What New Role Model Nations in Asia Can Bring!


Summary

From the historical perspective, in the colonialism era, Asian deindustrialization was due to the pooled effect of at least two factors. First, the unequal terms of trade and commerce that the colonial home countries imposed by force: competition from European manufactured goods on the Indian and Chinese markets had taken place in a context of free trade that was anything but free, since the colonies were compelled to open their borders unilaterally to European product without any quid pro quo. Second, Europe had acquired a decisive lead in technology: mechanization brought major increases in productivity, resulting in an explosive growth of manufactured goods with lowered production costs.

China and India have adopted a measured and gradual approach to liberalization in order to shift to more productive economies and pro big business approach. In the last decade investment in China generated a lot more growth than in India where average investment rate in China was 60 per cent higher than in India its growth exceeded that of India by a greater margin (10.1 per cent against 5.5 per cent). This relation appears to have been reversed in the more recent period as China deepened its integration into the global economy at a faster pace, and experienced a surge in inflows of FDI, an investment boom and rapid growth of exports and imports. Between 2000 and 2005, Investment in India has generated more growth than in China.

Growth miracles are a result of a dramatic shift towards more productive firms and better forms of industrial organization. These same types of situation also translate to India and China where India lead the market in offshored back-office services, but as a manufacturing center it lags behind China, Thailand, and the rest of Asia. With high-skill sectors accounting for almost 40 percent of the manufacturing output of India, it is in a good position to absorb some of that increase. The country offers abundant engineering and technical talent: every year, it produces 400,000 graduate engineers, second only to China’s 490,000. In a few important segments (such as customized performance chemicals, including advanced printing inks and adhesives), domestic demand is rising as well. In India only 1.2 million people hold engineering degrees—4 percent of the total university-educated workforce, as compared with 33 percent in China. Pooled with the generally low level of suitability among Indian graduates, this means that India could face an overall shortage of engineers in the next few years, with a particular squeeze in certain cities. Consider engineers. China has 1.6 million young ones, more than any other country we examined. Indeed, 33 percent of the university students in China study engineering, compared with 4 percent in India.

China’s pool of potential talent is enormous. In 2003 China had roughly 8.5 million young professional graduates with up to seven years’ work experience and an additional 97 million people that would qualify for support-staff positions. Just one-quarter of all Chinese graduates live in a city or region close to a major international airport—a requirement of most multinationals setting up offshore facilities. Raising the quality of China’s graduates will be a long-term effort, but even modest improvements would make a huge difference. If the proportion of Chinese engineering graduates who could work at global companies increased to 25 percent (as it is in India), from today’s 10 percent, China’s pool of qualified young engineers would be among the world’s largest by 2008.

The labour market problem in China, India and industrial countries cannot be solved by the expansion of trade liberalisation through market integration and high economic rate of growth only but also originate primarily in macroeconomic and financial policies. More importantly, massive unemployment and underemployment in developing countries especially in Asia have their origins in structural weakness rather than market integration per se. Not only that, the role of MNCs in labour employment is only a tiny fraction of total labour forces, for example in China its only employ around four million worker and in India where employment in the entire IT services is only one million. Last but not least, the emergence of China and India (including Vietnam) has contribute to the main source of insecurity among workers in world including Asian workers as already indicated by widespread global unemployement and underemployment.

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From the historical perspective, in the colonialism era, Asian deindustrialization was due to the pooled effect of at least two factors. First, the unequal terms of trade and commerce that the colonial home countries imposed by force: competition from European manufactured goods on the Indian and Chinese markets had taken place in a context of free trade that was anything but free, since the colonies were compelled to open their borders unilaterally to European product without any quid pro quo. Second, Europe had acquired a decisive lead in technology: mechanization brought major increases in productivity, resulting in an explosive growth of manufactured goods with lowered production costs.

