WASHINGTON – There’s a fashionable theory making the rounds here that China’s booming manufacturing economy will soon “hit a wall” just as did the export-driven Japanese economy in the early 1990s. Relax, the hit-the-wall crowd urges, the Chinese can’t innovate much less maintain their current pace of economic growth.
Not only is this view misguided, it threatens U.S. global competitiveness. One reason is that those who espouse this position are essentially arguing that policy makers do nothing but wait for China’s economy to cool off and fade while we continue to out-innovate them. Problem is, there’s a growing gap in the U.S. between technology innovation and the ability to scale up and produce new value-added products and services.
At the very least, we need to close that gap.
Moreover, some proponents of the hit-the-wall theory are the same Beltway insiders who enriched themselves by helping to ship U.S. manufacturing jobs to China, a ruinous trend that has effectively hollowed out the U.S. industrial base.
Naysayers also point to China’s overheating real estate market as another sign of an impending slowdown, along with a declining rate of growth for China’s GDP. It’s also true that China’s state-run enterprises are a drag on economic growth, and the failings of the central government are, as one observer says, “unbelievable.”
But China watchers note that the stasis created by China’s command economy is slowly being challenged by more nimble provincial and municipal governments. Regional and local officials “are doing everything in their power to make the system work, sometimes against the wishes of the central government,” Dan Breznitz, a China expert at Georgia Tech’s Nunn School of International Affairs, told a recent hearing before the U.S.-China Economic and Security Review Commission. “We should not rely on China failing.”
Robert Atkinson, president of the Information Technology and Innovation Foundation, argues that the dismissive attitude toward China’s innovation drive is predominantly held by “Washington elites.” “There are way too many who have this deeply held view that we just don’t have to worry” because the China can’t innovate,” he told the U.S.-China commission. China “will hit the wall when they get to the stage of Japan, which is a long time from now,” Atkinson predicts. “The Chinese can go 40 or 50 years before they get to that wall.”
Breznitz stresses that China is not Japan. Municipal and provincial officials, he argues, have a clear set of goals, the money and the will to transform China’s economy in hopes of surpassing ours. “It is time that we wake up and smell the jasmine or ginger [tea] because it’s coming,” Breznitz warns.
One could argue that China’s current leaders are taking the nation in a direction that is unsustainable. Beijing’s air pollution is but one example. Another is rising labor costs in China, a trend that has some Western companies looking for ways to pull their manufacturing operations out of China. But penalties related to government economic and other incentives will make these manufacturing “re-shoring” efforts difficult.
Rather than wait for China to hit a theoretical wall, the U.S. must rebuild its manufacturing capacity from the ground up. Atkinson’s foundation is preparing a report to be released in June that will propose the creation of 15 “manufacturing universities” that will be modeled on Germany’s approach to training manufacturing engineers. Such an initiative would augment other efforts to revive U.S. manufacturing so that we can begin the close the gap between laboratory innovation and the introduction of new products and services that can help create a new engine of U.S. economic growth.
Which were the most productive times in the USA in the last 100 years?
Probably WW2 and the "space race" era of the 1960s.
During both those periods the relevant US industries were being driven as a command economy.
The goals were generally national - production of war materials, getting a man on the moon.
During those periods the major companies spent a lot less time beating each other up in court.
It is certainly true that the government does not innovate itself, but it can direct the industry to work towards innovation.
I think where Americans keeps falling down is that they see this as a competition: USA vs Russia, USA vs China,...
I doubt China sees it this way. China are not interested in becoming a bigger economy than USA. They are just interested in becoming a bigger economy. Their goals surely make for a bigger economy than USA, but beating USA is not a goal in itself.
As an outsider looking in, there are pros and cons to a command economy.
When over-done, a command economy has the down side of stifling some market driven development.
A command economy does however prevent some useless competition.
The free-market view of competition is that competition encourages innovation. That was perhaps true at some time. These days far too much Western competition is playing out in IP battles between belligerents. The innovation isn't happening. Instead it is being stifled.
The only sustainable trade is real trade - I make a real product or service that you value; you make a real product or service that I value - let's make a deal. If I don't have a real product or service to trade, NO TRADE TAKES PLACE.
US fiat money has infected the global system and broken it down, temporarily making it possible to trade virtual credit for real, manufactured products, causing enormous trade imbalances as a result.
A return to honest, commodity-based money is the only way to resolve the imbalances of trade.
For anyone interested in the China-Alarmist perspective please read Forbe's article on China's financial system: "Ponzi in Peking - China Meltdown, be very scared." It appears in their 28 December, 2009 issue. As the title implies it comes from the perspective of impending doom, which runs counter to George's point, but regardless of which prognostication you favor this article also provides to Westerners some good insight on just how things work over there. Yikes!
This article along with my everyday work with our blooming Asian vendor list(mostly Taiwanese, Korean and Japanese companies who've set up shop in China, and some native Chinese companies) are the cornerstones of my thinking on business in China. It can be summed up this way: while I am very sceptical of the long term health of their financial system and overbearing command and control government the shear number of hungry and able people will keep them competitive for the rest of my career.
Not much in George's article here causes me to waver from that view except this important new datapoint:
"...China watchers note that the stasis created by China’s command economy is slowly being challenged by more nimble provincial and municipal governments. Regional and local officials “are doing everything in their power to make the system work, sometimes against the wishes of the central government.”
This is important because, if successful, it could take out one of the impediments mentioned above and will make them even more competitive. Freedom Works!
And that bring me to my final point which comes in the form of a question: why is decentralization good for China but bad for the US? We certainly aren't heading in that direction now.
Demographics might be China's biggest nightmare in years to come as the population is clearly ageing and there are not enough young people to keep the levels of growth we have seen in the past 20 years or so. How China manages the inevitable transition from a labour-intensive economy to a high-tech high-value economy will dictate its future.
The raising labor cost got a big effect on China's growth. This is where China had the fullest advantage. All their investments are in large scale production and labor intensive. Soon we may see a big change in the current scenario of the Chinese growth.
It took awhile for the motive all of this positive spin and coverage on China to sink in on me. EET understands where their advertiser and reader market is shifting, at least in their minds. Good luck with that, I'm sure they'll let most of your coverage to be read. China is my competition, in business, in freedom and in human rights. I don't hate or fear them, bring it on.... Yes, a rising middle class in China may force positive change, just as our falling middle class will force change. Can we get back to signal integrity now.....
Yes, labor costs are rising in China. Cheap labor was of course one of the key reasons to shift manufacturing to China on the first place. The savings also made it worth all the hassles. Now we are hearing from manufacturing services providers that more western companies in China want out, but Chinese joint venture partners control product specs and other documentation. Hence, it's going to hard for these companies to extricate themselves from joint ventures, especially if they have received government incentives.
Meanwhile, the central government is pouring funds in areas away from the coast like Chengdu. One reason is that the bosses in Beijing realize they have to shift investment away from the coast to get closer to new sources of labor.
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