Chinese labour pains

China—and later India—proved to be the source of a huge reserve army of labour that Karl Marx had said would help keep down wages. The very threat of offshoring to China robbed trade unions in the West of their bargaining power. Besides, the combination of a cheap currency and low wages helped China export low prices to the rest of the world, which is one reason why Western central banks could pursue very loose monetary policies without sparking off inflationary fires.

Also Read | Niranjan Rajadhyaksha’s earlier columns

Is that era now over? There has been a spate of reports in recent weeks about how growing labour unrest in China’s manufacturing belt is forcing companies to raise wages. Foxconn, a Taiwanese manufacturer with factories in China, raised wages by two-third after a series of worker suicides were reported. Other companies such as Honda and Kentucky Fried Chicken have also reportedly threatened industrial action in protest against low wages.

“In the three decades of opening-up, ordinary workers are among those who have received the smallest share of economic prosperity. The temporary stoppage of production lines in the four Honda factories highlights the necessity of organized labour protection in Chinese factories," a Chinese Communist Party newspaper said in an editorial.

The demands for higher wages come at a time when the Chinese working population is nearing its peak, as the one-child policy reduces labour supply. There is as yet no economy-wide data to show that Chinese wages are rising faster than underlying productivity. But these could be the first signs that China cannot keep competing on low wages and export deflation to the rest of the world.

One possibility is that higher wages could help China become a more consumer-oriented economy. “Higher wages mean that now a worker in a Nike factory can go out and buy a motorbike or a television," Stephen Green of Standard Chartered Bank told the Financial Times’ beyondbrics blog.

A steep rise in the wage bill could also reduce the profits of Chinese companies and perhaps the Chinese savings rate, given that high corporate savings are one of the reasons why China saves so much. That could be a small step in correcting the problem of global imbalances that is one of the most important faultlines in the global economy today.

The usual response of countries with rising wages is to move up the value chain—and into activities that require more skills and knowledge. China’s leadership has clearly been working towards this strategic shift in its economic model, going by the way it has poured investments into both physical and human capital. This week, the Chinese government announced a plan to attract foreign talent to China, in a bid to transform the country from being “labor-rich to talent-intensive", according to a report in the China Daily.

Is there an opportunity for India to fill the space that China now seems keen to vacate?

The low-cost manufacturing that sustained the first push towards development tends to get offshored as a country grows richer. Japan did it in the 1970s and 1980s, as higher wages and a rising yen made it lose its edge in low-cost manufacturing. Japanese firms moved aggressively into countries such as Malaysia, Thailand, Indonesia and, later, China.

It is quite likely that China could lose its edge in low-cost manufacturing as its wage levels and currency value rise. That could surely open up an opportunity for India.

But there is another possibility that commentators have pointed to. China is a huge country and this is now a chance for its government to push some types of manufacturing activities away from the prosperous coastal belt and inland. It is well known that the Chinese government has been frenetically building infrastructure such as roads and railways to link its inland provinces to global markets.

The entry of a billion low-wage Chinese into the global labour market completely changed that dynamics of global capitalism—be it undermining the power of organized labour in the developed countries, the export of deflation through so-called China prices and changing geopolitics.

The initial signs that Chinese labour supply has peaked and wage levels are rising could have similarly significant effects on the economy and politics of many countries, including India. We could be heading into a new era for the global economy.

Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at cafeeconomics@livemint.com

Milestone Alert!
Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!