Does China s Opening-up De-industrialize Europe s Center and Industrialize its Periphery? Günter S. Heiduk* Yue Jiang #

Transcription

1 Does China s Opening-up De-industrialize Europe s Center and Industrialize its Periphery? Work in Progress Preliinary Draft by Günter S. Heiduk* Yue Jiang # Preliinary draft presented at the International Conference of RCIE, KIET, and APEA on China and the World Econoy March 16, 2012, Seattle I * Professor and Head, East Asian Center, Warsaw School of Econoics, Warsaw, Poland gheidu@sgh.waw.pl # Master student, School of Econoics Fudan University, Shanghai, P.R. China, and exchange student, Warsaw School of Econoics @fudan.edu.cn 1

2 Abstract China s accession to the WTO in Deceber 2001 has significantly changed the global division of labor. In cobination with the earlier ipleented policy to attract foreign direct investent China eerged as the anufacturer of the world. In the last decade the share of anufacturing on GDP increased considerably. Sourcing to China decreased anufacturing in industrialized countries. Multinational copanies fragented their value chains and established production plants for parts and coponents in China or outsourced labor-intensive production to Chinese producers. The fast growth of anufacturing in China resulted in positive and negative effects. The latter are anifested in increasing wages, pressure on inflation, financing bottlenecks. There is evidence that China s copetitiveness in anufacturing is decreasing. Multinational copanies already started to re-allocate their foreign production plants fro China to other countries. Near-shore countries ay be the winner. De-industrialization in European, Aerican and East Asian core countries and parallel industrialization in China has led to a shift in the centre of the econoic geography to the East. This trend sees to lose stea which opens chances for peripheral countries in Europe, Middle and South Aerica, Asia to industrialise. The paper is aiing to test this hypothesis by using a gravity odel and a data set fro Gerany, China, Albania. The result confirs the hypothesis but needs stronger evidence firstly by using a coprehensive data set of trade, FDI flows and FDI stocks, and secondly by specifications regarding industry, regions, even locations. Keywords: Fragentation, Vertical Specialization, Core-Periphery Countries, De-Industrialization, Albania, China, Gerany I. Introduction China s accession to the WTO in Deceber 2001 has significantly changed the global division of labor. The pattern of trade which eerged after China s opening-up in 1978 had been in accordance with the Heckscher-Ohlin trade odel: China starts exporting laborintensive consuer products and iporting capital-intensive goods, predoinantly parts and coponents to establish/odernize its heavy industries. The increased global labor supply with basic education has reduced the coparative advantage of the low-skill work force in other developing countries. The WTO ebership obliged China to reove arket access barriers which aongst others raised the expectations of foreign investors for lower risk preiu. Capital - generated in industrialized countries - had been allocated to China instead of other countries at the periphery of the industrial centers in Europe, North Aerica or East Asia. China s opening-up policy started with the Regulations for the Special Econoic Zone of Guandong Province which passed the National People s Congress in August A part of Shenzhen was officially declared as Shenzhen Special Econoic Zone. Since then the policy of attracting foreign investent has been geographically extended and econoically diversified. 32 state-level econoic and technological developent zones, 53 new and hightech industrial developent zones, 15 free trade zones are scattered over China. The ain characteristics are the functioning of arket echaniss, the legal requireent of Sino- 2

