Wednesday, July 20, 2011

Is China facing an American future?

At first glance, that may sound like a crazy question. The two giants of the global economy appear to be heading in opposite directions. China is the world's up-and-coming superpower, propelled forward by stratospheric growth, advancing industry, a goal-oriented political system and a supposedly superior form of economic management, “state capitalism.” On the other side of the Pacific, the U.S. looks like a bumbling behemoth, its competitiveness on the wane, its political system paralyzed and its future direction uncertain. What could these two economies possibly have in common?

More than you think. Very rapidly, China is beginning to encounter the same economic pressures as the U.S. Some are simply the natural outgrowth of China's supercharged development. Others are being brought about by policy errors – similar, in fact, to those made by the West before the 2008 financial crisis. All of these new pressures are serious and, if not handled properly, could alter the course of China's economic progress.

First of all, China, like the U.S., is facing a challenge from competitors with lower wages. As my colleague Bill Powell recently pointed out, the era of cheap labor in China is over. Wages are growing about 12% a year (in real terms). As a result, China is losing its competitiveness in labor costs to other emerging economies. That puts at risk the low-end, labor-intensive, export-oriented manufacturing (apparel, shoes, electronics) that has created countless jobs and jumpstarted China's rapid growth. Just like the U.S. has lost factories to lower-wage economies like China, China is already seeing neighbors like Vietnam eat into its dominance in these types of industries. (more)