Tuesday, January 19, 2010 1 comments ++[ CLICK TO COMMENT ]++

Bloomberg suggests China should follow the path of Henry Ford

Henry Ford is a controversial character. He is widely accused of being anti-Semitic and he may even have been a fascist but he did contribute positively in one major way. Although the ultimate impact was never clear, his policy of paying way-above-average wages for his employees radically altered the economic landscape—at least in the North-East, particularly New York and Michigan. It's possible that Henry Ford's compensation policy made Detroit into the powerful and influential city* it was in the early part of the 20th century.

It is a well-worn cliche but Bloomberg has a nice article suggesting that China should do what Henry Ford did. Namely, pay higher salaries for its workforce:

Higher wages for people like Xie would help resolve China’s biggest economic challenge: shifting away from growth fueled by exports and investment and moving toward an economy driven more by domestic consumers. China’s communist leaders might learn a lesson about how to create a more prosperous working class from American industrialist Henry Ford.

The founder of the auto manufacturer that bears his name generated headlines around the world in January 1914 by doubling the average autoworker’s pay to $5 a day. The move made Ford’s Model T more affordable, created a more stable workforce and helped stoke the growth of the U.S. middle class, according to Bob Kreipke, the historian for the Dearborn, Michigan-based company.

“This allowed people to increase their buying power and, at the same time, they produced a better product,” Kreipke said.

One thing to keep in mind is that the automobile industry was a heavily influential industry in the early 1900's. It was a revolutionary, new, technology and would probably be on par, in terms of the influence and size, to the present day computer industry (hardware plus software.)

I think the author of the article takes the Ford lesson too literally. The auto industry is likely not as signficant in China right now as it was in America in the early 1900's. Although China is a developing country, I suspect the greatest impact will probably come from some industry other than the auto industry.

Everyone, including the Chinese leadership, kind of knows that China needs to raise is wages:

Low wages in the world’s third-largest economy are slowing the rise of a consumer culture that Premier Wen Jiabao and President Hu Jintao have said China needs to maintain expansion at the 8 percent a year that will generate jobs for its 1.3 billion people. The current growth pattern is “unsustainable,” Wen said Dec. 27.

That hasn’t stopped China’s auto industry from booming, with sales last year of 13.6 million vehicles, eclipsing the U.S. as the world’s top market for the first time, according to figures from the China Association of Automobile Manufacturers in Beijing. The surge in purchases was spurred partly by government subsidies to help farmers buy autos.

Encouraging higher pay might help sustain the boom and boost consumption, which currently accounts for about 35 percent of China’s gross domestic product, compared with 70 percent in the U.S. It would also help ease income gaps between the rich and poor, which are higher than those in South Korea and Taiwan at similar stages of development and have led to riots and other labor unrest.

Ford’s $5 daily pay allowed an employee to buy a Model T that cost $440 with the equivalent of about four months’ wages. Chinese factory workers averaged 24,192 yuan ($3,544) a year in 2008, according to figures from the National Bureau of Statistics in Beijing, so it would take more than three years worth of wages for them to afford the cheapest car advertised on the company’s Chinese-language Web site: a four-door hatchback with a 1.3 liter engine listed for 78,900 yuan.

Saying that wages need to go up is the easy part. Some capitalists, including readers of this blog, probably won't agree with my stance here and those benefitting from the present situation won't agree either. What is happening now is that the majority of wealth generated in China is going to the rich or to the government. The government, in particular, siphons off a huge portion of the wealth China is creating.

On top of keeping down consumption, the problem with this is that generally governments are not very good when it comes to money. The biggest risk for Chinese citizens is the possibility that the government is wasting all the wealth on useless projects, dubious foreign investments, and the like. For example, Chinese state agencies often take on many uneconomic foreign projects, such as buying resources in far off places at high prices. You may have seen several bids where China appears to be bidding way above-market prices. Who knows if these projects will end up being profitable but all I know is that I wouldn't want the government going to far off places it is not familiar with and attempt to run businesses or cut deals.

Raising wages can also cause inflation (depending on how much money is printed, velocity of money, etc) so it isn't simple to raise wages even if the Chinese government wanted to. The cleanest way to raise wages is to weaken the US$-renmenbi peg but that will have wide ramifications.

To sum up, regardless of what you think of Henry Ford, his strategy of boosting wages for workers can help China's lack of consumption. It remains to be seen what China does on this front.


(* Most people living now, including in Michigan, probably have no idea how wealthy Detroit was in the 1930's. All you have seen in the last few decades are problems—racial tensions, crime, unemployment, declining wealth—but it would have been a totally different world before. On my personal blog I wrote about the decline of Detroit so if you are interested, take a look at the pictures of the buildings they have. From an architecture point of view, some of the buildings in Detroit are amazing. I've never been there (perhaps some day I will; not too far from Toronto) but I'm always impressed with the pictures. I'm not an architecture expert nor am I interested in it very much but, outside New York City, I can't think of too many other places with better buildings in the Art Deco style. The vast majority of cities in the world will never have a building half as good as some of the disintegrating ones in Detroit.)


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