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The PC16: Identifying China's SuccessorsGeopolitical Weekly TUESDAY, JULY 30, 2013 - 04:02 Print Text Size

By George Friedman

Editor's Note: For moreinformation on purchasing the fullPC16 report, which assesseseach member of the grouping,and for details on custombriefings and analysis for yourorganization, please click here.

China has become a metaphor. It represents a certain phase of economic development, whichis driven by low wages, foreign appetite for investment and a chaotic and disorderlydevelopment, magnificent in scale but deeply flawed in many ways. Its magnificence spawnedthe flaws, and the flaws helped create the magnificence.

The arcs along which nations rise and fall vary in length and slope. China's has been long, as faras these things go, lasting for more than 30 years. The country will continue to exist and perhapsprosper, but this era of Chinese development -- pyramiding on low wages to conquer globalmarkets -- is ending simply because there are now other nations with even lower wages andother advantages. China will have to behave differently from the way it does now, and thus othercountries are poised to take its place.

Reshaping International Order

Since the Industrial Revolution, there have always been countries where comparative advantagein international trade has been rooted in low wages and a large work force. If these countriescan capitalize on their advantages, they can transform themselves dramatically. Thesetransformations, in turn, reorganize global power structures. Karl Kautsky, a German socialist inthe early 1900s, wrote: "Half a century ago, Germany was a miserable, insignificant country, ifher strength is compared with that of the Britain of that time; Japan compared with Russia in thesame way. Is it conceivable that in 10 or 20 years' time the relative strength will have remainedunchanged?" Lenin also saw these changes, viewing them as both progressive and eventuallyrevolutionary. When Kautsky and Lenin described the world, they did so to change it. But theworld proved difficult to change. (It is ironic that two of the four BRIC countries had been or stillare Communist countries.)

When it is not in the throes of war, trade reshapes the international order. After World War II,Germany and Japan climbed out of their wreckage by using their skilled, low-wage labor to notonly rebuild their economy but to become great exporting powers. When I was a child in the1950s, "Made in Japan" meant cheap, shoddy goods. By 1990, Japan had reached a pointwhere its economic power did not rest on entry-level goods powered by low wages but byadvanced technology. It had to move away from high growth to a different set of behaviors.China, like Japan before it, is confronted by a similar transition.

The process is fraught with challenges. Atthe beginning of the process, what thesecountries have to sell to their customers is

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George FriedmanGeorge Friedman is the Chairmanof Stratfor, a company he foundedin 1996 that is now a leader in thefield of global intelligence.Friedman guides Stratfors

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The PC16: Identifying China's Successors | Stratfor

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their relative poverty. Their poverty allowsthem to sell labor cheaply. If the processworks and the workers are disciplined,investment pours in to take advantage ofthe opportunities. Like the investors, localentrepreneurs prosper, but they do so atthe expense of the workers, whose lives

are hard and brutal.

It's not just their work; it's their way of life. As workers move to factories, the social fabric is tornapart. But that rending of life opens the door for a mobile workforce able to take advantage ofnew opportunities. Traditional life disappears; in its place stand the efficiencies of capitalism. Yetstill the workers come, knowing that as bad as their lot is, it is better than it once was. Americanimmigration was built on this knowledge. The workers bought their willingness to work for longhours and low wages. They knew that life was hard but better than it had been at home, and theyharbored hopes for their children and with some luck, for themselves.

As the process matures, low wages rise -- producing simple products for the world market is notas profitable as producing more sophisticated products -- and the rate of growth slows down infavor of more predictable profits from more complex goods and services. All nations undergothis process, and China is no exception. This is always a dangerous time for a country. Japanhandled it well. China has more complex challenges.

The PC16

Indeed, China is at the fringes of its low-wage, high-growth era. Other countries will replace it.The international system opens the door to low-wage countries with appropriate infrastructureand sufficient order to do business. Low-wage countries seize the opportunity and climb uponthe escalator of the international system, and with them come the political and business elite andthe poor, for whom even the brutality of early industrialism is a relief.

But identifying these countries is difficult. Trade statistics won't capture the shift until after it iswell underway. In some of these countries, such as Vietnam and Indonesia, this shift has beentaking place for several years. Though they boast more sophisticated economies than, say,Laos and Myanmar, they can still be considered members of what we are calling the Post-China16, or PC16 -- the 16 countries best suited to succeed China as the world's low-cost, export-oriented economy hub.

In general, we are seeing a continual flow of companies leaving China, or choosing not to investin China, and going to these countries. This flow is now quickening. The first impetus is thedesire of global entrepreneurs, usually fairly small businesses themselves, to escape theincreasingly non-competitive wages and business environment of the previous growth giant.Large, complex enterprises can't move fast and can't use the labor force of the emergingcountries because it is untrained in every way. The businesses that make the move are smaller,with small amounts of capital involved and therefore lower risk. These are fast moving, labor-intensive businesses who make their living looking for the lowest cost labor with someorganization, some order and available export facilities.

In looking at this historically, two markers showed themselves. One is a historical first step:garment and footwear manufacturing, a highly competitive area that demands low wages butprovides work opportunities that the population, particularly women, understand in principle. Asecond marker is mobile phone assembly, which requires a work force that can master relativelysimple operations. Price matters greatly in this ruthlessly competitive market.

