1. China Facing the Future Center for Industrial Ecology Yale School of Forestry & Environmental Studies Prof. Marian Chertow Presentation to: Mandarin China AYA Excursion October 2008

2. Outline

• A wee bit of development theory

• Questions and trends

• Different perspectives

• • Chinese producing companies

• • Chinese workers

• • US and other overseas customers

• National policy choices facing China

3. What we know about what works for a countrys economic development

• Historically nothing has worked better than economic growth in enabling societies to improve the life chances of their members, including those at the very bottom.

• In this era of rapid globalization countries have become increasingly open to forces from outside their borders.

• However, that countries have responded so differently provides evidence that national policy choices are the ultimate determinant of economic growth.

Dani Rodrik One Economics, Many Recipes 2007

4. What we know about what works

• China and India would not have done nearly as well without access to relatively open markets in the advanced countries. But their success was also due to their governments concerted efforts to address fundamentals and restructure and diversify their economies.

• Our institutions of economic globalization should be designed to provide strong support for national developmental goals.

Dani Rodrik One Economics, Many Recipes 2007

5. National policy choices and the China future question

• Large (but controlled) population x sustained high rates of economic growth x increased investments in military and space x growing technological might = world superpower ?

• Intolerance of social behaviors x mass rural unemployment x corruption x poor environmental conditions x unwillingness to undertake structural reform =

• collapse of China ?

6. Will the pace of growth continue? Chongqing Dan Eckstein 2006

7. How will the business-miracle story change for China?

• Remember these sentiments:

• The only way for manufacturers to compete with China is to move operations to China themselves....

• China makes you sharp or it kills you.

• • • Wall Street Journal

• • • March 2004

8. What about

• Human rights

• Censorship

• Chinas reputation in the world?

9. Observations and trends what Chinas producing companies face

• China - as a labor-intensive manufacturing powerhouse: a victim of its own success?

• Rising wages and social concern for workers

• • Increases in government set minimum wages

• • Internal competition from service sector jobs

• • Wuhan wages tripled since 1995 to $76/mo in Feb 2007

• Rising material and energy costs

• Rather than exports prices getting lower and lower, since 2004 they have risen on average 2%/year (UBS Investment Research, 2007)

• Calls for better product quality and safety and higher risk of litigation

• Moving farther west into the hinterland is not keeping wages down as in Sams story

• A. Harney, The China Price , Penguin 2008

10. Chinese workers - some unintended consequences? A. Harney, 2008

• The 2 nd wave of post-reform migrant workers, many born under the one-child policy, are more aware of the risks in the workshop of the world.

• Today, fewer, pickier workers are more likely to shun factories with poor conditions, they are more prone to protest or strike, more willing to sue their employers than in the past

• Subtle change few unions etc. but much more attention to worker protection through labor law

11. What can Chinese producers do?

• Move up the value chain from low value goods i.e. cars, motorcycles industrial machinery

• Branch out into design J&J, research and development, brand creation to compete with higher price intl brands

• Acquire rivals and increase economies of scale

• Retire and speculate on real estate!!

12. What about US and other customers willing to pay more or buy elsewhere?

• Could purchase in lower wage countries

• • Soft goods - Viet Nam, Bangladesh, Sri Lanka,

• • Electronics Malaysia, Indonesia and Thailand

• • India deficiencies in infrastructure but many incentive programs

• Japanese business strategy China-plus-one

• • have production in China as well as another country in the region to hedge against political and other risks

• • an apparel company reduced sourcing of Chinese clothing from 90% to 60%

• Butcant abandon China

• • domestic market too attractive and

• • supply chain, cluster advantages are substantial

A. Harney, The China Price , Penguin 2008

13. Move toward domestic consumption

• In December 2004, Chinese leaders agreed to shift the economy to be less reliant on inventment and exports and more toward domestic consumption.

• One Chinese report referred to this as a move away from the two strong horses of investment and international trade toward the weak donkey of consumption.

14. Still, Chinas problems are the worlds problems

• Importing companies contribute to Chinas vast pollution

• That pollution has reached the US west coast and other parts of the world

• China and other countries compete for energy, food crops, and other global resources (but this also reduces fertilizer loading and the water needed to grow grains and other crops

• Chinas fate is already intertwined with that of the rest of the world.

15. In an industrial ecosystem, the consumption of energy and materials is optimized, waste generation is minimized, and the effluents from one process serve as the raw material for another My circular approach only gets you so far in Chinas vast industrial ecosystem R.A. Frosch, and N. Gallopoulos, Strategies for manufacturing, Scientific American, 260 (3), 144, 1989.

16. Elizabeth Economy and Adam Segal, Council on Foreign Relations in NY

• For many in the international community, it has now become impossible to separate the competing narratives of China's awe-inspiring development and its poor record on human rights and the environment.

• It is no longer possible to discuss China's future without taking its internal fault lines seriously.

• For the Chinese government, the stakes are huge.

Foreign Affairs , July/August 2008

17. Still more national policy choices by the Chinese government concerning

• The rule of law and the legal system

• Worker and farmer health, safety and livelihoods

• Watchdog role of media

• Grow-at-any cost vs. balanced development

• And, even with the rising expectations of Chinese citizens, ultimately, remember an important lesson from the west

18. GDP Happiness Mean Happiness and Real GDP per Capita from 1975-97 for repeated cross-sections of (different) Americans R. Easterlin 1995

19. Thank you for a lovely trip!