Most of the headlines that blare at us from newspaper pages and internet sites are noise. Much of the breathless commentary that we get every day in the opinion pages and on cable news is fluff.
But every now and then in this world something real happens; a news story comes along that points to profound forces at work. These often get less attention than, say, Lady Gaga’s wardrobe choices at Yankee Stadium or for that matter General McChrystal’s observations to a Rolling Stone reporter, but these are the stories that will remake the world.
There’s a story like that by Mark Lee on Bloomberg today. “As Chinese Wages Rise, Machines Replace Migrant Workers,” read the headline. “New minimum wage laws, a looser yuan and worker strikes like those affecting Honda Motor Co. and Toyota Motor Corp. are raising costs at plants in China’s Pearl River Delta, leading to increased automation of assembly lines.”
That headline and that paragraph point to changes, pressures and uncertainties that are far more consequential than anything that has happened in Washington since January 2009. And like all real news, it has its good sides and its bad.
On the up side, the news that Chinese workers are fighting for and winning better wages is good for them, good for the cause of human justice, and (together with other recent developments like China’s new flexibility on the value of its currency) enhances the chances for the world economy to rebalance itself in an orderly and positive way.
Some years ago I visited an isolated village in China where the people faced relocation to a new village as the Three Gorges Dam neared completion. My arrival was a big event in a village (hamlet, really) that didn’t see that many foreigners up close. We crowded into the largest house around as everyone wanted to get in on the discussion. There was a lot of talk about the upcoming resettlement; most of the villagers were cautiously optimistic. For at least a few years, they said, things would be better. They were being allocated new land up the hillside near the new village site, and until the waters rose they would still be able to work the old land. This, they could live with. Sitting on the only chair in a room that looked a bit like a carport, but was a storage area for sacks of sweet potatoes, peanuts and hot peppers and doubling as a community gathering space, I asked the people in the village if there was any message they wanted me to carry back to the United States.
“Yes,” said the most assertive of the villagers. “Tell them to build us a factory.”
“And how much would you want to work in this factory?” I asked.
The question set off a great wave of deliberation and discussion, but after a while a consensus seemed to emerge: about $70 per month in US money.
“Are you sure?” I asked. “Is that really what you want?”
“Yes,” said the spokesman. “For that money, we will work very hard.”
I believed them, and so have countless investors, Chinese and foreign, who have built what may soon become the world’s largest manufacturing economy on the basis, primarily, of low wages, hard work, and tight labor discipline. Following an economic model pioneered by Japan after World War Two and then by Japan’s ex-colonies on Taiwan and the southern half of the Korean Peninsula, mainland China developed the infrastructure required for a massive export-oriented growth push, reassuring foreign (and Taiwanese) investors that the world’s largest Communist country was a safe place for their money. Linked to the world economy and its customers’ markets by the telcom and IT explosions that vastly reduced the cost of sending information worldwide and facilitated such practices as just-in-time inventory and the integration of design, marketing and production into global networks, China rode the wave of export growth to global power and wealth.
Now it is clear that China faces a turning point. Twenty years ago China was a relatively insignificant part of the global economy and it could grow by taking market share from less efficient producers. But now it is a large enough presence in the world that it faces limits on growth: the world’s leading supplier cannot indefinitely faster than the demand for its products. If the US is growing, long term, at about 3.5 percent a year, and the EU at about 2.0 percent, China cannot indefinitely grow at 10 percent as long as exports are its chief engine of growth. Many of the disturbances in the world economy in the last three years are linked to the consequences of China’s rise and more generally the rise of export-oriented growth strategies in Asia and beyond. The fall in blue collar real wages in the US and the crisis of the European social model are partly due to the enormous increase in the world’s supply of manufacturing labor in countries like China. The cheap interest rates that contributed to the hothouse financial climate of the last decade were fueled by the accumulation of enormous foreign exchange reserves by exporters seeking to hold their currency values down (to keep their exports competitive). Domestically, an era of loose credit and rapid growth seems to have left China with a deeply flawed financial system in which a number of bubbles look increasingly likely to burst.
All these signs point to the need for change in the world economy, even as the vast public government deficits and unfunded, unsustainable entitlements in western countries suggest that demand for Chinese manufactured products may grow less robustly moving forward. As Americans and Europeans loose confidence in their social welfare systems (and as they seek to rebuild their household accounts to offset the effect of lower real estate values on their net worth), private consumption may face constraints for some time to come.
Domestically, China is also at a turning point. It is not just the proliferating financial bubble; unrest is growing. Something like 800 million Chinese will be moving from the country to the city in coming decades, and Chinese society is becoming a much more complicated entity — harder to understand and harder to govern. One clear area of tension: many of China’s lowest wage urban jobs (factory and otherwise) are held by new migrants from the rural regions. Bewildered by urban life, desperate to win some kind of a foothold, living from hand to mouth and sending money to children or aged parents at home, these workers tend to be hardworking, desperate, disciplined — and used to living on very little.
But that changes with time. Karl Marx and Friedrich Engels, ironically, were the first to analyze the phenomenon. Peasants, they said, were hard to organize. (Marx compared them to potatoes, who could only be organized by putting them into a sack.) Factory workers are different. They work together, rather than each on his or her own tiny plot of land. Their interests are distinct from the factory owners, and easy to recognize. They have many opportunities to build trust and to organize on and off the job. They also have power; when peasants quit farming, they starve. When workers lay down their tools (especially in a tight labor market), the factory lies idle, costing the owner. Moreover, as perhaps Marx and Engels failed fully to recognize, factory workers can gain power in other ways — in western history, they mostly gained it through voting.