In the 1950’s and 1960’s, it was broadly argued that long-run income levels depended on capital investment, and raising savings through a “big push” would launch countries into self-sustaining growth or “take-off”. Accordingly, the World Bank funded infrastructure, like dams and roads. However, by the 1980’s international financial institution policymakers decided that capital accumulation and technological progress depended not so much on investment and careful engineering, but rather on a better economic policy environment (Williamson 1990, World Bank 1993a). Development assistance was extended conditionally to encourage countries to adopt economic policies associated with this “Washington consensus” view, characterized by reduced tariffs (free trade), appropriate foreign exchange rates and low inflation. By the 1990’s, this approach too became broadly seen as unsuccessful, and according to a new consensus, the mandated policies would have only limited impact in the absence of fundamental institutional reforms (World Bank 1998). Income differences can be attributed, at least in part, to differences in TFP which include fundamental institutional conditions. Previous studies of poverty trap models with endogenous TFP pointed to the failure of adopting the most productive technology as the cause of low TFP and income in poor countries. The Industrial Revolution was characterized by a shift from less productive forms of production (household workshops) to more productive ones (factories). In China case, the source of growth from TFP contribution alone in 1984-94 was 4.6 per sent annually which was the highest in Asia.

China and India have adopted a measured and gradual approach to liberalization in order to shift to more productive economies as also explained in their TFP performances and pro big business approach. Even in the most democratic societies, ultimate power rests with those who control the means of granting or withholding a livelihood. Big business is still the economic prime mover and guarantor of security for the masses. Indeed, the grand alliance of the oligopolies, mercenary politics, and entrenched bureaucracy is further consolidated in the power center where the elite organizations guiding the policies and actions of the private and public sectors. After the cold war era, both countries have tried to begin gradual step toward manageable liberalization. The same story applies to Vietnam where communism has been helping those countries in taking a careful step toward liberalization. At this point, transformation from communism to capitalism tends to produce high economic growth as long as gradual step to liberalization is in place. Even though, the average economic growth of India is only second behind China in the world, there are also important differences between them in terms of accumulation and growth.  In the last decade investment in China generated a lot more growth than in India where average investment rate in China was 60 per cent higher than in India its growth exceeded that of India by a greater margin (10.1 per cent against 5.5 per cent). This relation appears to have been reversed in the more recent period as China deepened its integration into the global economy at a faster pace, and experienced a surge in inflows of FDI, an investment boom and rapid growth of exports and imports. Between 2000 and 2005, Investment in India has generated more growth than in China. Several factors for high capital-output ratio in China compared to India are misallocation of resources, excess capital and gross wastage of capital.

A puzzle closely related to cross-country income differences is the question of how and why countries grow and what causes growth miracles. A common view in the literature is that growth miracles are a result of a dramatic shift towards more productive firms and better forms of industrial organization. For example, the Industrial Revolution was accompanied by the ever-growing physical separation of the unit of consumption (household) from the unit of production (plant), due to  concentration of former artisans and domestic workers under one roof (plants), in which workers were more or less continuing what they were doing before, only away from home and a more radical change in production technique, with substantial investment in fixed capital pooled with strict supervision and rigid discipline. Thus, plants and factories (i.e., bigger establishments) must have been more productive than in home production units (i.e., the smallest establishments), and the Industrial Revolution can be viewed as a shift of resources from smaller, less productive units to larger, more productive ones. Japan postwar growth miracle is similar in this respect to the Industrial Revolution: the labor share of the smallest establishments (i.e., establishments with nine employees or fewer) fell by 9 percentage points between 1957 and 1969. The period from 1957 to 1969 was a period of remarkable economic growth. The usage of worse technologies, on the other hand, depends on the entry cost. A reduction in the entry cost can cleanse the economy of lower productivity, increasing average productivity and TFP. This mechanism of growth miracles shares a common driving force, reduction of barriers. A common explanation for why LDCs are poor is that they have poor institutions which result in high barriers to capital and technological accumulation and entry. These translate in low levels of capital, productivity and output. Capital goods are more expensive to acquire in poor countries than in rich ones, and this translates into low levels of capital.

These same types of situation  also translate India and China where India to lead the market in offshored back-office services, but as a manufacturing center it lags behind China, Thailand, and the rest of Asia. The reasons are well documented: multinational companies operating in India must overcome erratic electricity supplies, poor roads, and gridlocked seaports and airports while contending with government policies that discourage hiring and hold back domestic demand for goods in many sectors. With high-skill sectors accounting for almost 40 percent of the manufacturing output of India, it is in a good position to absorb some of that increase. For one thing, the country offers abundant engineering and technical talent: every year, it produces 400,000 graduate engineers, second only to China’s 490,000. Companies might also be attracted to India (and to other developing countries) by the increasing availability of reliable suppliers, the chance to escape unrelenting price pressures at home, and the size of the domestic market. LG, for example, plans to make handsets in India to take advantage of its rapidly growing demand for mobile telephones.

