China’s socio-economic development

Previously, China was considered as a country with inexhaustible labor; but not any longer. The biggest challenge in front of the apparel manufacturers today is finding good workers at a lesser cost. The skyrocketing labor wages in China are pushing the apparel retailers of US to consider other alternative options. Labor costs have risen by 5% to 15% in the current year. Increase in labor will affect the profit margins of the foreign companies 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 Countries A less developed / developing country… lower GDP „ A country with lower GDP relative to other countries. by little Less developed countries are characterized by little industry industry and sometimes a comparatively high dependence foreign aid on foreign aid. Less developed countries often undertake programs of development programs of development, with greater or lesser interventions on the part of the national governments. major borrowers They are major 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.

Financial Definition: Developing Countries low per capita income little industrialization Gross National Income US$ “A country with relatively low per capita income and little industrialization. Countries are divided into developed or developing according to their Gross National Income (GNI) per capita per year. Countries with a GNI of 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.

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The recent rise of Labor Costs low per capita income little industrialization Gross National Income US$ “A country with relatively low per capita income and little industrialization. Countries are divided into developed or developing according to their Gross National Income (GNI) per capita per year. Countries with a GNI of 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.

Model Assumptions Lewis Turning Point Theory Model 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

Illustration Lewis Turning Point Illustration Situation before LTPSituation after LTP Lewis 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 PROCESSPROCESS

Situation before LTP Rapid wage increaseVery slow wage increase  Finite supply of skilled workers  Unlimited supply of unskilled worker

Lewis Turning Point Situation before LTPSituation after LTP Lewis Turning Point

Situation after LTP unskilled workers become finite group significant and rapid wage increase the rural labor surplus disappears in the long run

Lewis Turning Point 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 labor supply 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: Education improvement 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?