I recently bought a new sun hat (stay with me). A label inside reads ‘made in China’. Replacing my previous hat was well overdue, as it was more than 20 years old. Out of curiosity and before getting rid of it, I checked inside and saw a label, which also read ‘made in China’. I must be something of a geek, as this got me thinking about the manufacture of clothing and development processes.
It is notable that China is manufacturing and exporting clothing such as this, just as it was twenty years ago. The hats are not dissimilar. Of course, the Chinese economy is the largest manufacturing nation in the world and exports a huge amount of goods of all kinds. But according to this experience, companies there are still involved in the manufacture of quite basic clothing.
Successful development leading to a rise in wages and living standards over the long term necessarily involves a transformation in economic structure. Production shifts towards sectors with higher productivity, capable of generating profits which can be reinvested in new capacity, and able to pay higher wages to employees.
The kinds of products produced also changes with the development process. As a counter-example to my sun hat, a number of articles of clothing I own are made in India, which has been growing rapidly in recent years, but remains much poorer than China, both absolutely and also in terms of income per head. India has a much smaller manufacturing sector than China, but its lower average wages and productivity levels support more basic goods for export.
As development and economic transformation proceed, a country’s exports will tend to shift from more basic goods requiring little processing or manufacture, into more sophisticated goods, requiring greater processing and technology. Most successful late developers started by producing textiles, and moved up the value chain.
The current phase of globalisation that began to gather speed in the 1980s, has in part been driven by the post-war advent of containerisation and advances in information technology. These developments have transformed supply chains, allowing many countries to specialise in different stages of the manufacture of sophisticated goods intended for international trade.
Although China still manufactures clothing such as my sun hat, it also has factories which manufacture smartphones and laptops. Much of the latter involves the assembly of components which have been made elsewhere, so that Chinese factories add relatively little value. However, the government knows that for Chinese living standards to continue to rise, its companies need to move up the value chain and engage in more sophisticated elements of the production process, including research and design.
At the moment, Chinese industry is excessively dependent on processing and low cost production based on low wages. Compared to the rich countries it wishes to emulate it lags behind when it comes to research and development and other higher value activities.
Graduation to rich country status will require substantial industrial upgrading over time, and entering markets where competition is driven more by innovation and more sophisticated technologies rather than low costs. The government recognises the challenge and its industrial policy is continuing to evolve to try to meet it.
In such a large and heavily populated country as China, with a high level of inequality, average wages will vary between regions, depending on productivity levels. The Eastern seaboard has been host to a huge amount of foreign direct investment and production intended for export, and is wealthier and more productive overall than the Western and Central regions, where average wages and productivity are lower. The latter are therefore more likely to host industries lower down the value chain such as clothing and textiles, given sufficiently skilled workers and adequate infrastructure.
The range of wage costs in a less equal country may well allow a wider range of industries, in terms of value added and productivity, to develop. As long as development continues and labour moves from lower to higher productivity activities, competition in the labour market should encourage wages to rise, so that lower productivity industries become uncompetitive and either shift production to a lower wage region within the same country, or abroad.
If China continues along its successful development path, and living standards continue to rise across the country, the competitive manufacture of clothing such as sun hats will at some point become unviable at current prices. It is likely then to shift to a country with lower labour costs, adequate productive capabilities to start becoming competitive in such sectors, and a sufficiently attractive business environment.
It remains interesting to me that despite China’s rapid growth and transformation since 1978, some companies there are still making more or less the same product intended for export as they were twenty years ago. It shows that despite the current vast size of its economy, much remains to be done before it graduates to rich country status.