China and America have several similar weaknesses. Our hubris prevents us from seeing this.

Summary: Americans overflow with criticism and advice for China, unaware of the congruence between China and America.  A closer look reveals as much about us as them.

America’s economists, businessmen, and financiers overflow with criticism of China.  Everyday brings new forecasts that China will soon have a bust, recession, depression, or sink into the sea like Atlantis.  So the refrain has run for a decade.  While the specific criticisms are accurate, they tend to ignore to ignore two things.

  • China’s strengths.  Social cohesion, good leadership, low levels of debt, and strong growth (momentum excuses mistakes, while stagnation multiplies social stress).  Plus $3 trillion in foreign reserves and almost no foreign debt (vs. America with tiny foreign exchange reserves and trillions in foreign debt).
  • The many similarities between China’s weaknesses and those of America (although we lack many of China’s strengths).  We’re the twin pillars of the global economy, leaning on one another for support.

Let’s do a quick review of some examples of the “China falling” story.  Each of the following is true, but of America as well as China.

  1. China has massive excess investment in physical infrastructure
  2. Wealth and power are concentrated in China, with ill effects both short and long term
  3. Much of China’s growth comes from its low wages and poor conditions for workers

(1)  China has massive excess investment in physical infrastructure

True.  On the other hand …

  • 14% of the US housing stock is vacant (18.4 million units, as of Q4 per table 8 of the Census CPS/HVS rpt).
  • Is infrastructure underinvestment better or worse than overinvestment?  China’s construction of bullet trains will prove to be a wiser policy than the US allowing its infrastructure to rot (see the ASCE’s reports on America’s infrastructure).
  • Over- or even mal-investment is not the most wasteful use of a nation’s resources, at it always gives some positive return (however small).  Pointless military spending has a zero return.

The last point is a serious relative weakness for America.   As shown in this graph from SIPRI, which shows US military spending as roughly half of the world’s total.  US spending on national security (not just military)  is much larger, approximately $1 Trillion/year).

(2)  Wealth and power are concentrated in China, with ill effects both short and long term

China’s policies have led to a massive transfer of income from politically weak households to politically powerful special interests (business and political elites).  For example:

  • A weak currency reduces households’ purchasing power by making imports expensive (protecting domestic business interests) and helping exporters.
  • Households earn low interest rates on deposits (negative real rates of return), as their savings produce low lending rates for businesses — in effect shifting income from households to business.
  • Wages grow slower than productivity, again shifting income from households to businesses.

All of these things are also true of the USA!  These characterize state capitalism, probably the dominant economic system of the 21st century.  Public costs, private profits — a hybrid free market system in which political power becomes a cornucopia of wealth for a nation’s elites.

(3)  Much of China’s growth comes from its low wages and poor conditions for workers

The ruling elites of both China and America agree that  low wages and poor treatment of workers are national strengths.  For an example of how global corporations boost profits by moving work to low-wage, poorly regulated nations see  “Ikea’s U.S. factory churns out unhappy workers“, Los Angeles Times,  10 April 2011 — “A union-organizing battle hangs over the Ikea plant in Virginia. Workers complain of eliminated raises, a frenzied pace, mandatory overtime and racial discrimination.”  Excerpt:

Residents thrilled at the prospect of a respected foreign company bringing jobs to this former textile region after watching so many flee overseas. State and local officials offered $12 million in incentives {aka tax breaks}

… Some of the Virginia plant’s 335 workers are trying to form a union. The International Assn. of Machinists and Aerospace Workers said a majority of eligible employees had signed cards expressing interest. In response, the factory — part of Ikea’s manufacturing subsidiary, Swedwood — hired the law firm Jackson Lewis, which has made its reputation keeping unions out of companies. Workers said Swedwood officials required employees to attend meetings at which management discouraged union membership.

… The dust-up has garnered little attention in the U.S. But it’s front-page news in Sweden, where much of the labor force is unionized and Ikea is a cherished institution. Per-Olaf Sjoo, the head of the Swedish union in Swedwood factories, said he was baffled by the friction in Danville. Ikea’s code of conduct, known as IWAY, guarantees workers the right to organize and stipulates that all overtime be voluntary.

… Laborers in Swedwood plants in Sweden produce bookcases and tables similar to those manufactured in Danville. The big difference is that the Europeans enjoy a minimum wage of about $19 an hour and a government-mandated five weeks of paid vacation. Full-time employees in Danville start at $8 an hour with 12 vacation days — eight of them on dates determined by the company.

What’s more, as many as one-third of the workers at the Danville plant have been drawn from local temporary-staffing agencies. These workers receive even lower wages and no benefits, employees said.

{Swedwood spokeswoman Ingrid Steen, in Sweden} said the company is reducing the number of temps, but she acknowledged the pay gap between factories in Europe and the U.S. “That is related to the standard of living and general conditions in the different countries,” Steen said.

… Low prices have helped Ikea weather the economic downturn. The company made 2.7 billion euros in profit last year, up 6.1% from 2009, according to its most recent financial statements.

Still, last fall, Swedwood eliminated regularly scheduled raises and made cuts to some pay packages in Danville. Starting pay in the packing department, for example, was reduced to $8 an hour from $9.75. Steen said the changes were made to free up more money to pay incentive bonuses to top performers.

The median hourly wage in the Danville area is $15.48, according to the Virginia Employment Commission.

Other posts about China

  1. Power shifts from West to East: the end of the post-WWII regime in the news, 20 December 2007
  2. China becomes a super-power (geopolitical analysis need not be war-mongering), 9 July 2008
  3. Words to fear in the 21st century: Lǎo hǔ, lǎo hǔ, Lǎo hǔ, 14 July 2008
  4. A different perspective on the US and China, seen by an American living in Russia, 23 March 2009
  5. China – the mysterious other pole of the world economy, 22 July 2009
  6. Another big step for China on its road to becoming a great power, 27 July 2009
  7. Will China collapse?, 5 August 2009
  8. A revolution is not a dinner party. Thoughts about the future of China, 19 August 2009
  9. Update about China: a new center of the world, 13 December 2009
  10. Fertilizer overuse destroying Chinese soil, 18 February 2010
  11. Rare earths – a hidden but strategic battleground between the US and China, 5 May 2010
  12. Today’s example of the inscrutable mystery of China’s economic statistics, 13 May 2010
  13. How China builds its commercial empire, 12 July 2010
  14. The West has power, but often little self-insight, 19 September 2010
  15. A look at the future (it’s already here, but it’s not in the USA), 29 September 2010
  16. Why China will again rise to the top, and their most important advantage over America, 11 November 2010
  17. Two pictures show an important difference between China and America, 2 February 2011

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