3 foreign joint ventures or wholly foreign-owned enterprises, and the priarily export-oriented production. This concept of attracting foreign capital and obilizing China s large and cheap labor force resulted in a fast industrialization of the preferred cities/regions. China s relatively low technological level on the one hand and its abundant but low-skill labor force on the other hand concentrated foreign investent in anufacturing standardized parts and coponents and exporting these goods back for assebling. Off-shoring of parts of the values chains to China accelerated the process of de-industrialization in old industrialized countries. After ten years of China s WTO ebership the pattern of the global division of labor sees to change again. Technological spill-over effects accelerated by high investent in huan capital increase the attractiveness of China as a location for off-shoring total production processes. Furtherore, fully integrated foreign production plants create the basis for the eergence of copetitive national industries (e.g. autoobile industry). Industrialized countries utate to knowledge producers and China is eerging as a newly industrialized country with a proising arket potential. As a consequence China s location advantage for ass anufacturing of parts and coponents will gradually fade away. MNCs fro Europe, USA, Japan, Korea as well as ore and ore Chinese MNCs have to think on relocating their parts and coponents production fro China to peripheral countries. Industrialization processes in Southeast Asia point in this direction. Free trade agreeents in Asia see to create favorable conditions for intensified trade flows within this region. The paper argues that Europe s periphery has siilar chances to industrialize when the core countries de-industrialize and China eerge as the ost dynaic industrializing country. The ongoing technological process of fragenting value chains accopanied by decreasing transport and logistics cost proote the globalization of production networks rather than the clustering which offers new opportunities especially for European peripheral countries copared to the periphery in other parts of the world. Difficulties with cross-cultural counication and anageent in Sino-foreign joint ventures or wholly foreign owned enterprises ay contribute to prefer near-shore investent when it coes to relocating the value chains. China s full integration into the international division of labor suggests a new pattern of deindustrialized and newly industrializing countries resulting in changes in the volue and coposition of regional and probably global trade and investent flows. In order to ake full use of the potential of increase in welfare, both econoic policy and business in both types of countries have to accept and anage the challenges resulting fro the changing pattern of the international division of labor. 3

4 The reaining paper is organized as follows: Section II reflects the discussion on patterns of sectoral change. Then sketchy description of China s eergence as the global center of anufacturing follows in section III Observations on recent developents in FDI and trade of Gerany, China and Albania should deliver in section IV the basis for a set of hypothesis which is put forward in section V. The odel is presented in section VI followed by the data analysis in section VII. The conclusion highlights the result and offer proposals for future research. Note that the current version does not include the test of FDI and trade flows between Gerany and China, respectively Gerany and Albania. II. Patterns of Sectoral Change It is well accepted that today s core countries experienced a gradual industrialization in the first phase after the industrial revolution. Whereas the labor force in the agricultural sector decreased in the second half of the 19 th century, the eployent in the industrial sector increased considerably and in the service sector oderately (table 1, left part). There is strong evidence that in countries with drastic structural change the overall benefits easured by increase in GDP per capita were higher than in slowly changing countries (table 1, right part). Table 1 Sectoral Labor Force in Britain, Gerany, France, in %, and Estiated GDP/Capita in US$ of 1990, Selected Years Country / Year Sector Year Estiated GDP/capita (US$ 1990) Agriculture Industry Service Britain Gerany France Sources: Fischer, 1985, p. 129 (left); Maddison, 1964, p 53 (right). The structural change continued and even accelerated after World War II. But the pattern changed in favor of the service sector. The industrialized countries service sector outpaced 4

5 the industrial sector. The coparison with iddle-incoe and low-incoe countries indicate that the lower the GDP per capita, the ore favors the structural change the industrial sector (figure 1). A closer look at Albania, China and Gerany confir these incoe-related patterns of structural change (figure 2). Figure 1 The Changing Pattern of Global Econoic Activity Source: OECD, 2005, p 5. Figure 2 Sectoral Changes in Albania, China, Gerany, , % of GDP Albania China

6 Gerany Agriculture Industry incl. Construction Service Source: Own calculations based on OECD, IMF, CIA Factbook Data. Panel regressions which include all types of countries suggest an inverted U-shaped pattern of industrialization [Aizenan, 2001, p. 1]. Eerging econoies reach their peaks in anufacturing s share on GDP when the GDP per capita catches approx. 60% of the US GDP per capita. In addition, financial sophistication has to atch the catching-up process. More and ore countries enter the phase of downward trend in anufacturing whereas few countries see to be in the upward phase. Japan reached its peak in the iddle of the 1980s, Korea at the beginning 1990s. There is evidence that China is now on its turning point. At first view, there sees to be no causality that de-industrialization in high-incoe countries is connected with industrialization in eerging econoies. Long-run observations of the price differential between tradable goods and non-tradable services suggest that the forer tend to decrease and the latter to increase. The deand for services is price inelastic, the supply offers relative low opportunities for productivity growth. In contrast, anufacturing offers peranent chances for productivity iproveents which in turn lead to decreasing relative prices. The result is an unbalanced growth between the service and the anufacturing sector. In the long run the share of the latter will increase and the share of the forer decrease. These converse developents ay cause a declining overall growth [Bauol, 1967; Bauol, Blackand and Wolf, 1989]. Any kind of causality between overlapping industrialization and de-industrialization phases in high-coe and eerging countries needs interdependencies between these countries by crossborder transactions or operations. Trade sees to be the ost proising vehicle in quantitative analysis. Based on the Helpan-Krugan trade odel [Helpan and Krugan, 1985] where the anufacturing sector is characterized by onopolistic copetition with a large variety of differentiated products which are deterined endogenously, free trade results in a decreasing nuber of varieties in the high-incoe (industrialized) country reducing the share of anufacturing. In contrast, the nuber of varieties in the eerging econoy will increase resulting in an increasing share of the anufacturing sector. If a newcoer enters the global arkets when the forer countries reached their equilibriu (hence, building the high- 6

