Global Agenda: China changing

Amir Peretz sought to shift the battle to his home turf, but this effort failed thanks to two factors.

china 88 (photo credit: )
china 88
(photo credit: )
Insofar as the Israeli election campaign now drawing to a close has had any economic policy content, as distinct from the shedding of crocodile tears over the plight of the country's poor, it has been focused on the labor market. The Labor Party's new leader, Amir Peretz, has sought to shift the battle to his home turf, but this effort has failed thanks to two factors. One was the reemergence of security and foreign affairs considerations as the central theme of the campaign, for which Peretz can blame Hamas. The other was Peretz's insistence on promoting his pet scheme, whereby the minimum wage would be raised from its current level of some NIS 3,400 (over $700) to the magic number of $1,000. This idea has patently failed to enthuse anyone, hopefully because most Israelis understand intuitively that it is nonsense. Economists can explain why it is nonsense, using long and tedious analyses of how the labor market works. Fortunately, these explanations are unnecessary because even an uneducated manual laborer can sum up the whole argument in one word: China. Virtually the entire developed world now understands that the phenomenal development of the Chinese economy over the last generation, and especially the last few years, has made it impossible to maintain low-income manufacturing jobs in developed economies (and even in many developing economies, as Mexico and others have discovered). The rise of China has wiped out entire industries in Israel, because the cost of the marginal Chinese factory worker is measured in dollars, or at most tens of dollars, rather than hundreds of dollars. Not only will raising the minimum wage by $300 a month be counterproductive to employment in Israel, but even reducing it by that amount would have little impact - at least in the manufacturing sectors. The image of an unimaginably vast Chinese juggernaut sucking into its labor force an additional 10 million to 20 million Chinese peasants every year, is now understood and accepted by almost everyone, from government to business to organized labor. It took time for people to grasp the enormity of the threat, but now it is conventional wisdom. As so often, this is exactly the point when the obvious becomes obsolete and the conventional wisdom loses its validity. Last week's column noted that the critical decisions affecting the global economy are being made in Washington and Beijing. With regard to the latter, the news is that China's leadership is altering course - the headlong rush to economic development is to be reined in. This does not mean that reform is dead or even in danger of being reversed; at most, some new reforms may be delayed or watered-down, but the reformists are still in firm control. They also intend to stay in control and are aware that this requires them to take heed of two growing foci of discontent. One - by far the less important - is the rest of the world, led by the US and EU, who are pressing them to change their policies away from export-led growth and an artificially cheap exchange rate, toward more rapid development of the domestic economy. The second and main focus is at home, in the Chinese countryside, where a large and rapidly widening gap has emerged between it and the cities. There are many indicators of this gap and the tension it causes, but the tens of thousands of riots that took place last year are much the most persuasive evidence, from the point of view of the Chinese Communist Party leadership in Beijing. Economic policy is, therefore, changing direction. More resources are to be directed to the rural areas, while the unsustainable use of resources - energy, water and especially agricultural land near big cities, is to be severely curtailed. The environment and its ongoing degradation is no longer something to be ignored or tolerated - rather the contrary. Banks will no longer throw cheap money at projects that will add still further to huge overcapacity - and so on. In short, the Chinese juggernaut is changing its orientation and hence its impact on the world economy. This will take time to feed through, but the implications are immense. For instance, China will stop exporting deflation, so that the prices of manufactured goods - from shoes to appliances - will end their apparently relentless downward spiral, and wage deflation in manufacturing may well stop, too. In that case, the minimum wage in Israel and elsewhere will rise naturally, without the need for futile legislation to achieve that goal.