The BaShiTong food court, a collection of small eateries on the third floor of an office building in central Chongqing, China, closed this summer just three months after it opened. Workers sued for back wages. The owner of one spot lost all his savings and barged into the office of the food court’s promoter with a propane tank, taking him hostage and threatening to blow the place up by igniting the tank.
It was Chinese capitalism in action: very messy, often unfair, sometimes violent. But the BaShiTong hostage incident ended quietly. While litigation continues over the back wages, workers quickly found new jobs, sometimes less stressful ones. Zheng Feng, the athletic, 28-year-old former manager of a dumpling shop in the food court, now sells sportswear at a fashionable shop nearby.
“It is much easier — plus the air-conditioning is better here,” he said.
Almost 3,700 kilometers, or 2,300 miles, to the southwest of Chongqing lies the sprawling, overcrowded city of Mumbai, the commercial capital of India. Bharat Petroleum, a state-controlled oil company in India whose sales rank it in the top 250 multinationals, has its headquarters in a dilapidated building in the city’s oldest British colonial neighborhood. A rickety, claustrophobic elevator takes visitors up to the chairman’s elegant office, tastefully decorated with abstract paintings in vivid blues.
Raj K. Singh, the company’s chairman and managing director, smiled when asked in late August how it treated its workers. Unionized employees performing even menial jobs earned the equivalent of $560 a month until this summer, when a new labor agreement raised their pay to $800 a month. Nonunion workers in India doing the same tasks earn as little as $50 a month, he said. The company’s losses, mainly the result of fuel price regulations but also its own high costs, are heavily subsidized by Indian taxpayers.
BaShiTong and Bharat Petroleum illustrate several facets of the Chinese and Indian economies. The economies could scarcely be more different. Yet each represents a formidable challenge for Europe in the years ahead.
Chancellor Angela Merkel of Germany repeated tirelessly during her successful re-election campaign this year that Europe has only 7 percent of the world’s population and produces 25 percent of the world’s economic output, but represents 50 percent of the world’s social spending. Sustaining those lopsided percentages requires that Europe remain at the forefront of competitiveness. Europe needs to produce quickly and efficiently a wide range of goods and services that the rest of the world is willing to work much longer and harder to buy.
That will not be easy. The problems for Europe look formidable.
China has embraced a version of the rapidly churning, sometimes Darwinian capitalism of the United States, including an almost American acceptance of large holes in the social safety net. Businesses like BaShiTong can and do fail quickly in China. But the resources are swiftly absorbed elsewhere. The country has proved uncommonly adaptable to opportunities in a wide range of markets — including Europe’s.
To be sure, China and India share two serious handicaps: chronic corruption and pollution. Both problems are particularly troublesome for their people and their economies. Project delays and substandard quality associated with corruption, and eventual cleanup costs associated with pollution, affect their competitiveness. But they do not offset the impressive gains that both countries, especially China, have made in recent years, and continue to make.
China has quadrupled its output of graduates in the past decade, built national networks of bullet trains and modern highways, and acquired the latest foreign inventions through joint ventures and technology transfer agreements. In the years to come, said Mary Gallagher, director of the Center for Chinese Studies at the University of Michigan, “It’ll have a labor force more like Europe’s, it’ll have an infrastructure more like Europe’s, it’ll have levels of foreign investment that will make it more competitive.”
A quadrupling of blue-collar wages in the past decade has made China increasingly uncompetitive in areas like garment manufacturing and shoemaking, which are shifting to poorer countries in Asia. But the result has been an accelerated shift by Chinese industry into higher-value sectors vital to Europe. Partly as a result, China’s appetite for European exports is faltering, even as Chinese exports to Europe keep rising.
China already buys only half as much worth of European exports as the United States, even as Europe now imports far more from China than anywhere else. China’s purchases from Europe fell slightly in the first half of this year from a year earlier.
Swiss watches and French wines may receive a lot of attention, but the three dominant categories of European exports are industrial machinery, vehicles and electrical machinery (mainly computer components). China is ramping up its own production rapidly in all three, and stepping up exports to overseas markets that used to buy from Europe as well.
Walk the noisy aisles of the IGP car and truck axle factory, which opened in Jakarta in 1987, and the European and Japanese brand names on the manufacturing equipment are conspicuous. But that is the exception these days: Chinese equipment is flooding into factories all over Indonesia.
“They make it so cheap that no one can compete,” said Sofjan Wanandi, the tycoon who partly owns the factory.
India’s challenge to Europe is different from China’s, but a potent one as well. In a strange way, India’s often self-inflicted economic wounds are actually making it a tougher competitor for Europe, by weakening India’s currency.
India is trying to create what in many ways is a low-rent replica of the European model of social democracy. Parliament, acutely conscious of national elections next year, voted to distribute subsidized food to two-thirds of the population. That program could increase the already large budget deficit and limit the government’s ability to build needed ports and highways for manufacturers.
India also has a two-tier labor system like Europe’s. Employees of government agencies and state-controlled enterprises like Bharat Petroleum receive relatively high wages, as do the unionized workers of large manufacturers, still heavily protected from foreign competition. Their high salaries come partly at the expense of widespread unemployment, extremely low wages and an inflated cost of living for the rest of society.
Budget deficits and an uncompetitive manufacturing sector have crippled the rupee, whose value has dropped steeply in currency markets this year. That has made European exports much less affordable in India. At the same time, India’s huge outsourcing industry has become much more competitive in euro terms.
Many European companies are already shifting large chunks of their computer programming, legal, accounting and architectural design divisions to India. The rupee’s fall makes the savings from doing so even larger. Rapid expansion of Indian universities since 2006 makes it unlikely that the country will run short of educated workers, while rising wages and declining competitiveness for them do not seem to be arriving any time soon.
With 20.7 million university students enrolled by 2010, India passed the European Union, with 20 million, that year. Both trail China, at 31 million.
In an Internet-linked world, that means China and India have many trained minds looking for business opportunities, and not just huge numbers of unskilled laborers. “We should not think in terms of bodies,” said Ajay Kapur, an economist at Bank of America Merrill Lynch, “but in terms of brains.”
Source: http://www.nytimes.com/2013/10/15/world/asia/asias-challenge-to-europe.html?n=Top/Reference/Times%20Topics/People/B/Bradsher,%20Keith?ref=keithbradsher&pagewanted=print
