China’s socio-economic development

10.12.2012

Previously, China was considered as a country withinexhaustible labor; but not any longer. The biggest challenge in front of the apparel manufacturers today isfinding good workers at a lesser cost. The skyrocketing labor wages in China are pushing the apparel retailersof US to consider other alternative options. Labor costshave risen by 5% to 15% in the current year. Increase inlabor will affect the profit margins of the foreigncompanies who have their manufacturing base in China.

Question: Does China loose the advantage of labor cost?

Question 1

Agenda

Definition: Developing countries Theoretical framework

• Lewis Turning Point• Middle Income Trap

Indicators for Lewis-Turning Point for China

Discussion & Conclusions

Definition: Developing CountriesA less developed / developing country…A less developed / developing country…

„ A country with lower GDPlower GDP relative to other countries.

Less developed countries are characterized by little by little industryindustry and sometimes a comparatively high dependence

on foreign aidforeign aid. Less developed countries often undertake

programs of developmentprograms of development, with greater or lesser interventions on the part of the national governments.

They are major borrowersmajor borrowers  from organizations such as the World Bank. While no strict definition of which

countries are less developed exists, most countries that do not belong to the OECD are considered less developed.”

(Source: Farlex Financial Dictionary. http://financial-dictionary.thefreedictionary.com/developing+countries)

Financial Definition: Developing Countries

“A country with relatively low per capita income low per capita income and little industrializationlittle industrialization. Countries are

divided into developed or developing according to their

Gross National Income Gross National Income (GNI) per capita per

year. Countries with a GNI of US$ US$

11,905 and less 11,905 and less in 2010 are defined as developing

(specified by the World Bank, September 2012).”

(Source: The International Statistic Institute. http://www.isi-web.org/component/content/article/5-root/root/81-developing

(Source: http://blogs-images.forbes.com/evapereira/files/2011/01/Developed_and_developing_countries3.png)

The recent rise of Labor Costs

“A country with relatively low per capita income low per capita income and little industrializationlittle industrialization. Countries are

divided into developed or developing according to their

Gross National Income Gross National Income (GNI) per capita per

year. Countries with a GNI of US$ US$

11,905 and less 11,905 and less in 2010 are defined as developing

(specified by the World Bank, September 2012).”

(Source: The International Statistic Institute. http://www.isi-web.org/component/content/article/5-root/root/81-developing

Lewis Turning Point Theory Model AssumptionsModel Assumptions

Idea:Explanation of the rising labor costs and the related

losing of the competitive advantage in unlimited labor

Supply

Assumptions Unlimited labour supply Long term dual economic development process

Lewis Turning PointIllustrationIllustration

Situation before LTP Situation after LTPLewis Turning

Point

Situation before LTP

Agricultural sector: numerous laborers, very low marginal labor productivity

Assumption 1: labor supply higher than demand

Modern sectors recruit laborers from agricultural sector at low rates

Assumption 2: labor supply from agricultural areas higher demand modern sector Increase of labor costs

P ROCESS

Situation before LTP

Rapid wage increase Very slow wage increase

Finite supply of skilled workers

Unlimited supply of unskilled worker

Lewis Turning Point

Situation before LTP Situation after LTPLewis Turning

Point

Situation after LTP

unskilled workers become finite

group

significant and rapid wage increase

the rural labor surplus

disappears in the long run

Middle Income Trap initial increase in income, which is

trapped in the middle income range

To encounter this state, developing countries have to master three

ongoing transformations:1) developing countries have to face

specialization in production 2) manage shift from investment to

innovation 3) education systems have to be

transformed so that workers are flexible to innovate and shape new products

Indicators for Lewis-Turning Point for China

Strong trend of urbanization in China

Past: Unlimited laborsupply

Strong economic growth due to the unlimited labor supply

Increasing shift of a large number of farmers into non-agricultural jobs every year China kept up high economic

growth at a stable inflation

Change: Educationimprovement of the migrant workers

Newer generation (born in the 90s): better education & desire to live in city

Easy to get a temporary living permit in the cities

Government policy focus and supports non-agricultual life

Possible consequences of the LTP for China

Decline of agricultural workforce

Rise of labor cost in the agricultural sector

Increasing wages for unskilled workers

Example: Yangtze River Delta recruitment issue (2004)

Resume

Fact of rapidly increasing wages due to scarcity of unskilled workers

Higher wages increase production costs for foreign companies

Foreign companies will look for countries where turning point is far away

China looses its cornerstone of low-cost labor

Outlook

Ongoing discussion about if the turning point is reached or not

Still 350 Million rural workers available Shift towards a normal economy is for

sure Government has to regulate transition

process to avoid middle-income trap

Questions?