Can Putin Survive?
The Lessons of the Soviet Collapse
THE rapid expansion of Japan's export trade cannot be dismissed as a temporary phenomenon. It is a part of a major development in the Orient that seems destined to disturb to an even greater degree than at present the economic equilibrium of the leading industrial and commercial nations. It is based upon the more effective utilization of cheap labor, Japan's principal resource for industrialization. It involves a conflict of widely contrasting standards of living. It may foreshadow important shifts in the direction of international trade.
I. ORIENTAL COMPETITION AND THE INDUSTRIAL REVOLUTION
To understand its full implications, Japanese competition must be viewed in its historical setting in the long commercial intercourse of East and West. The present is not the first occasion when Oriental goods produced by cheap labor have entered world markets with disturbing results. An examination of the economic literature of the seventeenth and eighteenth centuries reveals that Oriental competition was one of the more powerful economic forces of that period. There is abundant evidence that it was an important contributing factor in stimulating the invention of the various labor-saving devices that constituted the Industrial Revolution.
In earlier times Oriental living standards and the cost of labor were of little importance in the trade between Asia and Europe, since the principal articles which the West obtained from the East were exotic products such as spices, silks and tea, few of which competed with European products. But early in the seventeenth century the British East India Company -- and later the trading companies of other European countries -- began to bring manufactured goods from the Orient. Among these commodities were cotton yarn and cotton piece goods, particularly calicoes and muslins, from India; and silk cloth, screens, beds, cabinets, lacquerware and fans from India and China. By the closing decades of the seventeenth century the volume of this trade had increased to such proportions that it was being attacked as the principal cause for the distress then prevailing among the industrial population of Europe. Then as now, textiles created the most serious competition. Indian cotton manufactures struck at the very foundation of the British industrial structure -- the weaving of woolen cloth. Cotton cloth was not only cheaper but for many uses it was more desirable, and it lent itself to more pleasing patterns and colors. The pamphlets of the time paint grim pictures of idle wool and silk manufacturing towns in England, of silent looms, of laborers wandering about the country seeking work or begging, and of "calico chases" in which the clothing was torn from the backs of women who dared to appear on the streets in the imported fabric.
In 1686 French opposition to the Oriental textiles resulted in a decree prohibiting their importation or their imitation by French manufacturers; and similar acts were passed by the British Parliament in 1700 and 1720. The prohibitive legislation failed to restore prosperity to the British woolen and silk industries, and the distress of the weavers continued. The restrictions which were set up could not aid the sale of British woolens in foreign markets, and in England smuggled calicoes were available in sufficient quantities to meet the demand.
In the pamphlets attacking the Indian and Chinese manufactures, attention was directed mainly to the living standards and the cheap labor of the Orient. Many of the writers of the period pointed out that British goods could be sold only if production costs were lowered, and they singled out labor costs as Great Britain's most serious handicap in the competition with both Oriental and Continental manufactures.[i]
A few of the contemporary writers were able to distinguish between labor costs and wages, and they demonstrated that the labor costs could be cut without reducing wages. An anonymous writer in 1701 contended that the imports from India would be the cause of doing things with less labor through the invention of arts and engines and through better organization of industry and the division of labor.[ii] This writer was able to cite many examples of labor-saving devices already in use almost a century before the major accomplishments of the Industrial Revolution.
By the end of the eighteenth century, largely as a result of the many inventions in the textile industry, the factory system had become well established in England. The prohibitions against the import of Oriental textiles had been removed and the directors of the East India Company could claim in 1793 that Indian labor was no longer a competitive factor. In support of their claim, they could cite the declining imports of cloth into England and the rapid increase during the previous decade of the raw cotton imports for the Lancashire mills. They could also point out that "every shop offers British muslins for sale equal in appearance and of more elegant patterns than those of India for one-fourth or perhaps more than one-third less in price." In explanation of the lower price of the British product, they could state that "the slow progress of an Indian manufacturer unaided by machinery will require ten, twelve or perhaps fifteen persons to perform the same work which a single British manufacturer can execute assisted as he is by numerous inventions and improvements." [iii]
Though the machine and the factory had checked the flow of Oriental goods into England, the advantages were not sufficient to permit British goods to compete immediately in India or China. Machine-made cloth was still inferior to the hand-made cloth of the East, and in Eastern markets its price was higher. In the eighteenth and early nineteenth centuries the East India Company attempted to dispose of British manufacturers in the Orient, but with little success. In the period 1834-42, cotton manufactures amounted to only eight percent of China's imports, but in the decade 1872-81 the product of the Manchester factories had so improved in quality and so diminished in price that cotton manufactures constituted 28 percent of the total imports. Other manufactures were at the same time becoming significant in the China import trade. By 1870 cotton manufactures constituted over 50 percent of the Indian imports.
