Goodbye BRICS, Hello IndoAsia

I never really bought into the BRICs concept. It’s a hodgepodge. Brazil and Russia seem closer to Mexico and Turkey than to India and China. But it did capture the growth spurt in the emerging markets after 2000.

To me the real story was China and to a lesser extent India. And now the NYT says China is beginning to shift to a new trajectory:

Rocketing wages and benefits reflect an acute shortage of manufacturing labor, as a younger generation goes to college instead of heading for factories and as rural China has mostly run out of young adults to send to the cities.

. . .

The trade gains for China are magnified because over the last several years many companies have shifted the production of components from high-wage Asian countries like Japan and South Korea to China itself. So China is producing more of the value in each product, and not just doing the final assembly of products produced elsewhere.

. . .

In separate interviews this week with nearly a dozen Chinese exporters, at Hong Kong trade fairs or by telephone, all said that their biggest problem lay in labor: finding enough blue-collar workers and paying for their soaring wages.

Mr. Cheng said that a decade ago he paid about $75 a month for entry-level industrial workers and provided virtually no benefits. Now, he said, his 200-worker business, the Hangzhou Luyi Arts & Crafts Company, pays $570 a month plus $100 a month in government-mandated benefits.

That works out to compensation roughly three times as high as in Indonesia, four times as high as in Vietnam, five times as high as in Cambodia, and as much as 10 times as high as in Bangladesh. But all of those countries have other problems, such as overburdened, unreliable electricity grids, which force companies to install costly generators and buy expensive diesel instead.

Like many companies in China, Hangzhou Luyi has responded to surging wages with increased investments in automation.

So what does all this mean? First of all Chinese labor costs will continue soaring if China follows the path of South Korea and Taiwan, which seems likely to me, but not certain. So what then? Who makes the world’s sneakers in 2030?

Latin America is already a mature economy. Mexico will keep growing, but it doesn’t have global implications. Africa will grow with a commodity model, manufacturing will come later. The Middle East is only good at doing two things, producing oil and fighting. The developed world is already developed. That leaves places like this (data from The Economist):

Country Population GDP (PPP) per person RGDP growth/2014
Bangladesh 157 m $2130 5.7%
India 1,260 m $4350 6.1%
Indonesia 253 m $5470 5.4%
Philippines 108 m $4620 6.6%
Vietnam 91 m $4020 5.5%

That’s 1.87 billion people. Throw in a bunch of similar smaller places like Sri Lanka, Cambodia, etc., and you have 2 billion out of the global population of 7 billion. By comparison developed East Asia plus China has roughly 1.5 billion, the Western developed world 1 billion, Latin America 1/2 billion, sub-Saharan Africa 1 billion, and the other billion in places like the Middle East, Pakistan, Russia, etc.

Unlike the BRICs, it seems to me that IndoAsia is an actual category of similar countries. It’s the next China, but it won’t be as dynamic as China. I tried to come up with a clever acronyn for those 5 countries but failed. In any case, they share pretty similar GDP growth rates and income levels (except Bangladesh for income.). And while China’s population will soon start shrinking, they will keep growing. IndoAsia will have the young workers of the 2030s that will produce all that cheap stuff that used to be made in China.

If you believe that China depressed wages in the West, do much higher wages in China make that problem go away, or does it simply shift to IndoAsia? I can see arguments both ways. IndoAsia has enough labor to pick up the slack, but does it have the productivity to depress US wages? It seems to me that by the time Bangladesh gets to the point where it could threaten the US autoworkers, those workers will be replaced by robots and 3D printers anyway. So my hunch is that IndoAsia is a nonissue for US inequality going forward. It will be increasingly the case that most US workers do things that need to be done in the US for various reasons, or where we have strong productivity advantages.

Also note that these countries are growing at 6%, not the 10% that China grew when it was that poor. That suggests they’ll get stuck in the middle income trap unless they do more reforms. Or perhaps I should say until they do more reforms. In the very long run all countries may escape the middle income trap, the question is whether in the interim they go through decades of mediocre growth like Latin America.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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