The low-wage trap
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The news out of China this year has been relentlessly bad. The political system was embarrassed in front of its own people by the Bo Xilai scandal and in front of the world by the Chen Guangcheng incident. The Chinese economy has slowed while its neighbours have been strengthening their ties with the United States. All this has occurred at the worst possible time for the Communist leadership, as it prepares for what was supposed to be a seamlessly orchestrated transfer of power to a new president, premier and ruling cadre later this year. Instead, events have made accounts of an all-capable and problem-free China seem quaintly credulous. While these problems is likely to prove surmountable, together they are clues to a question that will take much longer to answer: Can China make it as a fully modern economy and society?
The China we have known for 30 years has been a phenomenal success, but one with some increasingly evident weaknesses and failures. The successful side of China's record is familiar. No society has ever created wealth faster nor alleviated poverty on a more sweeping scale. Its super-modern infrastructure makes the rest of the world seem pathetic and paralysed.
Some of the limits and failures are well publicised: among others, environmental despoliation; the demographic shift caused by the one-child policy; and the problems of transparency and accountability in the Chinese governing system.
But there's a bigger problem: whether the success of China's current model is leading toward a "low-wage trap," in which its outsourcing factories get bigger but don't necessarily move the country toward the higher tiers of the world economic structure. Put differently, will Chinese companies ever go from assembling iPads to fostering future Apples of their own — or, similarly, from selling knockoff copies of Western movies, music, search engines and online apps to establishing China's own pop culture industries with worldwide profits and soft-power appeal?
Nearly every Apple product is "made" in China, but barely 10 cents on the Apple sales dollar stay with workers, suppliers or anyone else in the country. The rest goes to designers and shareholders in the US, component makers in Japan, machine-tool makers in Germany and retailers or shippers around the world. The problem for Amreica is that it disproportionately rewards the top rather than the middle of our income scale. The problem for China is figuring out how to capture more of the rewards to begin with.
The profits of globalised commerce are skewed toward famous brand-name corporations, of which China has surprisingly few. Its most creative, dynamic firms are small subcontractors, while its biggest companies are sluggish former state monopolies. The challenge of creating a "Chinese Apple" has nothing to do with the insulting question of whether Asians can innovate. Rather, an escape from the low-wage trap involves social and institutional innovations that may be easier for Chinese planners to identify than to put in place.
The societies that have produced the real Apples vary widely, but they share a few traits. While they fall short of the ideal, they aspire toward reliable rule of law. They have intellectual-property protection regimes. They recognise the legitimacy of independent media and university establishments, and, with variations, the importance of guaranteed spheres of privacy and free speech. They are built on the necessity of encompassing a range of different beliefs within one political system. In short, they are liberal societies. The question is whether China can acquire or apply these traits of modern civil society while maintaining the overall control that, along with territorial security, is the Communist Party's paramount interest.
JAMES FALLOWS is the national correspondent for 'The Atlantic'
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