The machine had finally triumphed over cheap labor, and the destruction of Oriental handicraft economy had begun.
II. THE ORIENT AS A MARKET FOR THE WEST
With the supremacy of the factory in Europe, an outlet for the surplus products of an expanding machine economy became increasingly essential. For at least the past one hundred years, the densely populated countries of the Far East have been an alluring prospect for Western manufacturers. The British Plenipotentiary who signed the Treaty of Nanking in 1842, which terminated the Opium War and opened a number of ports to British commerce, informed his countrymen that he had opened up to their trade a country so vast "that all the mills in Lancashire could not make stocking stuff enough for one of its provinces." [iv] In more recent years, fantastic possibilities of trade have been visualized through the simple expedient of multiplying an added inch to a shirt tail or an extra cigarette by a numerous population. It has been easy to create a tremendous market -- on paper; but in reality the trade has fallen far short of such extravagant expectations. Today, despite its vast area and population, the Orient occupies a minor position in the volume of world trade.
The per capita foreign purchases of the three great Asiatic countries are very small in relation to the level of Western countries. For the years 1926-1930 (taken as representative of predepression conditions), the annual per capita imports of China and India averaged $1.77 and $2.42 respectively. For the United States, another large country also capable of supplying many of its needs through internal trade, the per capita imports were $32.79. Japan, a small island country, imported goods valued at slightly less than $15 per capita annually compared with $113 for the United Kingdom, likewise an island nation of limited area.[v]
The trade of the Orient today remains relatively small even when the per capita imports are multiplied by the huge populations. China, with an area of almost two million square miles and a population of about 430 million, imported goods to the average annual value of $763,000,000 (U. S. currency) in the period 1926-30. India, with 1.8 million square miles and over 350 million people, had imports averaging $851,000,000. Even Japan, the Asiatic country which has made the greatest commercial progress, imported goods of an average value of only $963,000,000. In comparison, the Netherlands, one of the smaller countries of Europe, imported each year goods for consumption averaging $1,032,000,000 in value. The three great Asiatic countries hold approximately 40 percent of the world's population. But combined, they account for less than eight percent of the world's total trade.
There are two explanations of the Orient's minor position in world trade. The more obvious is the low individual purchasing power of a population living very close to the margin of subsistence. But the more significant explanation, and the one not usually recognized, is the existence in the Orient of a going industrial system that for centuries has been supplying the needs for manufactured goods. It was this indigenous economic order with its cheap labor that offered such severe competition to
European manufacturing prior to the Industrial Revolution. It was this same economic order that for a time successfully opposed the efforts of Western traders to dispose of their manufactured goods in the Oriental markets.
But the pressure has finally become too great, and the old order of handicraft and workshop industries and of primitive methods of transport is no longer able to compete with the West. The resulting economic breakdown has disrupted the Oriental countries perhaps even more completely than Oriental competition disturbed European manufacturers in the seventeenth century -- a striking fact usually overlooked in discussions of the Yellow Peril. From the chaos there is gradually emerging a new industrial system modeled on modern Occidental lines.
The trade returns of the Oriental countries reveal vividly the economic changes that are occurring in the Far East. Throughout the nineteenth century the imports of cotton yarn and piece goods into these countries continued to increase. In the first years of the twentieth century (as is shown in Chart I), cotton manufactures constituted 39 percent of the imports of China and Manchuria; and they made up 38 percent of India's imports for the five years ending with 1900. By the turn of the century, Japan was developing a cotton industry of her own, and cotton goods represented no more than 8 or 9 percent of Japanese imports, whereas in an earlier period, 1876-1880, they had constituted 36 percent of the total.
