as Spence notes, over the last five years, India's
population grew at 1.4% a year, while China's grew at 0.6%, reflecting
the country's one-child policy. He says that the nearly one percentage
point difference will have a modest negative impact on India's per
capita income growth relative to China's.
As these countries grow, they will have to consider what their billion-
strong populations are doing to the environment.
"An interesting and very recent development is a growing recognition
in the large emerging economies that the growth paths of their
predecessors and the advanced countries won't work because they put
too much strain on a broad range of natural resources and the
environment," Spence wrote recently in a paper prepared for the
International Monetary Fund.
He told the Australian: "At some time in the future, China may face a
choice between draconian measures to restrain emissions for the good
of the planet and further growth. It may choose to go for growth
regardless."
As trusted advisors, Western-trained experts may have some influence
on the decisions that this global giant ultimately makes. So far at
least, China still relies on outsiders to help educate it on what it
should do and how its actions are viewed globally.
"They are coming to realize that they will soon be big enough
economically to put pressure on the entire globe's environment,"
Spence told the Australian. "In a sense, they will become much of the
globe."