The point is that China’s labor force is shifting from helpless and uprooted peasants to savvy urban veterans. The $70 per month that sounded so enticing back in the sticks on the banks of the Yangtze looks more like a pittance in the glittering Chinese cities where everything in the world can be had for the right price. And while there is a lot of unskilled labor still ready to flood in from the farms, skilled workers are in greater demand.
Optimistic scenarios for China and the world economy more broadly are based on a kind of confluence between the interests of those Chinese workers, the Chinese economy as a whole, and the global economic situation as well. The hope is that China’s workers will succeed in raising their wages, winning a greater share of the national income. That will accelerate the growth of China’s consumer middle class: instead of depending so much on exports for growth, China can look to domestic consumption to buy more of the refrigerators, cars, computers, cameras and other fine goods that the factories build. Greater domestic consumption will reduce China’s dependence on foreign markets (especially the US) for growth, giving China more foreign and economic policy independence even as the working class gradually and peacefully turns into the kind of satisfied consumers that are so common in the west. This is presumably the kind of China that the Beijing authorities want to build, and they hope to build it by planning and decree rather than through a messy process of democratic politics.
This would be good for the rest of the world. As China moves up the economic food chain, countries like Vietnam and Bangladesh (to say nothing of the countries of sub-Saharan Africa who would like to taste more of Asia’s success) will have more opportunities to lure away industries that become less economic in China. Meanwhile, western countries will be able to move to more sustainable patterns of consumption without setting off a worldwide deflationary spiral. With lower wage competition in China getting less acute, there is new hope for blue collar wages in the west as well.
All this describes the world that the smart money is rooting for if not always betting on — and it pretty well describes the kind of world I would like to see as well (although I’d like to see more democracy in China than some of the bureaucrats in Beijing think is wise). That’s why the first part of Mark Lee’s story looks like good news: rising wages in China and the government’s apparent willingness to accommodate the drive among workers for better lives are signs that the forces driving the positive realignment are in place and working. It also strongly suggests that the Chinese government wants to play ball: Beijing gets the picture and knows that China really does need to shift toward internal demand as it adjusts its economic strategy to new global conditions.
But there is a fly in the ointment, and this is why the Lee story should keep us all up at night. As Chinese workers become more demanding, factory owners are responding by investing in higher tech, labor-saving equipment. This makes perfect economic sense and in the long run it is exactly what should be happening. Surely the goal of industrialization, broadly considered, must be to allow more and more people to enjoy more of the necessities and conveniences of life with less and less backbreaking and dangerous labor. Substituting machine power and even machine intelligence (liberating people from the drudgery of counting widgets as well as the drudgery of making them) for human muscle and brain is where we want the human race to go. (This also promotes the substitution of cleaner, more efficient and less energy intensive methods of production.)
However, while the paradise of abundance that we are striving to reach features a lot of people lounging at the pool while robots bring them mimosas, in the short- to medium-term (by which I mean the lifetime of everyone reading this post) the substitution of capital for labor will combine with the ability of investors to shift from country to country in search of cheap labor to to exacerbate social and economic problems both in China and in the rest of the world.
The trouble is that productivity-enhancing technology is already relatively inexpensive and is becoming cheaper very fast. Chinese wages are still very low by western standards and in most cases remain well under $200 per month, but it is already becoming economical to outsource to cheaper countries (or cheaper places in China) or replace those workers with sophisticated machines.
The falling price of productive machines partly reflects advances in computer technology and engineering more generally; it also reflects the different wage levels in different parts of the world. For decades now companies (often with government help) in high wage countries have invested in labor saving technology as a way of staving off the pressure to move overseas. All that technology is now on the shelf; the kind of high tech machine tools that have allowed German car companies to continue manufacturing in Dusseldorf can be exported to Shanghai.
I was first struck by this more than ten years ago when on a flight from Thailand back to the US, I had a layover in Tokyo’s Narita airport. The airport lounge had a remarkable device that poured draft beer into a tall glass — and adjusted its pour to take account of the amount of foam. In Thailand, where people are cheap and machines are expensive, there would have been no point to a device like this. In Japan, where labor is expensive and technology is cheap, it made perfect sense to replace a bartender with a machine. Thai bartenders are in no danger of losing their jobs to an invasion of Japanese mechanical beer dispensers, but Chinese, Thai and other manufacturing workers will have to face the consequences of the robot-dominated assembly plants that Japanese companies have developed to keep Nissan and Toyota profitable at home.
It’s far from clear how all this will work out, but I suspect that the world’s policymakers and investors have not fully come to terms with the ways that labor saving technology will complicate the efforts of Chinese and other Asian workers to raise their wages and improve their living standards moving forward. Chinese labor risks being caught in a kind of scissors squeeze: the lower blade is competition from low wage platforms in both China and other countries and the upper blade is the low cost of labor-saving technology. These pressures will make it hard for Chinese workers to win higher wages and for the Chinese economy to shift as rapidly as we all hope it can to domestic-led growth. They will also make it hard for the Chinese government to satisfy the aspirations of the increasingly powerful and demanding urban working class now being forged from the hundreds of millions of peasants headed in from the rice paddies in quest of better lives.
The challenges ahead are bigger than most of our policy makers understand and we are moving rapidly into uncharted seas. Even rapidly developing countries like China face challenges for which the world’s wise men and women lack answers. That, I think, is the message of Mark Lee’s article, and it is almost infinitely more important than almost anything else going on.
[ Photo by Christoph Filnkößl ]