presentation questione one
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10.12.2012. China’s socio-economic development. Presentation questione one. 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 - PowerPoint PPT PresentationTRANSCRIPT
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?