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OU Lecture 2008: China's impact

Updated Thursday 29th May 2008

Why is China - or any nation - so keen to industrialise, asks Professior Kaplinsky in the fourth part of his lecture

Professor Kaplinsky talks about the strategy of industrialisation which has been the dominant strategy in Africa, and the rest of the world, over the last 30 years, since the Industrial Revolution.

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Why should countries industrialise? Well the first thing is countries should industrialise because there’s a demonstration effect, isn’t there? It’s quite clear that the rich people in the world, or until recently that the rich people in the world lived in countries which had large shares of industry. So that’s just an observation. There are analytical reasons for it. As people earn more, they buy more manufactured products than they buy agricultural products. And also industry supports military powers. So if you’re going to have military apparatus at one port or another, or protect your country, you need some sort of backup, some sophisticated backup.

There are other reasons as well. But the one I want to focus on is the dominant view in the world that the reasons we should move into industry is that primary commodities, agricultural products, tea, coffee, iron ore, coal, copper, fall in price, compared to the price of manufactures. And that’s called the terms of trade. I know you’re not all technical, but this – and I’ll explain to you what the graph tells us – looks at how many kilos of coffee a country has to export to import a motor car. If the price of your coffee is falling more than the price of motor cars, then you have to spend more and more effort in exporting more and more coffee to buy the same motor car. So when the terms of trade go down, it means that you’re having to invest more and more energy in producing and exporting things to buy the same amount of industrial products and this is a theory where my mentor and colleague Hans Singer made the seminal contribution in the 1950s of the Latin America, Argentinica Raúl Prebisch. Which essentially said the fact is that the terms of trade turn against agricultural and primary commodities and you’re always on a losing ground. So go for industry. And for these reasons particularly this relationship between the price of manufactures and commodities which I’m going to talk about, the dominant development strategy round the world has been to industrialise and move out of the primary sector, which is agricultural products. Tea, coffee, and mineral commodities.

And now what I want to do is to ask what does the advance of China particularly, and India, do for this historical relationship between manufactures and commodities. It’s this which has given us the organising principle for development all round the world. It’s based on an observed relationship which in this case goes back to 1960, but Hans Singer showed went back to 1870, of a long-term trend for the price of manufactures to go up faster than the price of commodities. Or the price of manufactures if you want to put it another way, to fall less rapidly than the price of commodities. And what I’m going to show you, is some numbers, to suggest that China may be altering this fundamental relationship between manufacturing and other sectors. And if that’s the case it has very, very severe implications for development strategy and for poverty and inequality in Africa. I’m going to tell that story first by looking at the global picture of what’s happening between the price of manufactures and commodities, and then I want to go to Africa and ask what’s happening within Africa on this, particularly with respect to Africa’s quest to industrialise.

I’m one of the few people in this room who was born before 1990 I guess. Well, not quite. [LAUGHTER.] I was socialised in the sixties and seventies when we were used to inflation and the price of manufactures going up. We know about the 1970s inflation being out of control. Do you remember? This is what happened on average to the price of world manufacture goods traded between 1986 and the year 2000. And anything below that line means that in those years on average the price of world manufacture products was declining. Look at the trend. Instead of manufacturing prices going up, the trend is for the rate of increase to decline and then after about 1996 for there to be a fall in the average price for manufactures. Now that’s something for those of us as I say brought up in this post war period which is really rather remarkable. Perhaps the young, the less old people in this room will be surprised that I am surprised at this! Because we’re all accustomed to the falling price of computers, DVDs, clothes, transport. But it wasn’t always that way. This is a recent phenomenon, bearing in mind incidentally that 1985 is the year in which China begins to export. Until 1985 China was inward looking. In 1985 the philosophy became to export and right through this period, particularly during the 90s and the early 2000s, we had this massive growth of Chinese manufactured exports.

And here’s how you can see it as an impact. I will come to this later on but it’s one important technical point for you to get. On the 1st of January 2005, the rules governing the world trade in clothing and textiles changed. Until the 31st of December 2004 there was a limit on the number of products which China and India and Bangladesh and Vietnam could sell to Europe and North America. It was called the Multi-Fibres Agreement, or the Agreement of Textiles and Clothing. From 1st of January 2005, those controls on the quantity of exports from China and Asia countries were removed. And the only thing hampering China and India’s exports to America and Europe was that they paid a higher duty. But there was no limit on the amount they could sell. And this compares the first three months of 2005 compared to the first 3 months of 2004, to show what happened to Europe’s imports or China’s exports to Europe when those controls were removed. And here you can see a number of products, t-shirts, pullovers, men’s trousers, blouses. I always say to my Chinese friends you know, what’s so hopeless about your linen and ramie industries that they can only expand the exports by 50 per cent in a year? Why can’t you be like pullovers and do it five and a half times. And they did it on the back of a massive reduction in prices. Five and a halftimes increase in pullovers, yes. But by halving the price of pullovers. This is where we get the falling prices. That clothing as an extreme case because there was this block until 2004 and so it shows us in extreme what has been happening in a number of sectors over a period of time. And you can see that the share of China in these sectors goes up. And this is a very important table and I’ll come back to it. It’s very important for Africa because clothing and textiles is the stepping stone for industrialisation. The first industries which countries start are the simple ones like clothing, textiles, footwear, furniture. And I’m going to come back to how the story works out for Africa. But I’m first just giving a sense of the general trajectory of China in the world.

But it’s not just clothing and textiles. And this is a difficult graph I’m afraid to throw at you, and I’ll try and talk us through. We then studied, I told you it was difficult, what was happening to the prices, not just of clothing and textiles, but of all products. And we broke the world’s products into different types of technology. At the bottom left you’ve got resource based manufactures. Tea for example, processed tea. Low technology products which is clothing and textiles. Medium technology products, automobiles. High technology products, electronics.

On the vertical axis is the likelihood of those prices falling and in each of these products you’ve got low income country exports, China exports, lower middle, upper middle, [high level?]. So you can see in each category we’ve got the likelihood of prices falling for different groups of countries. And you can see that in each category the more China participates, the more likely it is their prices will fall. And the more likely it is those prices will be of products produced by developing countries.

Now remember the terms of trade which is the underpinning of industrialisation strategy says that manufactures will go up in price and commodities go down and what I’ve tried to show us now is how price in manufactures has gone down. Not just gone down in general but gone down most specifically for those products produced by low income countries. And at the same time the price of commodities is moving in the opposite direction. And this is the share of China in global consumption of copper, aluminium, zinc, nickel, steel, monal. You can’t see the details, 1950 to 2000. You can see when China’s export boom begins. China’s share of world consumption goes up from very low levels, less than five per cent, in many cases to 30 per cent of total world consumption. And the yellow one is, if you take all of the increase in consumption of steel, nickel, copper and aluminium between between 2000 and 2003, basically all of the increase in world demand comes from China. And hey presto! We shouldn’t be surprised that the price of commodities goes up.

So this old relationship which had led to industrial development and industrial strategies, premised on the price of manufactures going up and the price of commodities falling. Get out of commodities, go into manufactures, is now turned on its head and it’s turned on its head because of the impact of China for the world.

 

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