01.07.2010
China at Lewis turning point
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| Editor, news2biz CHINA |
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When Sir William Arthur Lewis won the Nobel Prize in economics in 1979, he might have never expected that it will be a Taiwanese company which will make his theory of "the Lewis turning point" famous among many Chinese.
The Lewis turning point means that with the progress of industrialisation, the surplus of rural labour will at some point turn into labour shortage, which will then result in wage increases.
Since exporters in China's coastal areas have unexpectedly encountered a shortage of labour in early 2010; and especially since Taiwan's largest OEM manufacturer Foxconn was forced to increase wages for its hundreds of thousands of workers in South China in the past months due to a string of worker suicides which were mostly attributed to low wages, more and more economists and analysts have mentioned textbook theory of the Lewis turning point and educated the public that China is now at such a juncture.
Certainly there are disagreements. For example, one of the conditions for the Lewis turning point to come true is that the unemployment rate is low enough, but there are still several millions of migrant workers from China's vast countryside who cannot land a job. And with the coming of the Lewis turning point, the economy should transform into an integrated one, but in China, some 60% of population still live in the countryside and the gap between the urban and rural income is still huge.
While disputes on the Lewis turning point are more of an academic issue, the pressure of rising wages is already a reality for investors. With Foxconn - the largest exporter and one of the largest private-sector employers in China - hiking its salary levels, many other employers will have to follow suit if they do not want to risk losing their workforce. So, as the Chinese wages are already higher than those of other Asian nations such as India, Vietnam and Cambodia and will soon overtake salaries in countries like Mexico and Romania, the natural question now is whether China has lost its competitiveness as a low-cost manufacturing country.
The answer is both yes and no. For those who produce in China merely for export, it is probably time to consider other options. But it is never easy to relocate a plant. You will have to calculate whether any lower wages can offset the advantages that China can offer, such as infrastructure, pool of suppliers, etc. What is more, lower labour turnover and higher efficiency resulting from wage increases can also help offset part of the negative effects.
A survey issued by the EU Chamber of Commerce at the end of June showed that companies still have confidence in China. 78% of respondents report optimism regarding growth in their sectors over the next two years. Meanwhile, 30% of the Chamber members highlight China as their top investment destination today, with another 34% identifying China as one of their top 3 destinations.
Another question now is whether China will tumble at this Lewis turning point. China's economy has been steaming at an average growth rate of almost 10% per year in the past three decades in 1979-2009. Many are expecting an average of 8-9% per year in the coming decade, and 6-7% or even slower paces in the decade beyond when Beijing may become more realistic and quit its magic target of 8% growth.
By that time, a quickly aging population - mainly owing to China's one-child policy - could become an ever-increasing burden for Beijing and threaten the prospect of the country's growth story.
Goldman Sachs economist Jim O'Neal expects China to overtake the USA as the world's largest economy by 2027. But whether this forecast will come true or not now obviously depends on how well Beijing will handle its position at this sensitive Lewis turning point.
In fact, the Chinese government has been aware of the challenges ahead and has since 2007-2008 encouraged innovations and "transformation of growth models" which means relying less on import and more on domestic market for growth. China's efforts in climbing up the value chain and triggering consumption will translate into both stronger competition and more opportunities for foreign investors.
In the Chinese language, the equivalent of the word "crisis" is "Wei Ji" (by pronunciation) in which "Wei" means risk and "Ji" means opportunity. The Lewis turning point, for China and investors as well may be a juncture less of "crisis" and more of "Wei Ji".