Since the beginning of the twentieth century, cotton goods have declined both relatively and absolutely among the imports of all three of the major Asiatic countries. Thus during the five years ending with 1935 they represented less than 17 percent of India's total imports. They accounted for 13 percent of the total imports of China and Manchuria for the five years 1927-1931 (the period just preceding the complications in Chinese trade data arising from the invasion of Manchuria and the wholesale smuggling in North China). In the import trade of Japan, cotton goods had ceased to be of any importance: for 1931-1935 they amounted to less than one percent of the total. The loss of the European countries becomes even more evident when it is noted that an increasing share of the remaining imports of cotton goods into India and China is being supplied by Japan and not by the Western nations. The share of the United Kingdom in India's cotton manufactures had dropped from 95 percent in 1900-1904 to less than 57 percent in 1933-1935, and Japan's share had risen from less than one to 35 percent. During the same period the United Kingdom's portion of the cotton goods imported into China and Manchuria had dropped from 30 to less than 14 percent; while Japan increased her share from 14 to almost 79 percent.
The Western manufacturing nations have not been compensated for their losses in the cotton trade by any increase in other manufactures. Manufactures now constitute not more than 12 percent of Japan's imports. Raw materials, chiefly cotton, wool and crude iron and steel, account for over 60 percent of the total in recent years. China's leading imports are raw cotton, kerosene, tobacco, wheat and wheat flour. The trend is less marked in the case of India. Manufactures, chiefly cotton piece goods, still continue to constitute the major class of imports, the other principal items being machinery, iron and steel, raw cotton, mineral oils and sugar.
In the three Asiatic countries, there has been a general increase in imports, but it has been due very largely to the increased importation of foodstuffs and raw materials and not to any expansion in the effective demand for foreign manufactured goods. The changing emphasis in the Oriental import trade from manufactures to raw materials is well illustrated in Chart I by the growing importance of raw cotton and by the decline of cotton piece goods.
III. THE INDUSTRIALIZATION OF THE ORIENT
These shifts in trade are clear evidence that the West's supremacy in supplying the Orient with manufactured goods is being seriously challenged. More and more the industrialization of China and India and, to an even greater degree, of Japan, is enabling these countries to meet the domestic demand for manufactured consumers' goods. For a time they may be expected to take from the West increasing quantities of capital goods in the form of machinery and other instruments of production; but as industrialization progresses, such goods will be produced in the Asiatic countries and their imports will emphasize raw materials and foods more heavily. To pay for these imports, the Orient must provide exports, and it is reasonable to expect that the exports will be manufactured goods.
Already the trend in this direction is revealed in the expansion of Japanese exports. In 1922 manufactured goods made up about 35 percent of Japan's total exports; they now amount to around 60 percent. Among the manufactures exported, cotton piece goods have been the most important. The increased sale of these goods abroad has been at the expense of the British textile industry. In 1933 Japanese exports of cotton cloth for the first time exceeded those of Great Britain; by 1936 they had become 41 percent greater.[vi] The rise of imports from Japan and the decline of those from the United Kingdom have been particularly spectacular in certain countries such as British India and the Netherlands East Indies, as indicated by the following table.
|Share of United Kingdom and Japan||Share of United Kingdom, Japan and Netherlands|
|in cotton piece-goods imports into||in cotton piece-goods imports into Netherlands|
|British India (percent of total value)||East Indies (percent of total value)|
The West can no longer consider the Orient as a passive market. The Far Eastern nations are reaching beyond their own boundaries in search of outlets for their manufactures. They are entering into direct economic rivalry with the West, with results that are in many respects reminiscent of the Oriental competition of the seventeenth and eighteenth centuries.
A variety of factors have contributed to the revival of the Orient as an exporter of manufactured goods, but the most significant are markets, the scarcity of raw materials and the labor supply. With a population of over one billion in southeastern Asia -- more than one-half of the world's population -- the Oriental countries possess a market in which their proximity in distance and their common cultural background give them a decided advantage over European and American competitors. In raw materials, Asia enjoys no distinctive superiority for manufacturing. In many cases the supply is decidedly deficient, and requirements must be met from outside sources. This scarcity of raw materials, however, will not prevent industrialization; it will direct development into those types of manufacturing in which raw materials are not the determining factor, such as cotton textiles, rayon and light machinery; it will lead inevitably to an increased export of manufactured products in order to pay for the necessary imports.