7 incoe block), their de-industrialization will continue. De-industrialization in high-incoe countries occurs even without trade with eerging econoies, however, the existence of the latter agnifies in a free trade situation this downward trend in the share of anufacturing. So far, the analysis did not consider geography. What is the reason for the century old divided world econoy into core and periphery? In the iddle of the 18 th century China and India accounted for alost 57% of world anufacturing output. Till the edge of World War I their share eroded to 5% [Sions, 1985, p. 600]. Based on Ricardo s trade theory ost siple explanation focus on the effects of specialization in case of different odes of copetition on agricultural arkets and on anufactured goods arkets. If productivity growth in anufacturing is concentrated on few countries and at the sae tie copetition in agricultural products increase because of low productivity gains in an increasing nuber of countries which enter the world arket, then the few countries will industrialize and the ajority of countries will further de-industrialize because of the drop in agricultural prices. Whereas the forer countries experience iproving ters of trade, the latter suffer deteriorating ters of trade. If the innovative countries succeed in creating accuulation and productivity externalities within the industrial catching-up, then sustainable growth ay very likely occur. Even between countries that are on the sae level of industrialization uneven innovative shocks ay result in relative de-industrialization of soe countries. In the second half of the 19 th century traditional handcrafted products fro India where squeezed out of the world arket by copeting anufactured products fro Britain which used new productivity increasing process technologies. The price of British anufactured exports fell draatically. Failing to keep up with the factory-based productivity growth achieved abroad, the Indian textile industry took the price hit, becae less profitable, and de-industrialization ensued [Williason, 2004, p. 13]. In nowadays globalized world countries lagging behind in ipleenting innovative core technologies tiely lose copetitiveness in the anufacturing sector. World arket shares elt away fro all industries in countries which lag behind in applying general purpose technologies (GPT). Lagging behind ight aongst others ste fro relatively slow public investent in infrastructure which serves as enabler to introduce GPTs. Barriers to trade, investent and/or technology transfer are further reasons for losing industrial copetitiveness. In the long run the processes that led to industrialization respectively de-industrialization resulted in a dual world econoy. The developent paths seeed to be reinforced by lock-in effects. On the one side coplex technologies, closely linked production processes and highly 7

8 specialized labor force protected the core countries for newcoers. On the other side the concentration of peripheral countries on the production and trade of few priary and/or lowskill products ade the highly volatile; sustainable developent processes could not initiated by arket echaniss nor by governent policies. Despite reservations fro econoists a nuber of studies suggest that the secular iproveents in ters of trade in the core stabilized the positive trend of growth, whereas in the periphery the high volatility of the ters of trade restrained growth [Blattan, Hwang and Williason, 2004]. The results of country-specific studies where the data base allows the aforeentioned suggestions cannot be transferred one by one to all peripheral countries. The lack of long tie series of data for peripheral countries in Europe, Asia and Latin Aerica liits analytical studies. Observations and data based analysis of core and peripheral countries suggest the reversion of the forer developent paths. Most recently an intensive discussion arises about the effects of China s industrialization on core countries such as the USA, Gerany, and Japan. The hypothesis that China s eergence will initiate de-industrialization processes in the core is based on the observation of the increasing activities of Western MNCs in and with China. III. China s Industrialization: IFDI and Processing Trade China s industrialization after Deng Xiaoping s econoic refor has two characteristic features: firstly, concentration on labor-intensive anufacturing, and secondly, copleentarity of trade and IFDI as the driving force. In 2010, China replaced for the first tie the USA as the largest anufacturer accounting for alost 20% of the world production. Manufacturing contributed circa 35% to China s GDP which is two ties higher than in countries with siilar developent level. 1 This sector developed to the doinant pillar of China s econoic growth and econoic transforation resulting in considerable increases in the world arket shares in any anufacturing industries (table 2). Since two decades China s share on the global FDI stock is increasing whereas the shares of USA, UK and Japan are decreasing. In 2010, China attracted US$ billion FDI, which ranked the country on the second place after the USA. More than 50% of the utilized foreign capital is invested in anufacturing (figure 3). Due to a stock of approxiately US$ 900 billion foreign investent, alost 60% of China s exports result fro foreign invested enterprises. The share of state-owned enterprises decreased fro 42% in 2001 to 18% in In the first half of the last decade processed products contributed approxiately 56% to 1 Depending on the definition of anufacturing, the share ranges between 35 and 44%. 8

