What’s that about simplistic neoclassical models again?

Almost any statistic coming out of China can boggle the mind. In such a huge place, undergoing such rapid change, the sheer numbers in any area of inquiry are almost incredible. Especially to someone from the tiny peripheral nation that is Australia. The numbers relating to its economic growth are among the most impressive – GDP expanding at double figures for decades, 20,000 new dwellings and 250km of new roads built every day, energy consumption up 70% in just 10 years… the list of enormous numbers itself reaches a big one.

Such growth scares some people. While I was handing out how-to-vote cards for the LDP in the 2007 election, I was engaged in friendly argument by a Greens supporter about free trade. He asserted, as a possible consequence, that eventually Australia would lose all manufacturing and most services to China, since they can outcompete Australian firms on price. He rejected my objections that he was assuming an economic impossibility, and I didn’t really have the time to walk him through the reasoning as I had potential voters to convince. I’m also fairly certain no theoretical arguments would have convinced him anyway. So I dropped it.

Over the last few years, and with greater frequency in the past 12 months, the “capitalist press” (as my Greens interlocutor would have put it) has been reporting that a new big number is appearing in China – wages growth. Earlier numbers didn’t scare them, in fact the opposite, but this one tends to be couched in terms of apprehension. “Ow, my profit margin!” sums it up. But they shouldn’t be concerned. Unlike in some parts of the world, this particular kind of growth isn’t driven by inflation of the money supply, or edicts from on high that a bigger number is politically desirable. No, in this case, it’s the almost balletic interplay of our constant companions Supply and Demand.

The vast exodus from China’s under-developed hinterland to the booming coastal cities, which kept wages among the lowest in the world, is finally starting to diminish. Increasing productivity and wealth are increasing domestic demand. The shifting of workers from collectives to the private sector are improving pay and conditions. As a consequence, China’s labour force finds itself with much better bargaining power than it used to, which is mirrored in more industrial disputes. Some official minimum wages (which, more rationally than Australia, are determined by region) just went up by 20%, which sounds big, but in fact is lagging wage rises in the rest of the economy. Since 1995, average wages have increased 300%, while inflation has been very low.

All this, remember, is despite the hindrances of China’s fake labour unions that are in fact extensions of the Communist Party apparatus whose job is to keep workers docile, and the export subsidy that is the constricted currency.

Perhaps I should have tried to convince that fellow. I could have said that supply and demand never stop working, and if Australian jobs went to China, that would increase development, which increases wages, eroding China’s comparative advantage. Which is exactly what is happening – countries like Vietnam and India are benefiting. I could have pointed out that this is the very definition of beneficial globalisation, where companies seek out the cheapest labour in the poorest countries, and in so doing drive up wages and living standards. People live longer, better lives and national disparities diminish – goals every left-winger aspires to, brought about by brutal capitalism. I should have asked him why he hates the poor :-)

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2 Responses to What’s that about simplistic neoclassical models again?

  1. john walker says:

    All true , but it might take a few years before china is not a nation with one of the most skewed income distributions in the world. It is still ruled by the descendants of the same
    gangsters that instituted the ‘great leap backwards’.

  2. Jarrah says:

    China’s income disparities are widening, it’s true, but that’s what always happens in when moving to a market economy with an emphasis on export-driven growth. They’ll have to take steps to make sure it doesn’t get out of hand, which they are doing, but it also has to be noted that income for all deciles is going up. Rising tide, etc.

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