Even more fundamental for the progress of industrialization than either markets or raw materials is the labor supply. The most striking feature of the Oriental landscape is the crowding of a dense and increasing agricultural population upon the land. Individual holdings are so minutely divided that the great mass of the people live very close to the margin of subsistence. This relationship of population to area is the basic economic and geographic fact of the Far East. It provides a setting for industrialization very different from that in the West, particularly in the United States, where industrialization occurred in the midst of material plenty and of comparative labor scarcity. Free land was available for the taking and the infant industries have had to compete with agriculture for the limited labor supply. A young man who abandoned the inhospitable soil of New England had the choice of entering a nearby factory or of joining the westward movement toward virgin land. As a consequence, American wages have been maintained at a relatively high level. But in the Orient, industrialization is taking place in the presence of a great and expanding reservoir of potential labor. Agricultural lands are already overcrowded and the population pressure is away from the farm. With a vast population dammed back on the land for centuries by lack of economic opportunity, the standard of living has been pushed lower and lower. Into the new outlet provided by industrialization, an abundant stream of workers is being drawn by the prospect of a wage which, though extremely low in itself, nevertheless is materially higher than the money income to be expected from agriculture.
The differential between Oriental and Occidental wage levels can be easily exaggerated. As regards the individual worker's purchasing power, considerable allowance should be made for differences in price levels and standards of living. Nevertheless, from the standpoint of international competition it is significant that a Japanese cotton spinner receives a daily wage equal to less than one-tenth that of an American spinner and a little more than one-fifth that of a British spinner. The Chinese spinner receives from a twelfth to a sixteenth the American wage, and the Indian spinner about a seventh.
Such a low wage level does not necessarily indicate exploited or
sweated labor, for in general it makes possible an improvement in the living standard of workers coming from the rural areas. Oriental standards of living have been described as low. They are low, but they are also efficient. They most certainly do not provide an abundant life. Nevertheless, they have sufficed through many centuries to support large populations. Requirements have been reduced to a minimum and the demands of the people are limited to a nourishing and economical diet, simple housing and inexpensive cotton clothing. Relative to the amount of money spent, there is a high return in human comfort and in the satisfaction of primary needs. The standards of living compare well with the more elaborate and more costly living standards of the West. These Oriental standards have developed through a dependence on vegetable foods and fibers grown on areas of essentially young and fertile soils in regions where the rainfall is most abundant in the growing season. They are the major competitive factor in the Orient's participation in world trade.
Much of the advantage enjoyed by the Orient as a result of its low living standards is lost through the many deficiencies of the labor supply. Due to its centuries-old agricultural background the population is closely attached to the land and to the village; it turns to the city and to industry with great reluctance. Recruiting has consequently been necessary in order to provide labor for pioneer factories. The labor turnover is high: continual replacement of the workers is necessary, since they are likely after a year or two to return to their villages. Such labor is unskilled in the use of machinery; and adequate training presents a difficult problem. The agricultural background has given the worker a peasant outlook: he does not lack ambition, but he is accustomed to the deliberate pace which he and his ancestors have found adequate for the cultivation of their small tracts of land. He accepts long hours, but he does not take to the increased tempo, the close application and the continuous attention demanded by a machine economy. He is not efficient to the same degree that the American or European factory worker is efficient. Consequently, much more labor is required for a given operation than in the West.
IV. THE INCREASING EFFICIENCY OF ORIENTAL LABOR
But it would be a mistake to assume that these deficiencies of Oriental labor are permanent. They are not inherent qualities. They are evidences of industrial immaturity. They are the marks of the agricultural background of the workers, of slovenly management, and of the failure to use modern machinery. They can all be changed. The labor can be trained; its efficiency is being improved; the industrial population is becoming more stable, and the management more effective.
