You are talking to someone who actually has only 2 decades of experience in direct investment in China, both as a policy level advisor to government and an investor. There are always more than one way to skin a cat. Whatever it is, capital always wants more, and if there is a cheaper cost option, capital will move there and adopt it as the norm. This is not a criticism, just a statement of fact. If its your money, you'd do the same. In fact, it may very well be part of your retirement assets being managed by some conscious young guy fresh out of Harvard Business School in Stamford, Conn. It is the nature of money to seek the highest returns. Look at the internet stocks, companies that never showed a positive cashflow selling for over $150/share, with a p/e ratio of infinity. The fault lies not with money, but with those who allow abuses to be legal. In China, the empirical data are very clear. The theory that cheaper production costs attract more capital does not bear out in practice. The amount of capital available for any product line is determined by the total global demand, or it will result in overcapacity, (as incidentally the free market notoriously fails to prevent, but that is another story.) Consumers may buy a second pair of tennis shoes if the price is halved, but they won't buy a 3rd, 4th or 5th pair, until the first pair is either worn or become obsolete in style, no matter how cheap. Consumers do not eat 5 meals a day just because food is cheap. It is called price/demand saturation, a level below which lower prices do not increase demand. In fact, in an environment of falling prices, consumer demand actually drops in anticipation of better deals. This is what is happening to the Hong Kong property market at this moment. Plenty of cash purchasers waiting for the 50% fallen market to drop another 40 % before they buy. Same in Japan. Beside, only 18 cents of every export dollar revenue goes to China and less of that goes to labor and environment protection. Now, when capital first arrives at a cheap labor and environmental cost location, it will happily accept a marginal increase in returns over the norm in its original location, say 10% more. But the marginal utility theory soon goes on the window. Sooner they discover that the neighboring factory owner is making 30% more return, and immediately 30% becomes the norm. Then the maximization theory sets in. That is why in the last 2 decades, until July 1997, when one invested in emerging market funds, the returns were 50% or higher. Why? It was not because Asian were financial geniuses. It was because labor and environment were legally abusable in Asia. The squeeze for more profit always leads to the "race to the bottom" effect on labor cost, working conditions and environmental abuse. The negotiation tools used by mobile capital are always threats of closure or relocation. And if the threats fail, miraculously, the factories reopen and continue. Capital is a limitless pit that can absorb unlimited returns. The only thing obscene about obscene profit is their inhume labor and production practices. That is why there are more millionaire and Royce Rollses per square mile in Hong Kong than any other city in the world.
Its pathetic for for Delong to think that his "liberal" theory still sells in Asia, and its immoral for liberal economists to perpetuate this line of propaganda by claiming that oppression is actually helping the Third World poor. As I said often, I have more respect for hard-nosed capitalists that openly admit they are oppressing the Third World poor and if the poor does not like it, get their leaders to do something to stop it, than the modern day missionary argument that the new form of economic colonialism is good because otherwise the natives would not learn to speak English or buy disposable diapers. The bottom line is, capital can make a decent return without all the abuses. And it will stop the abuses if someone makes them. It stopped in the West. The weakness of the LDCs is that there is no solidarity and no common standards and then you have places like Hong kong and Singapore doing the dirty work for global capital. The UNDP and the World Bank are supposed to do that, but we are about them, don't we. If there is a global minimum wage regime and global environmental standards, capital will settle down and accept them. But in the absence of such, capital just runs amok, and the liberal economists then turn the mess around as scientific data to support their exploitation is better than starving theory.
In China, the higher wages factories are in fact more profitable, because management cannot afford to waste labor just because it is cheap. We in China are now in the midst of a majot ploicy debate to rapidly raise worker wages to stimulate domestic demand in response to the global financial crisis. the impacts from which are slow global investment and export growth. Brad is right, its very complex. But not in the ways he sees it. World bank memo has as much currency as Confederate money.
Henry
Tom Kruse wrote:
> Brad writes:
>
> >In a lot of manufacturing industries, "dirty" production processes are a
> >lot cheaper than "clean" ones. Since labor productivity in many developing
> >economies is still very low, a demand that developing countries adopt
> >first-world standards of pollution control may be a demand that they not
> >industrialize--that they stay very poor.
>
> Henry reponded:
>
> >The post-war international division of labor has degenerated into the
> >export of pollution and sub-standard working conditions from the
> >developed economies. And it has to stop.
>
> Brad's right: under the current rules of the game, "a demand that
> developing countries adopt first-world standards of pollution control may
> be a demand that they not industrialize--that they stay very poor." And
> that's why the rules themselves MUST be chagned. Not a practical
> proposition, I know, but I REALLY bristle when I hear suggestions that the
> options are (a) poison, or (b) poverty.
>
> This morning I joined some union friends in a surprise visit to a local
> glass factory that employs 80 people. Until 3 years ago, all workers had
> contracts, benefits, etc. According to the managers, this was untenable.
> So they shut the factory, fired everyone, and rehired 80 people 2 weeks
> later. About 20 were given contracts, and of those 8 were charged with
> contracting another 7 people each of the line production. The 8 each have
> a work group that is paid by the piece. In the words of the owners, these
> 8 groups are are "micro-enterprises, "that is, small business "owned" by
> the group boss, which sell services to the plant. Now the plant it doing
> pretty well.
>
> Raw glass for melting is brought in by an informal army of people -- the
> bosses suggested 500 families "benefit" from the "ant work" of collecting
> and selling used and broken glass to the factory.
>
> Workers wear shorts and sandals as molten glass is hefted and shifted
> about. 4 people carry the semi finished glasses to a tempering oven on the
> ends of long steel forks, the tines wrapped in asbestos cord. The asbestos
> cord is wrapped by hand, and changed 2-3 times daily. Imagine: 4 people
> scurrying about, dodging other workers, machinery, pools of water and
> powerlines, as fast as they can with glass at 600 degrees celcius on the
> end of asbestos wrapped rods. Just watching scared the caca out of me.
> The sound of the oven is deafening; over it the company play loud cumbias
> to "entertain" the workers.
>
> One woman we spoke to was requried to work until 2 days prior to giving
> birth; the child lived for 6 days.
>
> About 30% of the production is bought by intermediaries who export it to
> Italy and Germany. The glasses are advertised as "ecological" (recycled
> glass!) and "hand made by craftsmen".
>
> Average monthly wages -- excuse me, remuneration for the sale of services
> by micro-enterprises -- are around 65-80 US dollars. Poverty AND poison.
>
> Tom
>
> Tom Kruse
> Casilla 5812 / Cochabamba, Bolivia
> Tel/Fax: (591-4) 248242
> Email: tkruse at albatros.cnb.net