Average wages in manufacturing in China are running at around $7,000 a year. That is a 71-percent increase from 2008. The $7,000 a year is a rough conversion of the reported 41,650 yuan for 2012. According to a recent report, wages have risen on average 12 percent over the last 10 years while the renminibi has increased in value against the US dollar by about 25 percent. If things continue like this, then China will soon lose its low-cost manufacturing advantage which has been such a major contributor to its economic growth.
In 2007, China made 75 percent of the world’s umbrella and walking sticks, but times have changed and now the concentration of manufacturing is on higher value items (solar panels, wind turbines, machine tools, computers) which of course is exactly what should have happened; over time manufacturing becomes more high tech, supporting increased wages for higher skills—economic development. China now produces almost 20 percent of world manufacturing output, eclipsing the United States. The catch, of course, is that as wages rise (and currency strengthens) then other manufacturing locations become real competitors for manufacturing investment and creating jobs.
The Philippines has an average manufacturing wage of $4,581 and Vietnam reported in a Japan External Trade Relations Organization survey $ 2,602. As we know, Vietnam is now an attractive magnet for foreign direct investment (FDI), having attracted $12.72 billion in 2012, compared to the about $2 billion attracted by the Philippines. China attracted about $40 billion in FDI in 2000, which has grown to over $250 billion by 2012, according to the Organization for Economic Cooperation and Development.
So what are we to make of this other than the fact that as China raises its wages and its currency strengthens against the US dollar, the cost of everything for the poor old consumer will increase? Corporations and their shareholders have had a bonanza over the past 10 years or so capitalizing on very low manufacturing costs in China and selling at market costs in the developed world. That bonanza will be coming to a close perhaps—worryingly producers may still be forced by shareholder pressure to maintain their margins and dividends . . . prices will rise, dividends will reduce and demand will decrease. It is not so easy to shift manufacturing investment, factories and production facilities from China to somewhere else, but in the longer term, there will come a point at which economics will dictate that manufacturing facilities should indeed be moved to take advantage of lower labor costs, skills and infrastructure somewhere else (offset by the growth of the Chinese domestic market, which will be such that it will by itself support the “sunk” China FDI). This is an opportunity for the Philippines—and Vietnam, Thailand, Indonesia, Myanmar and India, and of these six, the Philippines is well placed; it has a skilled and educated workforce, English is widely spoken and people smile. But alas, the local capital market is limited and FDI is not encouraged. In newspaper reports the past few days, there was a gleeful headline that Brunei would be creating more jobs for Filipinos. Can it really be the case that the Philippines economic strategy is to concentrate on exporting its people and skills to take jobs from the nationals of other countries, remit their earnings back here to spend on consumption of imported goods in the endless number of retail outlets, (some of) the profits from which are used to build yet more retail outlets, while rebutting development of an industrial infrastructure at home? If this is indeed “the plan,” then economic development in the Philippines is constrained (and controlled) by the investment appetite of the local capital market which clearly lacks vision, and it must be the role of government to broaden that myopic view by force if necessary, which would include opening up the economy to FDI and real competition—not everybody needs a minimum return of 30 percent on their property-based investment and payback within two or three years. To stimulate foreign direct investment to manufacturing and then serve the domestic market would be a cataclysmic event for the local capital market, but it would be good news for 99 percent of Filipinos. There is a groundless fear of foreigners “getting control” in an open economy, I wonder who stimulates that along with the reluctance to consider opening up the 60/40 rule?
The opportunity is near as Chinese manufacturing activity for export will slow down, why not take it before it is captured by Thailand, Vietnam, Myanmar, India and Indonesia, and give Filipinos not only jobs at home but also some real choice based on real competition and of course because of that inclusive growth? Or is the Philippines doing so well as it is that it doesn’t need to change anything much?
Mike can be contacted at firstname.lastname@example.org