"Made-in-China" makes rich countries richer
(Xinhua)
Updated: 2005-08-21 08:54

Petrol, up. Eating out, up. School fees, up. Everybody in Britain seems to be talking about price rise, but why then is the inflation still so low?

Anatole Kasletsky, a commentator, gave the seemingly difficult economic issue a simple answer: it is the low priced "Made-in-China" products that help keep the inflation in control.

In a commentary published in The Times newspaper on Thursday, Kasletsky reminded the price-sensitive Britons that the Chinese-made commodities have not only helped bring down the inflation figures but also make the already rich countries like Britain richer.

Consider the following figures. Over the past 10 years, the total cost of living in Britain, as measured by the official consumer price index, has risen by just 14 percent. But that very modest average increase has included inflation in some categories to make consumers wince: school fees, for example, are up 62 percent, hairdressing up 58 percent, holidays up 52 percent and eating out up 33 percent on average, with top London restaurant prices showing much faster growth. Why then has the total cost of living remained so stable?

Inflation is just 2.3 percent so far this year. While this is a marginally higher figure than any recorded since 1997 on this particular index, 2.3 percent hardly amounts to an inflationary crisis and does not seem to reflect what many people feel about their own living costs.

So what is really going on?

The answer to these questions, the commentator said, is not just interesting in its own right, but tells Britons a surprising amount about what is happening today not only in Britain but in the world economy as a whole.

Because the prices of mass-produced goods have been plunging: clothes prices down by 42 percent in a decade, shoes by 31 percent and consumer electronics by 63 percent.

Kasletsky said that this relates to China's entry into the global economy. By becoming the workshop of the world, China has pushed down the prices of all mass-produced goods.

The "virtually limitless supply of cheap labor and capital in China," the commentator said, will ensure that manufactured goods continue to get cheaper not only in Britain but around the world.

The relentless downward pressure on goods prices from China has resulted in a second effect which is less widely understood, even among economists: cheap imports from China have actually pushed up the prices of many goods and services which the Chinese cannot or do not produce -- either because they lack the resources or the legal infrastructure or simply because some things cannot be traded, such as housing and education.

People who see China purely as a source of downward pressure on prices forget that overall inflation in any economy is essentially determined by the availability of money. If monetary policy is successfully run, as it is in Britain, to produce an overall inflation rate of 2 percent while the prices of manufactured goods are persistently falling by 3 or 4 percent, prices elsewhere in the economy must rise faster to maintain the 2 percent average inflation rate.

In this sense, the ever-cheaper consumer goods from China have created more leeway for other prices in the world economy to go up. This effect has been particularly visible in the prices of goods and services, for example, oil, financial services and luxury property around the world.

The third and most surprising part of the inflation story is that as the prices of financial services and luxury goods are driven higher, service-producing countries such as Britain get richer as compared with countries that specialize in manufacturing. And within Britain, the rich, who tend to work in high-end service industries that are relatively unaffected by competition from Asia, get richer, while the poor, who tend to work in industries more exposed to cheap-labor competition, get relatively poorer.

For the lucky bankers, lawyers and even journalists who are benefiting from this seismic change in the structure of the global economy, Kasletsky said, there is a sting in the tail. While people are getting richer, they are not happy to spend a disproportionate share of their income in the areas of high-end services, most obviously housing, travel and private education.

That is why, even as inflation remains almost non-existent, the talk in London's bars is still of galloping prices.

Close