Competition, Entry, and Future Slowth in China

Ben Muse pointed to this insightful description of the changes and competition to be expected between Chinese and other newly industrializing economies. If this analysis is even close to correct, then as entrepreneurs in other countries begin to out-compete Chinese firms, there will be a slow-down in economic growth in China [slowth], leading to more domestic unrest there. [I realize this is a long quote; if you're in a hurry, just skip to the last paragraph.]

For over twenty years now China has managed to benefit from a fortuitous set of circumstances. It has a relatively educated and low-wage workforce. It has set up a legal regime very friendly to foreign companies. It has actively sought out foreign investment. It has actively sought to import foreign technology. And it has not had to compete against other countries for that investment or technology.

Reasonably though, how long can that last characteristic of China's success continue? How long can it depend on the incompetence of other countries' leaders for its own success? China's growing heft in East Asia and the world more generally is real enough, but I can't help but think that this weakness will grow more dangerous as time goes on.

The scale of China is often too shocking to completely comprehend. I can't imagine all of the problems its leaders face: agrarian unrest as urban centers rapidly modernize, the East/West economic divide, managing all of the nationalities of Beijing's empire, finding an international role conmeasurate with its clout. And of all of this without even pretending to have the legitimacy of being democratically elected.

For these twenty and more years what Beijing has had was the legitimacy that economic affluence can buy. Only once has it dropped the ball, allowing inflation to careen out of control at the end of the 1980s, one of the reasons why Beijing's citizens decided to support the university students at Tiananmen rather than stay indoors. Since then Beijing has managed the economy relatively well.

This success fosters admiration, which is always nice to have, and emulation, which is always dangerous to have. Vietnam has begun to open its economy and is attempting to enter the WTO. India in the last fifteen years has finally turned away from its failed socialistic economic experiments and found the better friend of the poor is capitalism. And Japan has long moved many of its factories to Southeast Asia, to countries such as Malaysia and Thailand that have similar economic characteristics as China.

None of these countries would have been competitors for China's manufacturers twenty years ago, but they are now. And I don't think this is fully appreciated by many within China. The sun is setting on the "easy" part of China's modernization.

... Investments will not necessarily flee China and move to other countries: the world's economic pie is not static and not a zero-sum game. However, future investments will be made across a greater number of countries, China will cease to suck up so many foreign dollars, and the greater competition offered by other countries will cut into the margins that allow China to use its profits to solve its other pressing problems, whether they be an inadequate transporation infrastructure, agrarian reform, continued expansion of educational opportunities, or many others.

What does this say about the importance of China in the world economy? China will be increasingly important, but perhaps not as important as The Economist recently suggested ($subscription required).

I strongly recommend Ben Muse's blog. I visit it on a regular basis and always find items of interest.