Automakers in developed markets must contend with twin pressures: to innovate and, at the same time, to reduce costs. On the one hand, they must not only develop expensive new features to please consumers but also ratchet up their environmental and safety standards; on the other, the base price of a car is expected to remain. flat over the next decade. This combination of factors is pushing companies to source more components from places where costs are lower. As a result, outsourcing in this sector could be worth $375 billion by 2015, up from $65 billion in 2002. I think that India could capture up to $25 billion of this amount, to become (along with China, Mexico, and Thailand) one of the developing world’s top sourcing bases. Already, out of a sample of more than 400 Indian suppliers, 80 percent have ISO 9000 certification—the international standard for quality management. By contrast, the offshore manufacturing and sourcing of specialty chemicals has yet to take off: in most US specialty-chemical segments, for example, imports account for less than 20 percent of consumption. Moreover, developing countries have less than 20 percent of world trade in individual segments and a cumulative share of 10 to 15 percent. But price pressures and low profitability in developed countries, as well as the movement to Asia of a large number of industries that consume specialty chemicals, are giving multinationals incentives to look for new places to source, to manufacture, and to carry out research and development. The emergence of a maturing supplier base in countries such as China and India is furthering the trend.

Given India’s capabilities in chemistry, engineering, and cost reduction, the country has the potential to become one of the developing world’s top two exporters (along with China) of specialty chemicals and to increase its exports of them to as much as $15 billion in 2015, from $2 billion in 2002. A large pool of unskilled labor enhances its complement of engineers and chemists. As the head of the Indian unit of a specialty-chemical multinational put it, “We achieve European levels of labor productivity at our Indian plant, but at 20 percent of the labor cost.” In a few important segments (such as customized performance chemicals, including advanced printing inks and adhesives), domestic demand is rising as well.

When multinationals evaluate India as a hub for offshore manufacturing and sourcing, its engineering capacity and existing network of suppliers and related companies are important inducements. But before the manufacture of electrical and electronic products can take off, the country must address three issues: low domestic demand, a lack of manufacturing clusters, and an unreliable transportation infrastructure. For many of these products, India’s domestic market, constrained mainly by the higher retail prices resulting from high indirect taxes and import duties, lags behind China’s. Efforts to create manufacturing clusters for electrical and electronic gear have met with only minor success, owing to severe restrictions in the Special Economic Zone policy, including limits placed on the use of contract labor and complex administrative and customs procedures. As a result, companies remain geographically dispersed even if they have strong networks of suppliers and partners. And problems with the capacity and turnaround times of India’s ports reduce its competitiveness in time-sensitive industries.

In India only 1.2 million people hold engineering degrees—4 percent of the total university-educated workforce, as compared with 20 percent in Germany and 33 percent in China. Pooled with the generally low level of suitability among Indian graduates, this means that India could face an overall shortage of engineers in the next few years, with a particular squeeze in certain cities. Wages for India’s graduate software engineers have already risen steeply in the most popular offshoring destinations, such as Bangalore and Mumbai. Consider engineers. China has 1.6 million young ones, more than any other country we examined. Indeed, 33 percent of the university students in China study engineering, compared with 20 percent in Germany and just 4 percent in India. But the main drawback of Chinese applicants for engineering jobs is the educational system’s bias toward theory. Compared with engineering graduates in Europe and North America, who work in teams to achieve practical solutions, Chinese students get little practical experience in projects or teamwork. The result of these differences is that China’s pool of young engineers considered suitable for work in multinationals is just 160,000—no larger than the United Kingdom’s. Hence the paradox of shortages amid plenty.

Overall communication style and cultural fit are also difficult hurdles. One Chinese HR professional points out, for example, that Chinese software engineers would find it hard to draw up an information flowchart for an international five-star hotel, not because they don’t understand flowcharts, but because state-run hotels in China—the only ones they know—are so very different. Some people argue that a willingness to work long hours will compensate for any deficiencies in the suitability of China’s talent. Although this may hold true to some extent in manufacturing, it is likely to make only a marginal difference in services because of the specific skill deficiencies that come into play.