9 China s exports and 40% to its iports. In 2011, the share of exports (iports) by FIEs on China s total exports (iports) accounted for 52% (49%) (MOFCOM, FDI Statistics). Without going into details, China s industrialization could be characterized as a foreign venture in anufacturing (figure 4). Table 2 RCA > 1 in Selected Industries, 2000 and 2009 HS code Product, tech. classification World arket share, Rank (out of 44) RCA 2000 Rank (out of 47) RCA 46 Manufacturers of plaiting aterial, basketwork (LT) 66 Ubrellas, walking sticks, seat sticks (LT) Articles of apparel, accessories, knit or crochet Source: Adas, Gangnes, Shachurove, 2006, p Footwear (LT) Articles of leather, harness, travel goods (LT) 95 Toys, gaes, sports requisites (LT) Furniture, lighting, signs Electrical, electronic equipent (HT) 86 Railway, traway locootives (MT) Figure 3 Foreign Direct Investent in China by Sectors, in %, 2010 Manufacturing Real Estate Leasing and Business Services Others 9

10 Source: Own calculation on based on MOFCOM and National Bureau of Statistics. Figure 4 Foreign Invested Enterprise (FIEs) and China s Exports, Source: Source: Zhang, 2005, p. 12 IV. New Patterns of FDI and Trade? - Evidence fro China, Gerany, and Albania 2 Gerany Between 1997 and 2007 Geran copanies invested US$ 12.4 billion in China. In 2011 China was ranked for the first tie nuber one of Geran copanies FDI outpacing Geran s FDI in EU-15. The otivation is gradually changing fro low-cost production of parts and coponents which are assebled in Gerany to production of final goods for the doestic arkets. Gerany was the 8 th iportant investor in China (MOFCOM, FDI Statistics). The widespread opinion that FDI results in job losses in the hoe country proved to be right for Gerany s labor-intensive industries, but could not be finally confired for ediu- and high-tech industries. According to a 2011 published study of the Geran Chaber of Coerce and Industry the deand for workers is higher in copanies that invest abroad than in the whole industry (DIHK, 2011). Gerany s industry is optiistic 2 The presented collection of data in this section should deliver a sketchy overview on recent developents in trade and FDI. A detailed industry-specific, respectively product-specific data set is in preparation. 10

11 about the future of China as an attractive arket, but is also aware of adapting the business odel to gradually worsening cost situation with respect to local production costs in China. Chinese copanies are increasing their presence in Gerany. More than Chinesefunded enterprises set up branches in Gerany. Several large M&As see to strengthen Gerany as a high-tech production location, thus aintaining its industrial base (Liu and Woywode, 2012). After joining the EU, the first wave of Geran copanies FDI to Europe s periphery focused on Central and Eastern European countries (CEEC). The political and econoic stabilization on the Balkan and several Agreeents of the EU with countries in this region otivated Geran copanies to significantly increase their investent in the Western Balkan. The Stabilization and Association Agreeent with Albania which cae into force in April 2009 and the alost siultaneous subission of Albania s application for EU ebership set ore favorable conditions for exploiting the potential as a near-shore production location. Geran copanies FDI ore than quadrupled fro 2005 to 2010 whereas FDI to China decreased by circa 35% (table 3). At first view there sees to be no significant FDI-trade nexus. Iports fro Albania reain on a low level; exports to Albania show fluctuations that do not fit to the general pattern of Gerany s exports. More than 50% of iports are textiles/clothes; nearly 30% of exports are cars (final and interediate products) (table 4). Table 3 Gerany s FDI flows to China and Albania, 2000, 2005, 2010 (illion Euro) China 889, , ,0 Albania 1,0 7,0 31,0 Source: OECD.StatExtracts. Table 4 Gerany s Trade with Albania, Euro illion, Total Iports Clothes Total Exports Cars % % Source: Statististisches Bundesat,

