Will India be able to exit the middle income trap? Part 2
This is further to my earlier article on this topic.
I came across this recent testimony by Dr. Gordon Hanson Hanson before the U.S.-China Economic and Security Review Commission Hearing on Consumer Products from China: Safety, Regulations, and Supply Chains.
Here are a few excerpts from this document that are relevant for India
‘Over the last three decades, China has emerged as a global industrial powerhouse. The spectacular growth of the country’s manufacturing sector has turned the nation into the world’s factory. Initially, much of this growth was based on labor intensive manufactured goods, such as apparel, footwear, furniture, and consumer electronics. China has since diversified into more technologically advanced products, such as cell phones, laptops, solar panels, semiconductors, and electric vehicles. Although China remains the world’s largest exporter of manufactured goods, its period of rapid growth ended more than a decade ago.’
‘China’s manufacturing export boom began in earnest in 1992, when Deng Xiaoping expanded the country’s process “reform and opening” to encompass export-led development. Production for foreign markets, often in processing plants owned by or subcontracting for multinational firms, mushroomed in special enterprise zones allowed to operate in select 2 southeastern coastal cities, before being allowed to spread throughout the country. China’s embrace of manufacturing as its engine of growth was a conscious attempt to emulate the success of Japan, Singapore, and South Korea in previous decades. Indeed, Singapore’s long-serving Prime Minister Lee Kuan Yew was an informal adviser to Deng during the period in which Deng crafted his reform strategy.’
‘China’s WTO accession agreement in 2021 was pivotal. This required the country to remove barriers on exports, imports, and foreign investment, and provided it, in turn, with Most-Favored-Nation access to the markets of WTO members. These policy changes helped accelerate China’s export growth. Reductions in import tariffs in China gave firms in the country lower cost access to imported inputs and subjected them to greater import competition, leading to higher domestic productivity and lower markups of price over marginal cost.’
‘China’s has diversified its exports away from labor intensive goods into more advanced products. Whereas in 2000, China’s top two exports were footwear and children’s toys, by 2007 its top two exports were cell phones and laptops (these products have retained their top positions out to the present). This shift was due to the combination of (1) early increases in productivity in China, which pushed up wages and priced the country out of some very labor intensive goods, (2) rising educational attainment of the Chinese labor force, which lowered the cost of producing technology-intensive goods, (3) policy interventions, which subsidized sectors deemed important by the Chinese state, and (4) U.S. tariffs on Chinese imports, which induced China to relocate production in labor intensive goods to other countries, including Vietnam and elsewhere in Southeast Asia
China’s initial export growth was concentrated in products that are strongly intensive in the use of labor in production (Hanson, 2017). These goods include: apparel, bicycles and scooters, footwear, furniture, household fixtures, plastic products, sports equipment, textiles, travel goods, and toys and games. They are the products through which low-income countries typically enter production for global markets. In their day, Japan, Korea, Singapore, and Taiwan, began their processes of export-led development by first specializing in these goods. China’s global collective export market share in labor intensive goods rose from 6% in 1984 to 23% in 2001, during the first stages of export-led development, jumped to 40% in 2013, after China’s accession to the WTO, and then dropped to 32% in 2018, as China began to diversify away from the products (even before the U.S.-China trade war). China’s comparative advantage in labor intensive products actually peaked in the early 1990s. The country enjoyed spectacular export growth in these products, not because its comparative advantage in them was rising, but because China’s overall export growth as so high and these goods at the time constituted a large share of the total. Since the early 1990s, the rate of growth of Chinese exports has been faster outside of labor intensive industries. Their share in China’s total merchandise exports rose from 38% in 1984 to 47% in 1993 before declining to 18% in 2013 and then to 14% in 2018.
What caused the end of China’s export surge in labor intensive manufacturing? One factor is the overall deceleration of economic growth in China. The country’s post-Deng boom was in part transitional in nature, implying that it would ultimately play itself out. Once trade and other reforms were in place and a substantial share of the labor force had moved from the countryside to cities, growth rates would naturally subside. Other contributing factors may have included the slowdown and then reversal in the growth of China’s labor force and the rapid increase in college attainment after 2001. These changes appear to have put upward pressure on the relative wages of less-educated workers, thereby eroding China’s comparative advantage in apparel, footwear, and similar products.
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Which countries have gained most export market share in labor intensive products in the wake of China’s slower growth in the sector? Eight Asian countries —Bangladesh, Cambodia, India, 7 Indonesia, Myanmar, Pakistan, Sri Lanka, and Vietnam—are the largest low-income producers of labor intensive manufactured goods. Since 2012, three of these—Bangladesh, Cambodia, and Vietnam—have seen the most rapid growth in labor intensive exports. India and Pakistan are also major players in the sector, owing to their large economic size and low wages, but their growth thus far has been far lower than in Bangladesh and Vietnam. Myanmar and Sri Lanka, for their part, still remain small players in global markets. Among middle-income countries, the largest exports of labor intensive products are Bulgaria, Romania, and Poland, in Eastern Europe, and Morocco, Tunisia, and Turkey in North Africa and the Middle East.
The growth of Vietnam’s manufacturing exports is notable because, similar to China’s early growth, much of its export production is in export processing plants that are owned by or contract with multinational enterprises, including many from China. China is now “exporting” to Vietnam the export processing model that it followed in its first phase of export growth. The common practice of export processing is one reason why U.S. tariffs on Chinese imports have not led to expanded employment in U.S. manufacturing. By producing inputs in China and having Vietnamese firms assemble these inputs into final outputs, China is able to evade U.S. tariffs while still exporting substantial embodied manufacturing content to the U.S. market. (Early evidence of increased Chinese investment in Mexican manufacturing suggests that China may be expanding its use of export processing to avoid U.S. tariff barriers.)’
My own concern is that we are inward looking instead of being export focused as in the case of China. Here is an excerpt from an excellent article by Mihir Sharma .
‘The government has focused corporate energies inwards instead of outwards. New Delhi’s priority has been to cut down on imports, not to grow exports, and companies have noticed.
Why wouldn’t they? If a government can be lobbied to erect protectionist walls, that’s always the least-cost path to outsize profits for any domestic producer. It’s certainly easier and safer than searching out new markets.
And, when even companies in a successful export sector such as automotive components are told by senior officials that they should seek to substitute imports, they will recognize that quicker profits might come from doing what the government suggests.
Doing so, however, will be disastrous for India’s growth in the aggregate. The country won’t be able to raise wages and prosperity unless productivity takes off. And productivity won’t grow unless manufacturers are forced to measure themselves against global competition.
What should the government be doing instead? First of all, it needs to resist calls for more tariffs, deeper subsidies and higher trade barriers. While the rich West might be able to afford defensive industrial policies, still-developing India needs to play offense.’
I hope we will make course correction sooner than later.