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The Next World Factory

  • Author:Esway
  • Source:www.eswaychina.com
  • Release on :2015-01-20

The Next World Factory

Ask any cab driver in Beijing, and they can tell you without hesitation what ails their country: China just has too many people, they will say with a Sigh.

But economists disagree, and as the population reaches a turning point- the number of entrants to the workforce may peak this year the country is set for a difficult adjustment, with growing labor market pressures bearing on the workshop of the world.

That is a transition that China's neighbor, India set to overtake it as the world's most populous nation in 2025 hopes to capitalize on, as entrants to its labor market will rise annually for the next 14 years.

But many analysts are questioning whether India with its overstretched, underdeveloped infrastructure and its poorly educated youth really has the capacity to take up the slack.

"In all likelihood, India will not be able to benefit from this reduction in the growth of China's labor force, simply because India is not ready to have a manufacturing sector as large as China's," says Laveesh Bhandari, founding director of Indicus Analytics the New Delhi -based economics research house. "Infrastructure is limited and too expensive, and the human capital base is not deep enough."

China, where the total workforce is due to start falling by about 2016, is already showing symptoms of a tightening labor market, with the country rocked this summer by a spate of labor disputes and strikes, by staff demanding higher wages.

The unrest has fuelled debate about whether China has reached its "Lewis turning point", named after Nobel laureate Arthur Lewis, who theorized that a developing economy's wages will rise sharply once labor demand from industry has exhausted available surplus' labor from the agricultural sector.

Some economists believe that China reached this tipping point in 2004. When manufacturers in the Pearl River Delta reported labor shortages although pressures eased temporarily during the global financial crisis when demand for Chinese exports fell.

But this year, the manufacturing hubs of Guangzhou and Dongguan have both raised their minimum wages, and many companies are expanding leisure activities and improving food at their factory compounds in order to boost worker retention.

Companies such as Foxconn, the electronics maker, have also begun moving inland closer to the areas where their workers hail from hoping to make it easier to gain new recruits, and thereby forcing local factories to raise their wages to compete.

"The consensus is that China is probably approaching the Lewis turning point soon, based on recent developments in population growth and also the one-child policy," says Jiang Tingsong, senior economist at the Centre for International Economics in Australia.

Rising wages in the coming years are expected to drive manufacturers away from low-value-added sectors, while rising consumption by better-paid Chinese workers will play a bigger role in propelling the domestic economy.

Morgan Stanley has projected that Chinese labor’s share of gross domestic product would rise from its current level of 15 per cent to at least 30 per cent by 2020, reversing the trend of the past decade, in which wage growth has trailed economic expansion.

"If wages rise, then the household share of national income must rise. That would be a very beneficial process and that would aid the economic re-balancing," explains Arthur Kroeber, managing director of Dragonomics, an independent research and advisory firm.

Yet some economists fret that tightening labor supplies will lead to slower growth and higher inflation.

Mr. Jiang estimates that a 5 per cent reduction in the size of China's unskilled labor force could result in a 2 per cent slowdown in GDP.

In China's labor headaches, some Indians see opportunity. The UN estimates that India's population will rise by 26 per cent from 1.2bn in 2010 to 1.5bn in 2035, while its labor force will rise by 33 per cent to nearly 1 bn.

By then, Indians of working age 15 to 59 will account for about 65 per cent of the population, making India the world's largest labor market.

Goldman Sachs says that India's labor force will grow by 110m people over the next 10 years, the largest addition to the global labor force, which could potentially add 4 percentage points to GDP growth over the next decade.

But what worries many Indian business executives, economists and policymakers is whether the country's economy can absorb the masses of aspiring workers, mainly from poor rural areas and with little or no training. While nearly 13m young Indians are entering the workforce every year, India's vocational training system has the capacity to train just 3.1 m a year. Many young people lack even rudimentary' skills.

"We do not have people who are actually functionally literate," says Mr. Bhandari. "Most of our labor force is inappropriate for the mass manufacturing practices that China has excelled at."

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