12 China At first view, China s catching-up fro low-tech exports to ediu-tech and high-tech exports see to strengthen its anufacturing sector. The share of final products in ediutech and high-tech sectors is increasing and points into the sae direction. But siilar to the leading industrial countries the crucial point is the relation between doestically and foreign value-added. In the last decade, processing trade as a share of China s iports declined fro 41.1% to 30.0% (RIETI, 2011). The growth of the active labor force is gradually slowing down thanks to the aging population. The relatively inflexible labor arket leads to labor shortage in the centers of anufacturing. The reaining worker reservoir in rural areas does not eet the skill level of ediu-tech and high-tech industries. Since several years the increase in real wages exceeds the real growth of the GDP. China s export driven growth which is based on low wage production of parts and coponents is fading away. The shift fro low value-added to high value-added production stages requires an extensive adjustent within copanies, industries and regions. Doestic and foreign copanies ight be forced to fragent their recently established fully integrated production processes and outsource laborintensive processes. Doestic copanies probably tend to establish production facilities in nearby low wage countries whereas foreign copanies ay consider to relocate parts of the production process to countries near their headquarters. On the one hand, this change contributes to China s eergence fro a developing to a developed country with a higher level of industrialization. On the other hand, the generally observed trend of a decreasing share of the industrial sector on the GDP in developed countries ight be accelerated by efficiency-seeking OFDI. A detailed analysis of China s OFDI ay deliver evidence for first signs of de-industrialization in anufacturing. Albania In principle, the access respectively availability of detailed industry-specific data with respect to trade and FDI is liited. The late opening-up of the country is one of the reasons why years tie series of data do hardly exist. Even tie series of acroeconoic data such as GDP, M1, M2 are available fro 1990 on only. (It is planned to search for data in Albanian language by involving a researcher fro at Aleksandër Moisiu University, Durrës.) V. Hypothesis General hypothesis: 12

13 1. Even in a closed econoy de-industrialization easured by the declining share of the industrial sector on the GDP occurs after a ature level of industrialization easured by growth of GDP per capita has been achieved. 2. In an open econoy de-industrialization in anufacturing starts before the ature level of industrialization is achieved. Specific hypothesis: 1. De-industrialization in China results fro a) gradually decreasing FDI inflows into the anufacturing sector especially fro countries such as Gerany, b) gradually increasing FDI outflows fro the anufacturing sector especially to peripheral countries in the region (Southeast Asia). 2. De-industrialization in China leads a) to decreasing exports of interediate products to developed countries such as Gerany and b) to increasing iports fro peripheral countries in the region. 3. De-industrialization in China encourages FDI outflows in the anufacturing sector fro European core countries such as Gerany to European peripheral countries such as Albania and intensifies iports of interediate products fro the latter. 4. De-industrialization intensifies trade relations between China and European peripheral countries. VI. Modeling Industrialization and De-industrialization We consider a global econoy characterized by a traded anufacturing industry and non traded services. The anufacturing sector is coposed of a large nuber of producers organized in a onopolistic copetitive environent, as in Helpan-Krugan, where the nuber of varieties is endogenously deterined. We assue Dixit-Stiglitz [1977] preferences for anufacturing varieties, and a CES aggregator of the utility fro services and anufacturing. Consider a world econoy coposed of 2 nations. The hoe econoy is populated by agents whose utility at tie i is W i U t i1 1 r Where the period t utility is the aggregate of the utility fro anufacturing and services t t t 1 U [ M S ] 13

