Updating on my post from yesterday, Dave Altig at MacroBlog reproduces a map (first posted by Sun Bin) of services as a component of GDP. As Dave points out China has clearly be come a significant outlier among would-be-developed economies in its reliance on manufacturing share. Even with the most recent data added in China is still very services-light. So: yes China needs financial reform, yes China needs to shift to a more domestic-consumption-driven model, and YES China needs to get into services, and bigtime.
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I don’t think that the share of services of GDP is any meaningful. Among “services” there are street vending or shoe shining as well as chip design or advanced financial engineering. Even less meaningful is percentage of workforce in services.
Lots of Latinoamerican workers are in the business of low-level services, optically it looks that these countries are highly developed.
“I don’t think that the share of services of GDP is any meaningful.”
True enough but the fact is that there are still huge political arguments in Britain about the share of “services” in GDP and the declining share of “manufacturing”.
“Lots of Latinoamerican workers are in the business of low-level services, optically it looks that these countries are highly developed.”
The thing is that we are talking in vaue terms here, not numbers of people. Of the top of my head, for example, I think in India has about 60% of its population engaged in agriculture, but this generates something like 20% of GDP.
The same goes for shoe shine boys (except of course for the ones who invest in wall street).
So I think you are wrong. The image of Latin America is extremely interesting. I had known for some time that Brazil, Argentina and Chile had a disproportionately large educated middle class for the level of development of the economy.
Argentina, for eg, was the country with the highest number of domain names per capita globally before the dor com crash. My guess is that at some stage both Argentina and Chile will be important services outsourcing centres for part of the EU via Spain, and possibly for the US via the Spanish speaking population there.
OTOH the very poor Latin American countries have very little in the way of services. All this relates to what I was saying about Bo Malmberg and Evo Morales the other day. To have an important high-end services economy you need to follow Becker’s idea and trade quality for quantity in children: less children with more education per child.
China is in danger of becoming too dependent on industry and too dependent on exports. Mid-term India’s model could prove to be much more interesting.
“and the declining share of “manufacturing”.”
Remember Bob that with corporate ‘disagregation’ manufacturing itself can be brocken down into a real manufacturing component and a services component: marketing, accounting, design, even sales can all be seen as services really. So you can get rid of the physical end and sell the other part. This is the idea. This is the knowledge based, information society. But to get this it is likely you need both male and female population to be much more highly educated. Curiously Ireland now claims to have more than 50% of its population going to university (both male and female). At the same time fertility is dropping steadily. The two do seem to be connected.
The two don’t seem to be connect, they are connected. The longer they study the more expensive they are.
“The longer they study the more expensive they are”.
Well you need to be careful here Charly, you are using ‘expensive’ as if it were some kind of ordinal scale.
If you look here:
http://neweconomist.blogs.com/new_economist/2005/06/how_much_burger.html
a big Mac is pretty expensive in Sweden, Denmark and Switzerland, while a software of design engineer in India or Argentina is still relatively cheap I guess.
Indeed since it is much cheaper to educate people in these countries, I would say they have an educational comparative advantage.
Better to buy your big Macs and your film technicians in Buenas Aires where they are both comparatively cheap I guess.
I agree with you that China needs to ‘get into service’, but I have s different rationale.
I think the fact today that China is manufacturing heavy (while India service heavy) compared with their ‘peer’ of similar GDP/cap, is not a chosen strategy. But rather, a result of “free market”/”darwinistic evolution choice”, determined by the relative competitive advantage of these 2 countries.
It would be nice to diversify and grow at all directions. Shifting into service could also mean (correlated with) higher-value added products. However, the question is not ‘should’, it is ‘how’, and what kind of competitive advantage China has for it to do so.
Does China have any active options here?
Given the huge agricultural labor pool, how can wages for basic services be anything but minimal in the forseeable future?
olivier,
you have just explained why the price in walmart has not increased (because wages in china has basically unchanged) for the past 10 years.
but in 5-10 years the pool of unlimited supply of labor will come to an end. then things will change.
either price will increase, or china will have to find higher value added industries.
Hello, Sun Bin. Having read you, it’s nice to meet you ‘in the flesh’ as it were.
“But rather, a result of “free market”/”darwinistic evolution choice”, determined by the relative competitive advantage of these 2 countries.”
Well yes and no. I do think ‘policy’ can be used to ‘tweak’ the market in all sorts of ways. Not only can be, but should be.
I don’t basically disagree that no-one really chose to be ‘manufacturing heavy’ in China, it just sort-of happened, in the same way it didn’t happen in Argentina. But I do think there is a sort of post-Marxist version of ‘stages developement’ knocking around (in both China and the views of many would-be free market economists) where you have to pass through one level to get to the next.
If you read Dooley et al, which is kind of post-Marxism in this sense, you will see that (in what is generally a very interesting body of work) they see China’s main play as leveraging all the cheap labour it has.
In a sense China does have a very constrained set of choices, because of all those people looking for work, but I still feel a greater push towards higher value services could be interesting, eg by encouraging many more people to come out and work in Europe and the US when they leave engineering school. We are talking right now about a green card system in Europe for skilled workers. Helping people come here for 3 to 5 years in relatively large numbers – and learn English – could be very interesting as a policy move. I have no doubt that it was all those ‘boys on the bench’ in California that gave India the push start here.
I think that the transition needs to be a rapid one in China, because the demographic damage done by the one child policy means the favourable demographics are going to rapidly invert, and China needs to have made the transition before this happens.
On the policy side, look at things like the Lisbon strategy here in Europe. Free market doesn’t really mean ‘free market’ it is much more complex than this.