Does China make it harder for other developing countries to make it?

Yes, according to FT's Alan Beattie. He writes in today's FT:

Being a developing country used to be easy. You followed leaders - Japan, Hong Kong, Taiwan, South Korea - up a well-trodden ladder from agriculture through manufacturing to services. Starting with tilling the soil, you moved on to turning out T-shirts, then toys, then tractors, then television sets, and ended up trading Treasuries.

The rise of China has made that less straightforward. Not only is the first rung harder to reach, thanks to the hundreds of millions of rural migrants to Chinese cities still willing to work for low wages stitching garments, but also exports of goods from China's coastal industrial fringe are rapidly becoming more sophisticated, threatening those halfway or more up the ladder. While the shoemakers of Italy and the steelmakers of Pennsylvania may complain loudly about Chinese competition, those with more to worry about are middle-income Asian countries geographically and economically close to the Middle Kingdom.

So what is a poor developing nation to do?  There are two schools on thought on this, as Beattie notes. One thinks that government cannot possibly do much and they better get out of the way, after taking care of the usual list of fundamentals of course:

For countries such as the Philippines, without a big arsenal for public investment, policy recommendations from most business people for competing with China involve no magic elixir. Governments should improve logistics, infrastructure, the business climate and education; try, possibly, to spot specialities emerging and support them, but otherwise get out of the way. They warn against governments crashing into the market having decided what the economy is likely to be good at and then promoting it at all costs.

The other school (which includes me) thinks that by following this route you not only remain in a rut, but you also miss out on the most important lesson from China's success: the need for the government to be strategic (and yes also flexible) in supporting industries. Yo do need an industrial policy--but of this kind, not of the traditional type.

Comments

[Emmanuel]

Alan Beattie, the author of this FT article, is usually reliable. Not here, though.

(1) My first gripe is with this statement:

"Remittances form more than 10 per cent of gross domestic product, the highest ratio in the world."

This is flat wrong. The Philippines is not even among the top twenty countries in this respect according to the World Bank publication "Remittances: Development Impact and Future Prospects".

(2) More trouble in store:

"Being a developing country used to be easy. You followed leaders - Japan, Hong Kong, Taiwan, South Korea - up a well-trodden ladder from agriculture through manufacturing to services. Starting with tilling the soil, you moved on to turning out T-shirts, then toys, then tractors, then television sets, and ended up trading Treasuries."

One word: India. India is taking advantage of its large, educated workforce fluent in English to offer more services and thus avoid direct competition with China. Given India's less well-developed transportation infrastructure, this makes sense. Like India, the Philippines has a large, educated workforce fluent in English that is suitable for a service economy.

Beattie's mistake is in assuming there is "one best way" to development. I have written more about this article here:

http://ipezone.blogspot.com/2007/06/ft-gets-philippines-wrong-bigtime.html

Dr. Rodrik: Please enable formatting for us commenters so we can italicize text, make links, etc. I think you need to fiddle with your Typepad settings a bit to get this done. Thanks!

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