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10.12.2012
China’s socio-economic development
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?
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…
„ 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/developing+countries)
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
(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
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
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
Lewis Turning Point
Illustration
Situation before LTP
Lewis Turning
Point
Situation after LTP
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
R
O
C
E
S
S
Situation before LTP

Finite supply of skilled
workers
Rapid wage increase

Unlimited supply of
unskilled worker
Very slow wage increase
Lewis Turning Point
Situation before LTP
Lewis Turning
Point
Situation after LTP
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
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
Past: Unlimited labor
supply
Change: Education
improvement of the
migrant workers
 Strong economic growth
 Newer generation (born in
due to the unlimited
labor supply
 Increasing shift of a large
number of farmers into
non-agricultural jobs
every year
the 90s): better education &
desire to live in city
 Easy to get a temporary
living permit in the cities
 Government policy focus
and supports nonagricultual life
 China kept up high economic
growth at a stable inflation
Strong trend of
urbanization in China
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?