The Price of Development

Modernization has apparently driven prices up in China, so that many of its Taiwanese investors are thinking of pulling out. Don Lee of the Los Angeles Times reports:

Thousands of foreign businesspeople, primarily Taiwanese, helped turn this southern Chinese city into one of the world’s busiest export manufacturing centers.

Now, amid rising wage and pension costs, energy shortages, tighter government regulation, traffic bottlenecks and other concerns, some of them are starting to look elsewhere. Their restlessness reflects a dark side to China’s economic boom, as growth pains and other issues prompt companies to reconsider starting up or expanding in China.

Chang Han Wen is having second thoughts. He came here from Taiwan in early 1991 when the area was still largely farmland, launching a shoe assembly line with 200 workers. He has since opened five factories, including three shoe plants that employ 3,000 people and produce 1.5 million pairs of specialty boots and high-end shoes a year for export to the United States and Europe.

But his sixth plant, a garment operation, sits empty. Chang has indefinitely postponed its opening, anxious about China’s tense trade relations with the West and the threat of more quotas that would limit clothing exports. That’s only part of his worries.

This year Dongguan’s minimum wage jumped more than 27%. Even with the increase, employers are struggling with worker shortages. Government inspectors are making the rounds at factories, enforcing work-hour rules and pension contributions that officials paid little attention to in the past. Electricity is in short supply, as is fuel.

All in all, Chang says, things have gotten so much tougher that his next investment may be in Vietnam, where many Taiwanese have gone.

“For manufacturers here, the golden period has passed,” he said.

China has often tried dangling the carrot of lower capital costs to attract foreign investment from Taiwan. Beyond the obvious uses for modernization, this also tied Taiwanese business closely to Chinese interests, and made Taiwanese investors in the mainland pliable to suggestions that they rein in nascent “independence” programs. Now that capital flight is happening, the Communists may be losing even more influence in Taiwanese politics.

However, supporters of Taiwanese independence should be careful. Loss of such influence may indicate a willingness on Beijing’s part to push its political agenda “by other means”, as Clausewitz would have appreciated.

[Cross-posted at Between Worlds and Naruwan Formosa]

7 thoughts on “The Price of Development”

  1. It has long been anticipated that economic growing pains would eventually precipitate a crises in China.

    The fundamental problem is that the ruling class and institutions are inherently economically inefficient. Even if they have the best intentions and are wholly uncorrupt, they cannot keep pace with capitalistic economy. Their decision cycles are just to slow. That is the inescapable inefficacy of all centralized decision making systems.

    Eventually, the cost imposed by a lack of physical and legal infrastructure outweighs the benefits of cheap labor.

    Capitalism shatters elitist rule by forcing decentralization of decision making. Eventually, the faux-communist will be forced to either liberalize (decentralize) political power or clamp down on economic expansion. Historically, if they choose the latter, the people will try to force the former.

  2. “Capitalism shatters elitist rule by forcing decentralization of decision making. Eventually, the faux-communist will be forced to either liberalize (decentralize) political power or clamp down on economic expansion. Historically, if they choose the latter, the people will try to force the former. ”

    Suppose they get some sense and try the former?

    Liberalize like crazy, give up control and be content with a share of the loot? That’s how the American governments at their finest tended to work. Maybe they could beat us at their own game.

    The most liberal society on Earth, in all areas of life, could not only unleash their own creative forces, but become the new “land of opportunity” for foreigners all over the world including Americans and end up dominating the world in all aspects (economic, military, etc.) like the US does today.

    (And if they do it that way, it won’t even be a bad thing…)

    Of course, when have elites ever had enough sense to give up control and let the geese lay their golden eggs in peace? Only a few times in history (such as the founding of this republic) has any group of elites ever come close…

  3. Ken,

    Elites rarely evolve. Those who benefit the most from the status quo are the least likely to support changing it even when they perceive it as a danger. The temptation is always to make some minor change in an attempt to stave off disaster.

    The core problem for the current Chinese leadership is that centralized control is chocking the system but the leadership as a class derives all its power and benefit from that very same centralized control. The more freemarket the system becomes the more superfluous the elites.

    Perhaps there might be enough of them concerned with the greater good to sacrifice the position of themselves and their families within Chinese society but I wouldn’t count on it.

  4. Oh how quickly things could collapse for the CCP. If the Mainland is suddenly undercut by the Vietnamese and other South Asians hungry for dollars, and Brazil and India hungry to take up the slack, and the Japanese and Taiwanese investors are fleeing there too, American consumers’ spending flows can (and have in the past!) very quickly flow to other quarters.

    I think that the CCP correctly fear that an end to the dollar peg could help to precipitate such a shift. And that would be Very Bad. Not just for them in many ways: the Chinese middle class could largely collapse as a result and die on the vine, so young and tender is it.

    Of course a war in North Asia would be far worse, and if it involved the US it would be the first time 2 powers with ICBMs had fought a hot war: the Chinese lacked them the last time we tussled in Korea. And war with Taiwan that involved us would certainly staunch any dwindling American trade in such a climate.

    India and Brazil are democracies, too young and poor as yet to have welfare states, and Anglospere members and a Latinate nation respectively. May they fare well in the coming Century as perhaps the last bastions of what was great in EuroAmerican cultures.

  5. With the recent CNOOC bid to buy Unocal, which, as The Economist explained, might end up being a sucker deal for the Chinese, Beijing and her semi-private minions will be having one hang over of overreach, much as the Japanese discovered in the 1990s when the properties they’d invested in in the 1980s lost value.

  6. Hmmm…. Interesting take. Taiwanese are distinctly Chinese, although “officially’ foreigners, and are an irreplacable part of Chinese business culture that the Cadres can’t possibly fill from within their own rank and file (two generations of ideological purges have taken their toll, especially within the intellectual and professional classes). This said, it strikes me as Chinese regional face politics when Taiwanese threaten to move their operations to non-Chinese Countries like Viet Nam. This would be akin to a Texan telling a northern Mexican that he’s going to take his business to Quebec, even if it means learning how to speak French.

    China has very distinct regional cultures with their own historic inter-relations and tensions, and it’d be a mistake for outsiders to read too much between the lines, especially in terms of business negotiations.

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