China has become a metaphor. It represents a certain phase of economic development, which is driven by low wages, foreign appetite for investment and a chaotic and disorderly development, magnificent in scale but deeply flawed in many ways. Its magnificence spawned the flaws, and the flaws helped create the magnificence.
The arcs along which nations rise and fall vary in length and slope. China's has been long, as far as these things go, lasting for more than 30 years. The country will continue to exist and perhaps prosper, but this era of Chinese development -- pyramiding on low wages to conquer global markets -- is ending simply because there are now other nations with even lower wages and other advantages. China will have to behave differently from the way it does now, and thus other countries are poised to take its place.
Reshaping International Order
Since the Industrial Revolution, there have always been countries where comparative advantage in international trade has been rooted in low wages and a large work force. If these countries can capitalize on their advantages, they can transform themselves dramatically. These transformations, in turn, reorganize global power structures. Karl Kautsky, a German socialist in the early 1900s, wrote: "Half a century ago, Germany was a miserable, insignificant country, if her strength is compared with that of the Britain of that time; Japan compared with Russia in the same way. Is it conceivable that in 10 or 20 years' time the relative strength will have remained unchanged?" Lenin also saw these changes, viewing them as both progressive and eventually revolutionary. When Kautsky and Lenin described the world, they did so to change it. But the world proved difficult to change. (It is ironic that two of the four BRIC countries had been or still are Communist countries.)
When it is not in the throes of war, trade reshapes the international order. After World War II, Germany and Japan climbed out of their wreckage by using their skilled, low-wage labor to not only rebuild their economy but to become great exporting powers. When I was a child in the 1950s, "Made in Japan" meant cheap, shoddy goods. By 1990, Japan had reached a point where its economic power did not rest on entry-level goods powered by low wages but by advanced technology. It had to move away from high growth to a different set of behaviors. China, like Japan before it, is confronted by a similar transition.
The process is fraught with challenges. At the beginning of the process, what these countries have to sell to their customers is their relative poverty. Their poverty allows them to sell labor cheaply. If the process works and the workers are disciplined, investment pours in to take advantage of the opportunities. Like the investors, local entrepreneurs prosper, but they do so at the expense of the workers, whose lives are hard and brutal.
It's not just their work; it's their way of life. As workers move to factories, the social fabric is torn apart. But that rending of life opens the door for a mobile workforce able to take advantage of new opportunities. Traditional life disappears; in its place stand the efficiencies of capitalism. Yet still the workers come, knowing that as bad as their lot is, it is better than it once was. American immigration was built on this knowledge. The workers bought their willingness to work for long hours and low wages. They knew that life was hard but better than it had been at home, and they harbored hopes for their children and with some luck, for themselves.
As the process matures, low wages rise -- producing simple products for the world market is not as profitable as producing more sophisticated products -- and the rate of growth slows down in favor of more predictable profits from more complex goods and services. All nations undergo this process, and China is no exception. This is always a dangerous time for a country. Japan handled it well. China has more complex challenges.
Indeed, China is at the fringes of its low-wage, high-growth era. Other countries will replace it. The international system opens the door to low-wage countries with appropriate infrastructure and sufficient order to do business. Low-wage countries seize the opportunity and climb upon the escalator of the international system, and with them come the political and business elite and the poor, for whom even the brutality of early industrialism is a relief.
But identifying these countries is difficult. Trade statistics won't capture the shift until after it is well underway. In some of these countries, such as Vietnam and Indonesia, this shift has been taking place for several years. Though they boast more sophisticated economies than, say, Laos and Myanmar, they can still be considered members of what we are calling the Post-China 16, or PC16 -- the 16 countries best suited to succeed China as the world's low-cost, export-oriented economy hub.
In general, we are seeing a continual flow of companies leaving China, or choosing not to invest in China, and going to these countries. This flow is now quickening. The first impetus is the desire of global entrepreneurs, usually fairly small businesses themselves, to escape the increasingly non-competitive wages and business environment of the previous growth giant. Large, complex enterprises can't move fast and can't use the labor force of the emerging countries because it is untrained in every way. The businesses that make the move are smaller, with small amounts capital involved and therefore lower risk. These are fast moving, labor-intensive businesses who make their living looking for the lowest cost labor with some organization, some order and available export facilities.