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Friday, October 17, 2003

America's 'Productivity Advantage'

Brad had an interesting post some time back that I never got round to commenting on. Now's my opportunity:

The French--and the British (I know: I've shopped in Britain)--are deprived of the opportunity to buy in the equivalent of CostCo and WalMart, and deprived of the opportunity to get lots of good stuff cheap by shopping at high-volume retailers who have taken advantage of the efficiencies of distribution offered by bar codes, POS systems, databases, and all the other information-age inventions that make it possible for retailers and distributors to keep track of stuff.

This doesn't matter much to John Kay: he doesn't have trouble financing his vacation to the Mentonnaise Riviera: "...between Monaco and Italy, the mountains and the sea, Menton is like an island where life flows serenely... Nestled at the foot of the Azur Alps which plunge into the Mediterranean..."

But there are lots of guys living in western Europe for whom the lack of an opportunity to shop at a WalMart equivalent--and thus to shave 50% off the retail margins they pay while shopping in the picturesque marché municipal--is a real loss. True, they would miss out on their "pleasant excursion[s] to pick up some produce in Menton's marché municipal and browse the FT over an espresso in the place Clemenceau." But if they paid less for produce and staples, they might use the money to pay for a better vacation of their own, or perhaps a dishwasher. They are more than picturesque background figures to entertain John Kay's eye: they are people with limited incomes, but with lives and plans of their own.

And it is not a good thing that western Europe today deprives them of their choice. They are not free to choose to shop at Andronico's, Safeway, or CostCo. Even though the fact that they are deprived of that choice does not strike John Kay as a big deal, it is. For them, it is a problem that, in this particular dimension, Europe is not like America.

Now in one sense Brad is right. we don't have the 'drive and shop' model of the Americans, at the same time we don't have the obesity and life expectancy problems (so we may have some positive - if unmeasured 'externalities'). We do, however have (plenty of) bar codes, POS systems, data bases, and we're getting more by the day. My take is that what we're slow on is extending the supply lines - WalMart style - into China, and getting the real benefits of IT leverage, and that is one of the main 'drags' on the living standards of our 'working classes':

Andrew Tsuei's job is to fill the shelves of Wal-Mart, the world's biggest retailer. He heads a chain of 23 buying offices scouting for goods in 50 countries. Mr Tsuei's own sleek silver and grey HQ is in Shenzhen, a Chinese city so new that it was paddy fields just 25 years ago.

Today Shenzhen is the gateway to the world's biggest manufacturing zone. Shipping-firm Orient Overseas Container Line this year named the world's largest container ship after it - the OOCL Shenzhen. The rise of Shenzhen's Pearl River Delta hinterland into a global manufacturing powerhouse has fuelled admiration, and - increasingly - envy among the top developed nations. China's economy is growing at roughly 8% a year, easily outperforming G7 countries. Economists think it could overtake the United States as the world's biggest economy by mid-century. It has a bigger trade surplus with the US than Japan, Asia's last miracle growth story, and last year it displaced Britain as the world's fifth biggest exporter. China has arrived at the world's top table and the hosts are increasingly nervous. It is accused of sucking jobs and growth from somewhere else - usually the US or Hong Kong - and a vociferous US Congressional lobby wants it punished. US demands for forced currency reforms have been echoed by the International Monetary Fund (IMF) and G7 club of advanced economies. Guangdong province, up the Pearl River from Hong Kong contributes 10% of China's economy, pours out one third of China's exports, and has pulled in one third of China's total foreign investment. Few people around the world had heard of this region until it became the birthplace of the deadly Sars flu outbreak.

But its global economic importance has been snowballing since China's Communist rulers decreed an experiment in capitalist economics there in 1980. A visit to Yantian, one of Shenzhen's two ports, brings home the scale of China's trade. Its 40 cranes can load one container every two minutes, up to 1,200 an hour. "We never stop," says general manager Kenneth Tse, who radiates energy and wears a navy silk tie scattered with golden currency symbols. Construction is going on to double Yantian's capacity by end-2004. Hong Kong remains the biggest container port in the world - also thanks to China's trade. But nine-year old Yantian handled the same amount of goods last year as Felixstowe, the UK's biggest container terminal.

How has the Delta achieved such rapid growth? And can it keep going? Cheap labour is one answer. "Basically what you have to pay somebody to be an assembly line worker is what is costs to get them off the farm," says Prof Michael Enright of Hong Kong University. Real wages have been static for a decade, but there is no shortage of workers. Everywhere, blue blouses hang drying outside factory dormitories, home to 20 million migrants. Manufacturers now come here to be near their suppliers and buyers, not because of the tax breaks that fuelled early growth. "What we see developing in the PRD is basically quite a deep economy," says Prof Enright.

The sheer concentration of suppliers is certainly one reason Mr Tsuei stuffs his shopping trolley here. "Many retailers worry about buying the right thing, then they worry about buying enough of it," he says. At Wal-Mart "we worry about buying enough". "Enough" for him means $12bn (£7.2bn) this year, roughly 10% of the $116bn trade deficit the US clocked up with China in the 12 months to July. Vast amounts of what the world wears comes from here - clothing, footwear, watches, jewellery. In 2001, two thirds of shoes imported to the US came from China, says the World Trade Organisation. But China's exports are getting increasingly hi-tech, something that makes its critics nervous. A fifth of Guangdong's industrial output is now consumer electronics. It is the biggest sector, worth 4.3bn yuan ($500m).

One reason is investment from foreign electronics and telecoms giants like Nokia, IBM, Phillips and Siemens. Foreign firms investing in China do so partly to tap its growing consumer market, but overwhelmingly to produce for export, according to Morgan Stanley chief economist Stephen Roach. He thinks tirades against China's cheap exports are scapegoating it for the problems of the world economy. Chinese officials think so too. "We don't understand why Americans are complaining about us. They should feel thankful to us because we're producing low priced goods they can benefit from," says Chen Weilin, the Guangdong province official in charge of IT development.

China's State Council has come up with a plan to double the region's growth, giving the go-ahead to a huge bridge linking the western side of the Pearl River with Hong Kong. The idea is to bring the west shore within a three hour car drive of Hong Kong, its international airport, foreign investors and financiers and pump it up into another Shenzhen. It should also speed the integration of Hong Kong, a city which is struggling economically after decades of viewing mainlanders as poor relations. Wal-Mart's procurement strategy offers a snapshot of the shifting industrial balance. It buys food and trinkets in Europe - gold chains in Italy, olive oil in Spain, wine in France. And what does Wal-Mart buy in Britain? "Almost nothing - except stores!" laughs Mr Tsuei.
Source: BBC News

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