Presentation questione one

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Presentation questione one
10.12.2012

• Chinas socio-economic development

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Question 1

• 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?

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Agenda

• Definition Developing countries
• Theoretical framework
• Lewis Turning Point
• Middle Income Trap
• Indicators for Lewis-Turning Point for China
• Discussion Conclusions

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Definition Developing Countries

• A less developed / developing country
• A country with lower GDP relative to other
  countries.
• Less developed countries are characterized by
  little
• industry and sometimes a comparatively high
  dependence
• on foreign aid. Less developed countries often
  undertake
• programs of development, with greater or lesser
• interventions on the part of the national
  governments.
• 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.
http//financial-dictionary.thefreedictionary.com
/developingcountries)
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Financial Definition Developing Countries

• 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 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
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(Source http//blogs-images.forbes.com/evapereira
/files/2011/01/Developed_and_developing_countries3
.png)
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The recent rise of Labor Costs

• 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 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
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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

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Lewis Turning PointIllustration
Lewis Turning Point
Situation before LTP
Situation after LTP
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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
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Situation before LTP

• Finite supply of skilled workers

• Unlimited supply of unskilled worker

• Rapid wage increase

• Very slow wage increase

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Lewis Turning Point
Lewis Turning Point
Situation before LTP
Situation after LTP
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Situation after LTP
unskilled workers become finite group
significant and rapid wage increase
the rural labor surplus disappears in the long run
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(No Transcript)
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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
• developing countries have to face specialization
  in production
• manage shift from investment to innovation
• education systems have to be transformed so that
  workers are flexible to innovate and shape new
  products

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Indicators for Lewis-Turning Point for 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

• Strong trend of urbanization in China

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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)
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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

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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

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Thanks for your attention

• Questions?