[OPE-L] Goldman Sachs on high profitability in China

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Aug 14 2007 - 14:59:09 EDT

Goldman Sachs published an interesting paper in 2006 by Hong Liang, on
investment and profitability in the People's Republic of China.

Among other things, it says (p. 18, top):

"Why are investment returns so high in China? In a classic development model
by [William Arthur] Lewis (1954), where there are numerous surplus labourers
in the agricultural sector waiting to be absorbed in the industrial sector,
the faster the capital accumulates, the more rapid the growth is, and the
more the income distribution tips towards profits [Lewis, W.A., 1954,
"Economic development with unlimited supplies of labour", Manchester School,
Vol. 22, pp. 139-191.
http://www.unc.edu/~wwolford/Geography160/368lewistable.pdf]. This model
still appears to be a reasonable approximation to China to date, since large
migration of surplus rural labor to more productive sectors is far from
complete. Therefore, theoretically, capital should enjoy a higher rate of
return in China compared with economies with higher capital-to-labor ratios
[i.e. a higher organic composition of capital]. Furthermore, the integration
of Chinese labor in the global production chain has arguably been
accelerated by China's entry into the WTO, and thereby contributed to a
higher rate of return on capital and higher income distribution towards
capital globally. Similarly, deepening integration of Indian laborers in the
global economy may carry this process further for years to come. From
China's perspective, the significant improvements in reported corporate
earnings in the last fews years are also fundamentally a reflection of
significant productivity gains in the overall economy, accompanied by an
impressive rise in the non-state owned companies, as well as a substantial
restructuring of existing SOE's".

But the first argument could also be turned around - what prevents workers,
given a high demand for urban labour, including semi-skilled and skilled
labour, from levering up wages, through collective bargaining? The answer to
that seems to be, that the ability for Chinese workers to engage in
collective bargaining for the purpose of raising wages is still very
restricted. Indeed, Shanghai Daily reported recently that a migrant worker
was beaten to death, while on strike for unpaid wages at a building site in
South China's Guangdong Province, and hundreds of other workers striking to
get delayed salaries were bashed by thugs hired by the building owner.
An exceptional case maybe, but much about the coercion of Chinese workers
gets unreported.

On International Labour Day this year, more than 400 crane operators and
truck drivers at the Chiwan Container Terminal in the boomtown of Shenzhen
stopped working, and staged a sit-in outside the container terminal's
headquarters. They were unhappy about wages, and accused management of
failing to pay them overtime as required by law. One worker said "Many of us
have sacrificed our health and spare time to work for the company. We only
have one or two days of rest each month. The company should treat us
better." Dockers earn about 4,000 yuan (US$519) on average per month, Hong
Kong's South China Morning Post  reported. The wage is considered high, as
government statistics showed the national average monthly urban wage last
year was 980 yuan (US$127).

"According to estimates in the 2002 version of the World Bank's World
Development Report, which is most often quoted when discussing PPP, prices
in China are only 21 percent of those in the U.S. when converted using the
current exchange rate of 8.28 yuan to the dollar, and to equalize the price
levels between China and the United States, the yuan must appreciate to 1.74
to the dollar (8.28 x 0.21). In other words, if prices in the U.S. are the
standard, PPP holds when the yuan is at 1.74 to the dollar - 4.7 times the
actual exchange rate." http://www.rieti.go.jp/en/china/03032001.html

So then the purchasing power of a Chinese docker's monthly wage at the
actual exchange rate of US$519 would appear to be more like US$2,469 a month
at PPP, or $29,638 a year. In reality, that is not so far off from the
corresponding US wage. According to US BLS data, the median annual earnings
of US crane and tower operators in 2004 were $37,410 (gross) and US
industrial truck and tractor operators earn about $26,580

In a broader perspective, Andrew Glyn comments: "despite the doubling of the
ratio of per capita GDP compared to the USA over the past 20 years, China is
still far behind the USA as Korea and Taiwan were before their three decades
of rapid catch-up beginning in the late 1960s; it is still well below the
position from which Japan started its spectacular growth climb in the
mid-1950s. (...) The current and prospective development of China...
accounts for all the reduction in the inequality of the distribution of
income on a world scale. (...) Despite major increases in inequality within
China, the improved living standards of millions of poor Chinese have been
more important in reducing income differences on a world scale" (Capitalism
Unleashed, OUP 2006, p. 88-89). "Access to this cheap labour could encourage
a much higher level of direct investment from the North, in effect an
investment drain away from the rich countries. In effect the capital-labour
ratio would decline on a world scale, by one-third or more according to one
estimate, as the vast reserves of labour in those countries become inserted
into the world economy. The result could be a major fall in the share of
wages in the rich countries as workers find their bargaining position
weakened." (ibid., p. 154).

However, the absolute level of wages is less important than unit labour
costs and labour productivity (higher, in high-wage countries), and
enterprises are unlikely to relocate overseas, if thereby they lose
specialised suppliers and welltrained staff at close proximity, while
incurring higher logistical costs. Quantitatively, the "threat" of China to
Western wages is most probably vastly exaggerated - the real threat to
wage-levels is to be found within the West itself, i.e. the reduced ability
to engage in collective wage-bargaining and the erosion of workers' rights.


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