The best evidence of the potentialities of Oriental labor is to be found in the cotton industry of Japan. As a result of more extended familiarity with machine industry, more adequate training and discipline of labor, better organization in the plants, and above all as a result of the installation of modern equipment, the efficiency of the Japanese worker has improved amazingly. The great progress that has been made in recent years is evident in Chart II.[vii] In the ten years from 1925 to 1934 the number of spindles per operative doubled and the weight of yarn produced per operative per day increased by 96 percent. Japanese efficiency is still below the standard prevailing in American cotton mills, but it continues to improve. It compares very favorably with the efficiency of British mills, and in some respects it is superior. What has been accomplished in cotton textiles is also being accomplished in other manufacturing industries in Japan; and what has been accomplished in Japan can also be accomplished in China and perhaps in India.
It is the contention of orthodox economists that as efficiency improves in the new industrial countries a rise in the wage rate may be expected to reduce much of the original advantage of cheap labor. In the present case, the striking improvements in the efficiency of Japanese labor have been accomplished without any advance in the wage level. In fact, the stream of labor into Japanese industry from the great reservoir of the agricultural population has become so accelerated that the trend of wage rates has been downward even during the recent industrial expansion. Based on 1926, the index of general wage rates had dropped by October 1936 to 80.6. This drop is very startling when it is noted that much of it occurred during the past five years, a period of depreciating currency when wage rates should have been rising. Prices, both wholesale and retail, have risen with the depreciation of the yen, and the decline in real wages has therefore been even greater than is indicated by the decline in wage rates.[viii]
As a result of the decline in wage rates and the increasing efficiency of the Japanese worker, actual wage costs (in yen) in cotton spinning, per unit of weight, were at the end of 1934 only about 30 percent of what they had been in 1925. After making all proper allowance for dormitory costs, bonuses and other payments supplementary to wages, we find that labor costs in the cotton industry are substantially lower in Japan than in the United States, Great Britain or -- probably -- any other important manufacturing country.
There are many reasons for believing that there will be no material rise in Oriental wage levels in the near future. There is no effective organization of Oriental labor, because its rural background makes it difficult to organize. The constant labor turnover not only tends to maintain a low wage rate but to reduce it still further. Population continues to increase in all the Asiatic countries and there are indications that in the future the food supply will be produced by the labor of fewer people as a result of improvements in seed selection, the use of commercial fertilizer, the introduction of new crops and new varieties of old crops, and the adoption of some of the simpler types of agricultural machines. The old handicraft by-occupations of the farm and of the village are being destroyed by the products of the factory. As a consequence, there is a growing surplus of labor in the rural areas. It can find few outlets in other countries due to the barriers that have been raised against Oriental immigration. It must turn to modern industry for employment.
This abundant and cheap labor supply is the greatest asset of the Oriental countries in developing their manufacturing industries and in expanding their export of manufactured goods. Once before, cheap labor gave the Orient the competitive advantage over the handicraft manufactures of the West, an advantage destroyed by the machines of Europe's Industrial Revolution. The cheap labor of the Orient and the machines of the West are now being brought together for the first time, and the advantage would appear to be returning to the Far East. The conjunction of these two factors creates a situation of tremendous international significance and raises the question: Can such widely differing living standards continue to exist side by side in a closely knit world economy?
[i] Charles D'Avenant: "An Essay on the East India Trade," London, 1696.
[ii] "Considerations upon the East India Trade," London, 1701.
[iii] Great Britain, Parliamentary Papers, 1793, "Report of the Select Committee of the Court of Directors of the East India Company upon the subject of Cotton Manufacture in this Country."
[iv] China, Imperial Maritime Customs: "Reports on Trade at the Ports in China Open by Treaty to Foreign Trade, 1866," p. 85.
[v] Trade data in this and following paragraphs are taken from the official trade returns of the countries concerned.
[vi] Exports of cotton piece goods (in millions of square yards):
[vii] Ratios computed from data published (in Japanese) in the semi-annual reports of the Japan Cotton Spinners' Association for the second half of the years 1925 and 1934.
[viii] This statement is based on indices of wage rates and prices as published by the Bank of Japan (Tokyo) and on monthly average quotations of yen exchange from U. S. Federal Reserve Bulletin.