Therefore we tried to determine places where these businesses are moving. We were notlooking for the kind of large-scale movements that would be noticed globally, but the firstmovements that appear to be successful. Where a handful of companies are successful, otherswill follow, so long as there is labor, some order and transportation. Some things are notnecessary or expected. The rule of law, understood in Anglo-Saxon terms of the written law, isn'tthere at this stage. Things are managed through custom and relationships with the elite.

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Partnerships are established. Frequently there is political uncertainty, and violence may haverecently occurred. These are places that are at the beginning of their development cycle, andthey may not develop successfully. Investors here are risk takers -- otherwise they wouldn't behere.

The beginning of China's boom is normally thought of as 1978-1980. The Cultural Revolutionhad ended a few years before. It was a national upheaval of violence with few precedents. MaoZedong died in 1976, and there had been an intense power struggle, with Deng Xiaopingconsolidating power in 1977. China was politically unstable, had no clear legal system, sporadicviolence and everything else that would make it appear economically hopeless. In fact, Egbert F.Dernberger and David Fasenfest of the University of Michigan wrote a paper for the JointEconomic Committee of Congress titled "China's Post-Mao Economic Future." In this paper, theauthors state: "In the next seven years as a whole, the rate of industrial investment andproduction, more than the total of the last 28 years, imply a level of imports and industrial laborforce such that the exports, transportation facilities, social overhead capital, energy andmiddle-level technical personnel requirements would exceed any realistic assessment ofChinese capabilities."

I don't mean to criticize the authors. This was the reasonable, conventional wisdom at the time. Itassumed that the creation of infrastructure and a managerial class was the foundation ofeconomic growth. In fact in China, it was the result of economic growth. The same can be saidfor rule of law, civil society, transparency and the other social infrastructure that emerges out ofthe social, financial and managerial chaos that a low-wage economy almost always manifests.Low-wage societies develop these characteristics possibly out of the capital formation thatlow-wage exports generates. The virtues of advanced industrial society and the advantages ofpre-industrial society don't coincide.

There is no single country that can replace China. Its size is staggering. That means that itssuccessors will not be one country but several countries, most at roughly the same stage ofdevelopment. Taken together, these countries have a total population of just over 1 billionpeople. We didn't aim for that; we realized it after we selected the countries.

The point to emphasize is that identifying the PC16 is not a forecast. It is a list of countries inwhich we see significant movement of stage industries, particularly garment and footwearmanufacturing and mobile phone assembly. In our view, the dispersal of industries that we seeas markers of early-stage economic growth is already underway. In addition, there are noextreme blocks to further economic growth, although few of these countries would come to mindas having low political risk and high stability -- no more than China would have come to mind in1978-1980. I should also note that we have excluded countries growing because of energy andmineral extraction. These countries follow different paths of development. The PC16 are strictlysuccessors to China as low wage, underdeveloped countries with opportunities to grow theirmanufacturing sectors dramatically.

The new activity is focused on Africa, Asia and to a lesser extent, Latin America. When you lookat the map, much of this new activity is focused in the Indian Ocean Basin. The most interestingpattern is in the eastern edge of Sub-Saharan Africa: Tanzania, Kenya, Uganda and Ethiopia.Sri Lanka, Indonesia, Myanmar and Bangladesh are directly on the Indian Ocean. TheIndochinese countries and the Philippines are not on the Indian Ocean, and even though I don'twant to overstate the centrality of the Indian Ocean, they are nearby. At the very least we cansay that there are two ocean basins, the Indian Ocean and the South China Sea. You might wantto read my colleague Robert D. Kaplan's book Monsoon on this region.

There are some countries in Latin America: Peru, the Dominican Republic, Nicaragua andMexico. A special word needs to be included on Mexico. The area north of Mexico City andsouth of the U.S. borderlands has been developing intensely in recent years. We normally wouldnot include Mexico but the area in central-southern Mexico is large, populous and still relativelyunderdeveloped. It is in this area, which includes the states of Campeche, Veracruz, Chiapasand Yucatan, where we see the type of low-end development that fits our criteria. Mexico's abilityto develop its low-wage regions does not face the multitude of challenges China faces in doingthe same with its interior.


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All of this has to be placed in context. This is not the only growth process underway. It is mostunlikely that all of these countries will succeed. They are not yet ready, with some exceptions, foradvanced financial markets or quantitative modeling. They are entering into a process that hasbeen underway in the world since the late 1700s: globalism and industrialism combined. It can bean agonizing process and many have tried to stop it. They have failed not because of theirrespective ruling classes, which would have the most to lose. It doesn't take place because ofmultinational corporations. They come in later. It takes place because of profit-driven jobberswho know how to live with instability and corruption. It also takes place because of potentialworkers looking to escape their lives for what to them seems like a magnificent opportunity butfor us seems unthinkable.

The parabola of economic development dictates that what has not yet risen will rise andeventually fall. The process unleashed in the Industrial Revolution does not seem to bestoppable. In our view, this is the next turning of the wheel.

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