Why not copy the Chinese, who took only 200 years to learn from Adam Smith?

The current discourse in the clothing and textile industry in South Africa and elsewhere is both unfortunate and inappropriate. Much of the antagonism is directed at China and their ability to be more efficient than everybody else in the production of clothing and textiles.

The vast majority of South Africans benefit from being able to buy good quality Chinese goods at low prices. So do Americans. Over the past decade or so imports from China have saved United States consumers more than $600 billion dollars according to Morgan Stanley. Lobbying for increased protection against low-cost clothing therefore cannot fail to reduce the quality of life of the poorest consumers in importing countries. It is not a one-sided argument but the consumer side is seldom heard.

Why has China emerged as such a dominant force in the global market in such a short time? In late 1978 the Chinese leadership began moving the economy from a sluggish, inefficient, Soviet-style centrally-planned economy to a more market-oriented system, through the implementation of special economic zones (SEZs) in strategic areas of the country. The result has been a quadrupling of GDP. The reforms have also increased living standards phenomenally in China, to the extent that the World Bank now estimates that approximately 250 million people have been lifted out of poverty since 1978.

The Chinese SEZs are now amongst the freest economies in the world, attracting investment in wholly-owned facilities by corporate giants such as Nokia, Motorola, Philips, Intel, IBM, HP and Procter and Gamble. The opening up of the market meant an inflow of approximately $54 billion dollars of foreign direct investment in 2003 alone, more than Japan has attracted since 1952.

In 2003 China became the world’s biggest producer of steel, cement, aluminium and copper and the second largest oil consumer after the United States. These accomplishments resulted in the Chinese economy growing at a rate of 9.3 per cent in 2003, followed by a rate of approximately 9.5 per cent in 2004. The Chinese National Bureau of Statistics reported that gross domestic product (GDP) came to a staggering 13.65 trillion Yuan (US$1.65 trillion) as exports continued to fuel the Chinese expansion. Measured on a purchasing power parity (PPP) basis, China in 2004 was the second-largest economy in the world after the US.

Opening to the outside world has greatly promoted the development of China’s foreign trade. China’s import and export volume increased from 1.13 billion US dollars in 1950 to 360.65 billion US dollars in 1999, or an increase of 319 times. The total import and export volume in 1999 was 17.5 times that in 1978. In 1978 China ranked 32nd in the world in foreign trade, rising to ninth in 1999

The per capita disposable income of urban households in 2004 was 9,422 Yuan (R7,858), a real growth of 7.7%, while per capita net income of rural households was 2,936 Yuan (R2,449), a real increase of 6.8%, both representing the highest growth since 1997. By the end of 2004, the savings deposits of urban and rural households totalled 11,955.5 billion Yuan, an increase of 1,592.9 billion for the year.

Statistics from the ministry of Labour and Social Security indicate that 9.8 million new jobs were provided to urban residents in 2004. This resulted in the unemployment rate dropping by 0.1 per cent in 2003/04 leaving the urban registered unemployment rate at 4.2 per cent in 2004. Contrast this to the urban unemployment rate in South Africa of approximately 30 per cent in 2004. Life expectancy in China is now up to 72 years as opposed to the average South African who can only be expected to live for approximately 48 years.

Free trade policies as implemented by the Chinese authorities are not new. Indeed, the idea that free trade is the engine of economic growth dates back to Adam Smith, who formalised the idea over 200 years ago in his landmark book, An Inquiry into the Nature and Causes of the Wealth of Nations.

Under protectionist regimes, government officials decide which industries are to receive protection and to what extent they are to be protected, a task that no one can have the necessary information to perform without causing harm to the economy. When trade is open, domestic and foreign consumers decide which industries will prosper and the increased competition leads to greater efficiency overall.

Corruption is inevitable when government officials control valuable instruments such as import licences, which has negative social and economic consequences. Apart from avoiding corruption, there are considerable economic gains to be made from eliminating trade barriers. The World Bank estimates that if we were living in a tariff free world, income around the globe would increase by $832 billion as a result of increased trade in all goods. Most of these gains ($539 billion) would flow to developing countries.

So what can the government do for workers that have lost their jobs in industries that are-out-competed by lower-cost foreign producers? If labour laws became more flexible, moving from unemployment to employment and from one job to another would be much easier. Couple this with a more open trade regime, which makes foreign investors feel welcome, and unemployment would be substantially reduced.

Many employers are not hiring workers because the costs of compliance with the labour laws have become excessive. In a labour surplus economy like South Africa’s, workers should be allowed to move freely on their own negotiated terms without unnecessary official interference. As in free trading markets, free labour markets tend to produce the greatest good for the greatest number, and that is surely what most South Africans want.

Author: Jasson Urbach is an economic researcher at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 09 August 2005 - Policy Bulletin / 20 October 2009