14 Following Bauol(1967) and Suers(1985), we assue that, Manufacturing is characterized by differentiated products, f which ( ) varieties are aggregated according to the Dixit-Stigitz utility, t t, n M M 1 [ ],0 1 n1 The preference structure is akin to Obstfeld and Rogoff [1996, section 4.4] and Spilibergo [1998]. To siplify exposition we suppress henceforth the tie index t. The production of services is given by S Ls where L s workers are eployed in services, which are assued to be non-traded. The production of variety n at hoe requires both the periodic aintenance cost C t easured in labor units and the eployent of labor tie where Ln workers are eployed in producing variety n,1n,and the constant a easures the arginal cost of anufacturing (in units of services). The foreign country is characterized by siilar equations, where * denotes foreign values. We noralize the labor force in the hoe econoy to 1, and in the foreign econoy to h, and the price of services in the hoe econoy to 1. The axiization proble facing the agent in the hoe econoy is suarized by ax n n1 { M }, S 1 [ M S ] [ P M S 1] n1 n ultiplier. A siilar proble applies to the foreign country ax n n1 { M }, S n n s n1 1 [ M S ] [ P M P S h] n M n Ln a, where is the budget constraint s Lagrange Applying the first order conditions leads to (1), (2) and (3). These conditions can be solved for the hoe and foreign deand of a representative variety. The deand for services is 1 h S S ( 1) 0 1 P 1 ( P P ) 1 s (1) The hoe and foreign deand of a representative variety is M v 1 P P ( P ) Pv 1 (1 ) (2) M v h P 1 (1 ) P Pv P P s P s Hence, the producer faces deand the elasticity of which is 1 (1 ) The ter P is the Dixit-Stiglitz anufacturing price index: 1 [ ( v) ( v ) ] P P P (3) where P v, P v are the prices of a representative variety in the hoe (foreign) econoy, respectively. The arginal costs of anufacturing at hoe and in the foreign country are MCv a MC a Ps (4) v 14

15 Applying the properties of onopolistic copetition it follows that P v a ap 1 Then P [ ( ) ( s ) ] (3 ) Free entry into anufacturing iplies that gross profits equal the fixed cost Mv M v Pv MCv C M M P MC C P v v v v s (6) a P P v s a (5) Applying (2) (4) (5) to two equations in (6), and then dividing the two resultant equation yields s S 1 P C a P C a Full eployent in both countries iplies that s 1 S [ am C] (8) v s v h S [ am C ] s s Where M v, M v is the supply of the represented variety in the hoe and the foreign econoy, respectively. Applying (4) and (5) to equations (6), we get s 1 amv 1 s 1 C a M v 1 C (9) Note that the anufacturing output in the hoe and the foreign econoy is M P s s a s s a v v v Mv Pv Mv Ps M Then fro (9) we infer that s v v M P (7) s C, M P C P (10) v v s Substitute equations (9) into Full eployent equation (8), we get 1S C h S C (11) Then substitute S and S with equation (1), we get C 1 [1 { P } ] 1 C P h [1 ] 1 P s (12) Therefore equation (3 ), (7), (10) for a siultaneous syste of four equations in four,, P, P s. Next we show the GDP shares of anufacturing s Mv Pv s Mv Pv S Ps S Ps S S (1 ) s Mv Pv C C a a (1 ) (13) 15

16 Applying (11) to (13) we get C 1 h(1 ) P 1 P s, siilarly we can get C 1 (1 ) 1 P Suppose that the foreign country is less productive. We can apply our syste to investigate the ipact of a catching up process. Suppose that C, a drop at the sae rate, that is d log[ C ] d log[ a ] dlog [1 ] p 0, dlog a [ ] p p dlog [1 ][ p ] 0 dlog a [ ] p p Where,,, are shares bounded between zero and one, defined by p p a p a ap s, p ap s a ap s P P P s 1 P 1 P P s Hence, the catching up process leads to the de-industrialization of the high incoe countries. It is noteworthy that, as long as the productivity growth rate of anufacturing exceeds that of services, the de-industrialization would have occurred even in the absence of international trade. Applying our odel it can be verified that in autarky. d log [1 ] 0 dlog a [1 ] dlog P 0 dlog a [1 ] Hence, technological iproveents in anufacturing would reduce the relative price of anufacturing, increasing the GNP share of services independently of international trade. Consequently, the catching-up of the eerging arkets agnifies the de-industrialization process. VII. The Case for China, Albania, and Gerany 3 De-industrialization has been the experience of a growing nuber of countries. China exhibits a strong surge in the anufacturing share in the afterath of the liberalization during the 3 The first version of this paper includes for the tie period the following data of the three countries: GDP, GDP per capita, anufacturing (absolute and in % of GDP), M1, M2. 16

