Confucianism and Trade Imbalances

The enlightened dictatorship of money

China’s failed apprentice system – Part 1

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According to Michael Pettis, there are three main forces behind China’s economic imbalances (i.e. its trade surplus): currency manipulation, repressed interest rates, and low wages.  I have dealt with the first two (which are closely connected) in The Chinese View of Money, at least marginally, tying it all to the concept of face.  Wages are both simpler and more complicated than monetary policies. Here and in the next three posts, I will use anecdotes to show how low wages are also a function of its culture, and where improvements need to be made.

Deliberate economic policies can have strong effects on culture. As an opposite example to China’s trade surpluses, consider trade deficits. Today trade deficits have a bad name, being associated with Southern European countries, but back in the day, right up until the financial crisis, many economists thought that  trade deficits were good for the economy. Crazy, I know, but think about this in the context of the roaring ’90’s: we were only thinking about growth. A healthy trade deficit county will have certain values related to its financial position – that its word is its deed, and that investment income is equivalent to any other kind of income. Abstract concepts like trustworthiness are of paramount importance for a healthy debtor, and it was these values that advocates of a “strong dollar” thought were more important than interest payments on debt.

Now think about the opposite situation, a trade surplus country.  I’ll talk about Germany here, to get outside of Asia.  The most important feature of Germany’s business environment is its its “hidden champions” – smaller companies, typically with a focus on engineering, with a global presence.  This economic model works because of its famed apprentice system, which emphasizes vocational training over high education.  This rigid career path for new labor market entrants helps keep wages low, with all sorts of other knock-on effects to the economy.

Germany adopted this model in a deliberate attempt to increase its exports. It tried to pay off its interwar debts by printing money, but the debts were in foreign currencies so the extra money just went towards hyperinflation. They found that they could only pay off their debts with goods that the Americans actually wanted, hence the export economy was born. This mentality has remained, and when the Euro was created, they secured an undervalued exchange rate. Since then, they have successfully resisted attempts to raise their prices to parity with the rest of Europe, in the name of their past experience with hyperinflation.  The German apprenticeship ‘culture’ is really just the result of a few carefully-chosen policies (and other European countries who have tried to imitate the culture without those policies have not been as successful.)

The German wartime economic system was later adopted by Japan, and then copied again by China. Does this mean that everything is the Germans’ fault? I don’t think so.  This interpretation of history doesn’t consider why Asian countries selected this model to imitate out of other alternatives – and it also ignores important differences between the Asian and European versions of the model. Instead, what I hope to show here is that the Asian apprentice system comes from deep-seated cultural attitudes, and that it produces trade surpluses as a consequence, opposite to Germany’s path to this point. Germany’s system emphasizes increasing productivity as a way to keep wages down, whereas the Chinese system simply seems to be interested in keeping wages down, regardless of the effects on productivity. Thus in the next two posts I will present a couple of examples of non-export sectors where the apprenticeship system is most apparent, and show how it is stifling efficiency (without even getting into innovation) – these will be aviation and health care.  My final post will be about solutions, but if you can’t wait until then, you could start by rereading my post on the nightmare of China’s accounting.

I have created a category for this series of posts, so you can access the others by clicking on the category name below.

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Written by Maofucious

August 19, 2012 at 10:02 PM

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