But in research, India faces stiff competition from China, Russia, and the United States, as R&D often gravitates to countries with large domestic markets for the resulting products. India enjoyed annual GDP growth of 6 percent from 2001 to 2004, for a total GDP of around $600 billion, but that isn’t enough to offset China’s advantage. India also suffers by comparison because of its income distribution. China’s wealthy elite is small compared with its large, fast-growing middle class; India’s elite is relatively larger, but in 2002 some 74 percent of the country’s households earned less than $2,000, which weakens the domestic market’s overall purchasing power.

China’s pool of potential talent is enormous. In 2003 China had roughly 8.5 million young professional graduates with up to seven years’ work experience and an additional 97 million people that would qualify for support-staff positions. Just one-quarter of all Chinese graduates live in a city or region close to a major international airport—a requirement of most multinationals setting up offshore facilities. Compounding that problem is a lack of mobility: only one-third of all Chinese graduates move to other provinces for work. By contrast, almost half of all Indian students graduate close to a major international hub, such as Bangalore, Delhi, Hyderabad, and Mumbai, and most are quite willing to move. As a result of these two factors, world-class companies that want to hire service labor in China have difficulty reaching as much as half of the total pool of graduates.

As economies develop, they shift from labor-intensive manufacturing to higher-value areas, notably marketing, product design, and the manufacture of sophisticated intermediate inputs. Northern Italy’s textile and apparel industry, for example, has moved most garment production to lower-cost locations, but employment remains stable because companies have put more resources into tasks such as designing clothes and coordinating global production networks. Similarly, in the US automotive industry, imports of finished cars from Mexico increased rapidly after the North American Free Trade Agreement took effect, but at the same time exports of US auto parts to Mexico have quadrupled, allowing much of the more capital-intensive work—and many of the higher-paid jobs—to remain in the United States. Raising the quality of China’s graduates will be a long-term effort, but even modest improvements would make a huge difference. If the proportion of Chinese engineering graduates who could work at global companies increased to 25 percent (as it is in India), from today’s 10 percent, China’s pool of qualified young engineers would be among the world’s largest by 2008.

The competion in unskill labour product market such as textile/garment is getting tough in the world including among Asia nations, eventhough China and India has been raising the quality of their graduate from time to time to follow higher industrial ladder including the success story from Northern Italy. But as we could see from the current experience in developed countries which fail to shift all their low skill labour productions into totally higher skill labour production stage in their economy as stated from their protection in high tariff barrier in industrial products and agriculture outputs, I think,  it is also difficult for China and India to reduce the proportion of their low skill labour in their total labour force instantly or at least in medium term in order to reduce low sill labour surplus in Asia. This situation contributes to the lower participation of many countries especially in Asia with large amounts of surplus low skill labour in the expansion of international production networks, international trade and investment. As result, eventhough accompanied by high productivity in some sectors, it is also possible accompanied by greater emergence of enclave economies in Asia. As a result, informal labour markets continue to absorp rising numbers of workers, particularly in Asian countries which have experience deindustrilalization as result of rapid liberalisation and rapid competition in low skill product markets after China, India and Vietnam entering capitalism phase of development. The labour market problem in China, India and industrial countries cannot be solved by the expansion of trade liberalisation through market integration and high economic rate of growth only but also originate primarily in macroeconomic and financial policies. More importantly, massive unemployment and underemployment in developing countries especially in Asia have their origins in structural weakness rather than market integration per se. Not only that, the role of MNCs in labour employment is only a tiny fraction of total labour forces, for example in China its only employ around four million worker and in India where employment in the entire IT services is only one million. Last but not least, the emergence of China and India (including Vietnam) has contribute to the main source of insecurity among workers in world including Asian workers as already indicated by widespread global unemployement and underemployment.

References

Engardio, Pete. 2007. How China and India are Revolutionizing Global Business. New York: McGraw-Hill Companies, Inc.

Kelly, D.A. 2006. Managing Globalization Lessons from China and India.Singapore: World Scientific Publishing Co. Pte. Ltd.

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