17 seventies, followed by a tenuous decline. Copared with Gerany, China is relatively poor, but as the productivity and the GDP grows faster than ost other countries, according to the odel, we can infer it would lead to further de-industrialization of Gerany and other developed countries, and at the eantie it is expected that when China s GDP per capita reaches a certain level (the turning point), its industrialization process ay influence by soe poor countries in the sae way as how it influences Gerany. Table 5 suarizes the regression results for the case where the explanatory variables are the countries relative GDP/capita (noralized by the Gerany GDP/capita), the square of the countries relative GDP/capita, and the financial depth and the exchange rate of RMB to US dollars. Our regression indicates that the anufacturing share reaches its peak when the China s GDP/capita reaches about 0.69 that of the Gerany. In addition, we find that financial depth is associated with a lower anufacturing share. Table 5 Association between China's Manufacturing GDP Share, the Relative GDP per Capita and Financial Depth, Exchange Rate Variable Coefficient Std.Err t-statistic C 0.37 * the relative GDP per capital between China and Gerany 0.43 * square the relative GDP per capital between China and Gerany -0.31* M2/GDP * exchange * Adjust R-Square 0.5 Note: Dependent variable is the anufacturing share as % of GDP, financial depth is oney and quasi-oney (M2) as a % of GDP. * represents statistically significant at the 1% level. So, it is expected that when China s GDP per capita reaches a rich level, soe peripheral countries in Europe like Albania which are relatively poor copared with China would set in otion a process that induces further de-industrialization of Gerany, and the deindustrialization of China. And the regression result of table 6 shows that a 1% increase in Albania s GDP per capita with Gerany as the benchark will result in ore than 1% increase in the anufacturing share of Albania. Thus, iagine if we take China and Gerany as a whole, it is expected that as the productivity of anufacturing in Albania continues to enhance, its anufacturing share will continue to increase and the entrance of new low wage eerging arkets like Albania to the global arena will account for the de-industrialization of both the sei-peripheral econoies and the developed countries like China and Gerany. 17

18 Table 6 Association between Albania's Manufacturing GDP Share, the Relative GDP per Capita and Financial Depth, Variable Coefficient Std.Err t-statistic C -2.1 * ln(the relative GDP per capital between Albania and Gerany) * ln(m2/gdp) * Adjust R-Square 0.55 Note: Dependent variable is Ln (the anufacturing share as % of GDP), Financial depth is oney and quasi-oney (M2) as a % of GDP. * represents statistically significant at the 1% level. Preliinary Conclusion Even if the result sees to confir the basic hypothesis, it is without doubt a considerable work to do in testing it with ore sophisticated odels. Furtherore, a larger set of data needs to be explored. Especially the role of the cross-border transactions/operations has to be further elaborated. Future research should concentrate on the following questions: Firstly, does de-industrialization of the core stands autoatically for the loss of the core status? Secondly, do industrializing eerging econoies (sei-periphery) autoatically ove up to the core? Thirdly, do industrial late-coers keep their periphery status? Fourthly, which factors priarily deterine the eergence of these late-coers? References Adas, F.G., Gangnes, G., Shachurove, Y. (2006). Why is China so Copetitive? Measuring and Explaining China s Copetitiveness. The Authors. Journal 2006 Blackwell Publishing, pp Aizenan, J. (2001). De-industrialization and Eerging Market Econoies. Journal of Econoic Developent, 26(1), Bauol, W. (1967). Macroeconoics of Unbalanced Growth: The Anatoy of Urban Crisis. Aercian Econoic Review, 76(5), Bauol, W. Blackand, S.A. and Wolf, E. (1989). Productivity and Aerican Leadership The Long View. Cabridge, MA: MIT Press. Black Sea Trade and Developent Bank (2011). Albania Country Strategy Thessaloniki: BSTDB. Blattan, C., Hwang, J. and Williason, J.G. (2004). The Ipact of the Ters of Trade on Econoic Developent in the Periphery, : Volatility and Secular Change. NBER Working Paper, Cabridge, MA: NBER. BME and Bogaschewsky, R. (eds.) (2009). Einkaufen und Investieren in China. Centru für Supply Manageent. 18

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