Why the CHINESE ECONOMIC MIRACLE is coming to an end - What planning mistake was made 50 years ago?

during the last decades China had an unprecedented economic growth it became the world's largest exporter in other words it became the world's Factory and the key element driving its economic growth was its huge working age population in other words the factor that played a central role in China's economic model was its cheap labor force however to the surprise of many China today not only is no longer a cheap country but in global terms it is even expensive so the questions are why is Chinese labor already considered expensive what planning the stake made China 50 years ago and which famous companies have been moving out of China in 2007 Chinese labor cost about one dollar an hour less than in India the Philippines and Thailand however according to a recent article in The Economist manufacturing wages Rose in China to an average of eight dollars and 27 cents an hour in other words wages in China are now four times higher than wages in India the Philippines and Thailand as a result Chinese labor is already considered expensive in global terms now what are the reasons behind the sharp rise in wages in the country that used to be recognized worldwide for its cheap labor prior to 1990 China kept wages very low because workers were assigned by the central government and jobs were permanent with little Mobility the central government set the wages of all workers through a simple grade system in which the grade depended mainly on the workers length of service but in the late 1980s the financial insolvency of many state-owned Enterprises led the Chinese government to allow profitable Enterprises to pay higher wages and even bonuses to the most productive workers then in the late 1990s China began privatizing state-owned Enterprises so millions of workers were laid off and moved to the private sector private employment as a percentage of total urban employment Rose in 1990 from 33 percent to 79 in 2010 with these privatizations wages were now linked to productivity so workers were more incentivized to improve their performance to increase their salary these reforms were changing the Chinese labor market where wages were gradually increasing but perhaps the most relevant reason for China's strong wage growth is its demographic transition according to data recently published by the government China's population decreased by 850 000 people in 2022 on the other hand the population aged 65 and over reached 13 percent of the total a high percentage for a country that is not yet rich on the other hand the fertility rate in China fell sharply since 1965 from a rate of 6.3 births per woman to 1.59 in 1999. this sharp drop in births was due to population control measures in the 1970s including the famous one-child policy which was to encourage families to have only one child by imposing fines on families that had more than one child this was the mistake China made 50 years ago distorting the natural population growth of a developing country it was the largest and strictest population control policy in the history of mankind and today it is suffering the consequences because China no longer has the Abundant cheap labor that attracted foreign companies and allowed it to become the world's Factory and therefore grow economically at very high rates although several countries are experiencing aging populations and low fertility rates China experienced this demographic transition very quickly without being a developed country in other words because it was punished for having more than one child for so many years the Chinese population aged very fast and at an early stage of Economic Development so the economic capacity of both families and the government will be limited to cope with the expenses required by a growing elderly population for example countries such as Germany and Japan also have aging populations and low fertility rates the difference is that an older adult in Japan or Germany has on average more resources than one in China so China is in a difficult position its labor is already expensive to compete with other cheap labor countries but its labor force is also not skilled enough to compete with developed countries now this does not mean that China will stop growing the point is that it is unlikely that it will return to the 10 rates that gave birth to the economic miracle that lifted 800 million people out of poverty what the Chinese government is seeking now partly because it has no alternative is to stop being the cheap labor manufacturing center of global capitalism and become an Innovative economy producing Advanced High value-added Goods like South Korea Japan or Germany but assuming that China achieves development centered not on cheap labor but on manufacturing Advanced or high value-added products it still has an obstacle to overcome and that is the aversion of companies and investors to the growing geopolitical risk China has historically had and still has territorial disputes with neighboring countries such as the Philippines Indonesia India Vietnam Japan South Korea Bhutan among others and all these tensions transmit a certain amount of uncertainty but the greatest risk lies in the threat that China is getting closer and closer to using military force to reunify with Taiwan if it comes to this conflict the U.S is likely to at least try to impose trade and economic sanctions on China as it did with Russia for the invasion of Ukraine in this case foreign companies and investors in China will be hurt because their factories and capital will lose value or they will find it difficult to trade with the rest of the world and eventually some will try to flee the Asian country so although the cost of Labor is one of the most important factors when choosing the country where a company wants to locate the risk of a military conflict also plays a very important role it is therefore not surprising that companies are leaving China to build factories in other countries and not necessarily because of their low cost there is a set of Asian economies that represent an alternative such as South Korea Philippines Indonesia Singapore Malaysia Thailand Vietnam Bangladesh among others for example in January 2023 it was reported that Sony plans to relocate the production of cameras it sells in Japan and the west from China to Thailand Apple confirmed that it was moving its iPhone 14 production to India this will be the first phone to be manufactured by Apple outside China Google will also move part of its production of its new pixel phone to Vietnam and Dell the U.S computer manufacturer plans to stop using chips made in China by 2020 4. in short although there is no single candidate to replace China what is certain is that its Rising wages and geopolitical risks and the deterioration of relations with the United States and its allies lead to the conclusion that the Chinese economic Miracle has come to an end thanks for watching see you in the next video

Channel: Economics Nation

Views: 115,580

Keywords: economics nation, economics nation china, china economic miracle, end of cheap labor

Id: V4O5YEwJVcM

Length: 7min 26sec (446 seconds)

Published: Mon May 08 2023