Asian Development in National Context

This week we will take a further look at the role of technology and business in changing the Chinese and Indian Economies. “Changing Industrial Geography in Asia: India and China” explores the origins and implications of the respective development paths in Asia. China’s industrial development has largely come about because of its economy’s long-standing emphasis on manufacturing. In the initially stages of reform, a lot of the industrial build up utilized the small scale, country side manufacturing of the Mao era, but gradually shifted to the establishment of industry through out the more urban, coastal and southern provinces. These were mainly focused on light manufacturing for the time being, but have gradually moved toward more capital-intensive sectors.  A variety of factors have influenced this shift, and “Changing the Industrial Geography” explores them as well as the future implications.

The subsectoral analysis shows that there is a trend to more manufacturing of industrial intermediates like rubber, glass, and chemicals. This combined with electrical appliance sectors accounts for 43.2% of China’s aggregate manufacturing output by 2007. This has translated into rapid growth in China’s exports of electronics and telecom equipment to account for about a third of its exports by 2006, roughly equal to the share of light manufacturing in that same year. This speaks to the rapid upgrading of manufacturing facilities in China from the baseline of primary and resourced based production through out the 1980s and early 90s. This rapid upgrading has been part of a concerted effort in Chinese industry to accumulate capital supply relative to its labor supply. The author’s study notes that the total factor productivity of capital in the Chinese economy has increased by a factor of at least 4 over the past 20 years. This means that capital produces 4 times the output it did 20 years ago all else being equal. Such large supplies of capital combined with low-cost labor with the advantage of economies of scale are what allow Chinese manufacturers to out-compete on the basis of price, at least in the initial stages of industrialization. Wages and demand for labor in China today have risen, but the productivity gains have offset much of the costs for additional labor and wages. With forecasts indicating slower global-growth, larger firms with higher value added to the market as well as those with ties to MNCs due to their better relative capabilities to absorb and implement technological changes and production upgrades.

In accessing the prospects for the drivers of industrial change in China, the authors employ measurements known as relative comparative advantage (RCA) and measurements of which specific products dominate China’s output. According to these measurements, we can glean which areas of China’s industrial base have been most dominant and which are viable areas of growth now and forecast them for the future. As it stands for the industries in the year 2006, growing industries by RCA were transportation equipment, steel, and industrial chemicals. These areas combined with the figure above for electrical appliances put China right in the hunt for a solid, mid-level industrial base. The next stage of the game is upgrading to more technologically advanced products in greater markets with higher prospects for increased sophistication. The trends in RCA from 1986 until 2006 show that such an upgrading has a long history, but it remains to be seen whether further upgrades will be subject to the law of diminishing returns. The origin for a lot of these upgrades has been inflows of FDI to China as it aids in the quest for higher domestic value added along with increased

The other side of this engine of industrial growth has been the human capital and urban development that allowed for a significant industrial base in each province or major municipality. These regions each bare good varieties in vertical and horizontal integration, making each achieve a variety of specialties across sectors. A prime example of this clustering is the successful organization of science parks, universities, and venture capital to focus on specific to create and foster the growth of small and medium sized enterprises within the field. The most striking examples of these are the Pearl River Delta, Changjiang, and Bohai, where several clusters have arisen in the production of food, textiles, and computers. While the demand for labor has increased wages in these clusters and exchange rate appreciation has made production more expensive over all, the productivity increases have increased enough to offset those additional costs at least, so far. If the current rate of wage increases continues, the lower end, labor intensive, light-manufacturing clusters may be shifted to the inner cities and away from the relatively more expensive coast.

India’s development pattern started to take real shape and gather real stem particularly with the rise in business process outsourcing and information technology enabled services through out Bangalore, Chennai, and Mumbai. These industries, along with a strategy of import substitution industrialization in the 1980s and 90s, provided for the establishment of a liberalized industrial base for India. But when compared with China, India’s manufacturing sector is smaller, only counting for 27% of exports by 2007, but higher quality in some high-technology sectors. In fact, India’s industrial organization as a whole is still in the early stages of what is considered to be an industrialized economy. This is partly due to lagging of its urban development in comparison to that of China with India’s urban population accounting for only a 3rd of the total. This provides some constraints on the formation of significant industrial clusters like the ones seen in China across virtually all sectors. This stems from a larger problem concerning the inadequate infrastructure in India’s urban centers on everything from sewage, roads, and electricity. The lack of these things in more abundance understandably hampers the growth of industry. The numbers back this up with India’s economic growth and total factor productivity going down slightly in the past 20 years. However, there are signs that investment in India will continue to grow as it’s current investment rate of 39% of GDP from 24% in the late 1990s shows.

On the human capital side, India has made extraordinary gains but continues to lag significantly in creating an adequately educated work force. Initiatives to increase literacy as well as primary, secondary, and tertiary education have left some noticeable improvements. But what remains is a undereducated workforce largely unprepared for the economy with some exceptions at the very high end of extremely technical products and services. Basically, the middle-income stratum in India is far too small for a fully industrial economy today. The gains made provide a solid base for India’s continued growth in telecom and technology services.