Anderson Forecast shifts focus to China

China is on track for long-term economic growth and the
expansion of the Asian powerhouse will likely yield more
opportunities than threats for the United States, according to
economists and business leaders who spoke at the presentation of
the UCLA Anderson Forecast on Wednesday.

The Anderson Forecast is a quarterly prediction of the
California and national economy. It is widely cited by media
outlets and observers of U.S. business and economics.

UCLA economists briefly discussed the domestic economy,
predicting that a gradual decline in the U.S. housing market will
weaken the economy in the coming quarter, but will not do enough
damage to cause a recession.

After explaining their data on the domestic economy, presenters
in the UCLA Anderson School of Management’s Korn Convocation
Hall quickly shifted the focus to China, where business is
booming.

China’s gross domestic product is growing at a staggering
rate. Its growth rate was about 9 percent in 2005, nearly three
times the United States’ real growth rate in the same year,
and experts predict that it will keep growing.

“China is long on labor and short on capital,” which
means that a little money goes a long way, and the growth can last
for a long time, said Donald Straszheim, vice chairman of Roth
Capital Partners, a large investment banking firm.

He described China’s situation as analogous to taking a
low-wage worker who only has a shovel and giving him a wheelbarrow:
A minimal investment allows him to drastically increase his
productivity.

China’s enormous supply of cheap labor is one of the
reasons it is so attractive to U.S. businesses, forecasters
said.

Many businesses have moved their manufacturing centers to China,
and some, like Cisco Systems-Linksys LLC, are starting to put
research and development teams in China in order to link research
more closely with production.

This “outsourcing” or “off-shoring” has
caused widespread anxiety in the United States concerning job loss
to China, especially as the number of domestic manufacturing and
factory jobs continues to drop. In order to protect their jobs,
California workers should be conscious of global competition, said
Tom Debrowski, vice president of worldwide operations for Mattel
Inc.

“If a function can be performed better, faster, cheaper in
another part of the world, it will end up there,” Debrowski
said.

But Edward Leamer, director of the Anderson Forecast, said he
does not expect the United States to lose too many jobs to China.
Much of the job market in the United States consists of jobs that
are “nontransferable,” he said. This means the jobs
rely on creativity or complex problem solving, which makes it
difficult for businesses to give those positions to lower-paid
workers in other countries.

The countries at greatest risk for job loss are ones whose job
markets are made up of comparatively cheap and less-specialized
laborers, such as Mexico and Brazil, Leamer said.

China’s impressive growth is also attracting large amounts
of foreign investment, according to data collected by Roth Capital
Partners. In 2004, for example, foreign investors poured about $60
billion into China’s economy.

But doing business there is still like going to the “Wild
West,” Straszheim said, because people doing business in
China have few of the protections American businesspeople are used
to.

China has few laws regulating commerce or protecting business
deals, its banks are often unreliable, and intellectual property is
hard to secure, he said.

Debrowski said Mattel is currently pressing more than 700
lawsuits against people or companies who it accuses of copying its
products.

But corruption and fraud are not the major reasons people lose
money doing business in China.

“It’s really hard to make money in China. …
It’s hyper-competitive,” said Charles Wolf, a senior
economic advisor for the RAND corporation.

Business in China functions according to a system different from
the one U.S. business people are used to. Rather than revolving
around laws as business does in the United States and Europe,
Chinese business deals are based on trust and personal
relationships, Wolf said. This means businesses have to invest
large amounts of time building relationships in China if they want
to succeed, he said.

Not everyone in China is benefiting from the economic boom. Of
the approximately 1.3 billion people in China, 700 to 900 million
of those in the country’s rural interior are still
subsistence farmers who produce so little that they barely play
into China’s economic statistics, forecasters said.
Unemployment is also high among those farmers.

But the country’s recent economic reforms have benefited
many Chinese people who live closer to the coast and in cities.

They are the ones pushing reforms; “they’ve decided
that rich and growing is more fun than poor and stagnant, and they
want this (economic reform) to continue,” Straszheim
said.