China's Productivity Miracle

Reflecting the Progressive Era’s reform agenda Simon Patten (1852–1922) argued that freeing markets from one source of economic rent (by taxing land rent) would merely leave the surplus to be taken by other monopolists and rent extractors (railroads, Wall Street trusts, and basic privatized utilities). To prevent unearned income (economic rent) from adding to the economy’s cost of living and doing business, potentially rent-yielding infrastructure should be kept in the public domain as a “fourth factor of production.” Instead of rentiers making a profit by charging access fees and user fees, the return to public investment should take the form of reducing the economy’s overall price structure. (Michael Hudson)

THE ECONOMIST

The U.S. lost 202,000 textile jobs between 1995 and 2002, a tremendous decline by any measure. But China lost far more jobs in this sector--1.8 million. All told, 26 of China's 38 major industries registered job losses between 1995 and 2002.--The Conference Board

Try imagining that you are the President of China and that, every day you are ultimately responsible for ensuring that 4 billion meals are served and 55,000 new jobs are created. Every day. There are two reasons why you need to create so many jobs (20 million a year): 

1. 10 million young people enter the workforce every year; 
2.  Because so many existing jobs get destroyed by automation. 

Automation raises productivity and, therefore, wages. Wages in China are rising 15% a year.

But, if you don't work and plan very hard, automation also creates unemployment–as we are seeing in the USA.

PRODUCTIVITY GROWTH

China's labor productivity grew at a 17% annually between 1995 and 2002. The rise in productivity comes from improved technologies and the reallocation of resources: from lower-value to higher-value activities–which is very much a part of the Chinese Government's 5-year plan. So plastic flowers are now manufactured in India, for example, while X-Ray machines are made in China....

China's 17% annual productivity growth compares with an average of 4% in the USA. Of course, US productivity was already much higher than China as we would expect of a rich country. High productivity is a hallmark of wealthy economies.

27 of the 38 industries in China saw annual average productivity growth of over 10%. Steel production saw a loss of 557,000 jobs, but actual steel production has soared. Even though private manufacturing in China added 9 million new jobs, there was a net loss of 4 million manufacturing jobs in China in the period–mostly from older, state-owned industries.

China's labor force is now producing 3 times as much as it did 10 years ago. 

Think about that: it's not just the lower wages in China that helped produce the boom of the last 10 years. It is that Chinese manufacturers are becoming more efficient. That's one reason why US import prices are stable or falling even though the dollar is down 20% over the last few years. Companies who export to the US are simply making the same products less expensively.

Economists refer to a rise in output per input of capital and labour as a gain in “total factor productivity”. 
Such gains have many sources. One textile boss got 20% more out of his seamstresses by playing background music in his factory, recalls Arnold Harberger of the University of California at Los Angeles. 
The striking thing about the growth in China’s total factor productivity is its speed: the fastest in the world over the past decade. Between 2000 and 2008 it contributed 43% of the country’s economic growth, according to the APO. That is just as big a contribution as the accumulation of capital, which accounted for 44% (excluding information technology). The Economist.

St. Louis Federal Reserve

IMPORT GROWTH

If we believe the mainstream media, China is taking advantage of our good nature, undervaluing its currency (though American exporters do not think so) and generally being mean.  But the figures tell quite a different story. 

But take a look at the growth in US exports to China!  

Harvard's Martin Feldstein has this to say about the future of our trade relationship:

The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China's current-account surplus will move into deficit [It has already done so, briefly–Ed], as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities. If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.

Although this scenario might now seem implausible, it is actually quite likely to occur. After all, the policies that China will implement in the next few years target the country's enormous saving rate–the cause of its large current-account surplus.

So that's the story on China's economy: annual productivity growth of 17% means wages rising 15% and national tax income rising 22% which means rising investment in education, infrastructure, and health care.

It also means that the Chinese people continue to give their government 85%–95% trust and approval ratings, year after year. Hardly surprising, when you think about it.


As always, your comments are welcome and encouraged. Issues like this need more than just one opinion. And do feel free to add links to useful sources and stories!