China’s Changing Economic Tide

17 Apr

China’s “economic” miracle has been somewhat remarkable. In just over 30 years, China has transformed itself from a hugely populated but economically insignificant country, to becoming one of the world’s most key economic players.

China has based its success on an economic model which rests on global exports, and foreign direct investments. Due to China’s vast pool of cheap and productive labour, the country is able to manufacture more products than any other country, and is able to keep costs low, and profits high. International investors have seized this opportunity and channelled significant funds into China in order to take advantage of this opportunity and capitalise on China’s cheap labour market.

China has so far been able to keep wages down, and maintain glorious profits by pulling its seemingly endless rural labour supply into urban manufacturing work to drive growth. As this rural supply is surplus, or, as it were “sitting around and waiting for jobs,” this excess source of labour has been able to be employed without a wage increase. By pulling more and more rural labourers into urban sector jobs China has been able to drive higher growth rates.

However, China is undergoing a significant demographic shift, and China’s economic success looks set to marred by a rapidly ageing population. Official sources have confirmed that China’s working age population is already beginning to fall, which questions the ability for China to sustain high production rates. In addition, China’s surplus rural labour is on the decline. Once the surplus labour becomes eradicated, wages will have to rise, in order for China to continue to pull rural workers into urban jobs and sustain their output in manufacturing.

Recent incremental wage rises in China suggest that it is very close to reaching this point. As wages get forced upwards, manufacturing industries become less competitive, as their economic profits less costs become reduced. China has recently appeared to embrace this turning point by pledging to restructure its economic model towards domestic consumption driven growth, yet the success of this restructuring is yet to be seen.

If China fails to re-engineer their growth model, three decades worth of persistent and relentless pursuit of economic development could be undermined. Moreover, China has continually been able to “beat to its own drum” and continually fail to compromise ideologically with the wishes of powerful states, on the basis that it has been so economically powerful that it can pursue its own goals without needed to conform internationally. Yet as China continues to show signs of slower growth, and economic projections for the future look weak, China may not only lose its economic superiority; it might also lose its ideological bargaining power.

Although economic scholars in the last decade have foretold an impending challenge which China’s growth will bring to the hegemony of the United States; until China can address their falling labour force, the only country that it will be challenging in the future is itself.

Sources:

Zhang, Xiaobo, Jin Yang, and Shenglin Wang. “China has reached the Lewis turning point.” China Economic Review 22.4 (2011): 542-554.

Yao, Yang, and Ke Zhang. “Has China passed the Lewis turning point? A structural estimation based on provincial data.” China Economic Journal 3.2 (2010): 155-162.

Meiyan, Wang. “The rise of labor cost and the fall of labor input: Has China reached Lewis turning point?.” China Economic Journal 3.2 (2010): 137-153.

Cai, Fang. “Demographic transition, demographic dividend, and Lewis turning point in China.” China Economic Journal 3.2 (2010): 107-119.

Fang, Cai. “The Lewis Turning Point and the Reorientation of Public Policies: Some Stylized Facts of Social Protection in China [J].” Social Sciences in China 6 (2010): 015.

Ikenberry, G. John. “American hegemony and East Asian order.” Australian Journal of International Affairs 58.3 (2004): 353-367.

Layne, Christopher. “China’s challenge to US hegemony.” CURRENT HISTORY-NEW YORK THEN PHILADELPHIA- 107.705 (2008): 13.

http://www.economist.com/blogs/freeexchange/2013/01/growth-and-china

http://www.imf.org/external/pubs/ft/wp/2013/wp1326.pdf

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