Ben Solver
Ms. Margaret Munley
Introduction to Microeconomics
24 February 2014
China: Can the Dragon be Satisfied China’s open reform period is characterized as one without a blueprint, but by ‘groping for stones to cross the river’, based on an incremental, gradualist approach to reformation (Lee). China is still a developing country with pockets of industry in different regions. While China may relishe in the fruits of its labor, there is an increasing disparity between the urban and rural areas due to this disequilibrium of development. China’s presence on the world stage has drastically increased since 2001 when China joined the World Trade Organization, in essence opening their borders and has left many researchers perplexed about the consequences of its rise. There exists a plethora of studies, debating whether China’s current path is one that is headed to the top, or whether China is at the peak of its development with looming declines in the near future, plagued by weak institutional reforms. While there are many features that characterize China’s direction, China is growing in its demand for products from around the world and its industrial side has been growing but at the same time increasing how fragile our world economy is (Badinger). Due to past and current monetary problems in different regions of the world and a shift in the location of manufacturing could pose future concerns to the emerging Dragon. China’s cheap labor has been a prominent economic advantage since opening its market. However, the average annual real wages have tripled from 1997 to 2007 from 3,285 to 24,932 Yuan (Yang). Now there is a notion that the rural surplus labor is decreasing to a level that continued industrialization but cannot be supported cheaply (Lee). Additionally there has been increasing reports about China losing its appeal as a manufacturing base for exports; China is showing signs of decreasing and being unstable. While there has been increasing reports suggesting that wage increases has led to decrease in US Foreign Direct Investments (FDI) this trend may be more illustrative of an increasing interest and access in high technological and service sectors, areas in which China does not have a comparative advantage yet. Outward FDI to Asian countries other than China is not an automatic indicator of China “losing out” as different regions are accessed for industries that may be complementary to China as in the case of India and other neighboring country’s (Yang). While increased earnings has surged manufacturing wages in the latter part of the 1990s into the second decade of the new millennium China’s wages are still below Malaysia, Thailand and the other Asian players. However China holds a significant share of the working labor population within Asian region, therefore while wages are lower than the majority of its neighbors it has been theorized that that Chinas wage inflation has impacted the rise of the wages of its neighbors especially those in labor intensive industries (Pop Culture China! Media, Arts, and Lifestyle). Additionally, the increase in China wages in relation to its labor market has been attributed to the increasing high skilled population as the role of education continue to play one of the most important roles in China’s development. Combined with increasing high tech industries will result in China approaching wage levels of the US, EU, Japan also possibly Korea (Yang).
Contrastingly, this is unlikely to occur in the short term as a result of China present low wage level and increasing robust supply of labor and skill that may also result in a stabilization of wage growth in the long run. Additionally, how this unfolds is not simply dependent solely on China pumping out more skilled workers and consistent growth rates but also how other developing and advanced countries react and adjust. It is also reliant on China, and how it addresses regional disparity issues resulting in its current status as one country with two explicitly divided societies, the urban versus the rural. Present day China will continue to maintain its global labor advantage and luster as an attractive location for FDI and outsourcing jobs while also developing its high tech industries (Yang).
Is China contributing to a “global labor arbitrage?” Chinas low wages and increasing labor market has been considered a “global labor arbitrage” which reflects the reduction of high paying jobs in the developed countries due to a preference and the appeal of low wages in developing countries (Badinger). Traditionally one of the benefits of globalization has been that developed countries had a comparative advantage in regards to a larger skilled labor force. However there is still a push for China and other Asian countries to continue the development of its human capital has not only reduced this disparity but for the most part has diminished it all together.
In China there are 750 multinational companies that have implemented R&D facilities allowing for access to high technology R&D development and production and much lower costs (Yang). While it is theorized that advantages of high technology and innovation are in the hands of more developed countries, the combination of low wage and highly educated workers in developing countries proves otherwise in the long run, making them strong competitors. China is continuing to rise up the technological industries and has become a key player in research in nanotechnology. Nanotechnology has become a multibillion Yuan industry in China and basic nanotech R&D is at the most advanced levels in the world, comparable to the United States (Yang). Additionally even though the majority of Chinas labor force may be less skilled, because of its large population, it has the ability to produce comparable amounts or more educated scientists and engineers than other advanced countries.
Since China’s central government decentralized power the minimum wage levels were determined by the subnational governments this has created regional disparity between inland and coastal regions(Yang). The government should further advocate for low wages through encouraging investors away from the coastal cities to the inland regions to explore cheaper labor. However a sustainable long-term geographical dispersion and selective FDI policy would positively improve conditions in the inland regions which would increase wage in the long term thus reducing the income disparity. Also, this would complement a rise in Chinese consumerism due to increasing wealth and disposable income (Pop Culture China! Media, Arts, and Lifestyle). Multiple reports found unreported income accounted for 40 per cent of the total income. Therefore the income disparity between the rural and urban households is smaller than reported since actual income level of rural households is estimated to be higher. Additionally the rural urban income gap accounts for 40-60 percent of the overall inequality in China thus, a re-alignment of rural and urban income for unskilled migrant workers and skilled labor force will be a key driving factor towards China’s rise to the top (Pop Culture China! Media, Arts, and Lifestyle). This will further contribute to China’s transition from export led growth to increased domestic consumption and innovation, an initiative of the central government. According to theorists such as Thomas Friedman, “Chinas integration into the world market has created a “flat world” primarily because it has become cheaper to manufacture and ship goods from China than within a countries domestic market. This has transformed the face of trade, for example China replaced Mexico in 2003 and is now their second exporter despite Mexico’s close proximity to the US, and additionally even Mexican companies in Mexico have resorted to importing from China.” With the increasing amount of interconnectedness of people and information (Badinger) the world has flattened in a sense but there is still an increasing difference between the rich and the poor, urban and the rural. As a result the global playing field has changed but it has by no means leveled. Over all China is good for the world they are creating a competitive world market and challenging for the lead in many industries. This is all part of a cycle that has been proven time and again throughout the world, prosperity can be short lived. Not to say the end of China is near but more of a balancing of the powers. I hope this generation and the ones that follow will take advantage of the spectacular educational system we have and pursue an education in the sciences, mathematics or engineering. This will establish that back bone of great minds and future leaders to help push a drive to strengthen the America’s and the future of their open market trade.

Work Cited * Badinger, Harald, Measuring the World Economy (January 2013). The World Economy, Vol. 36, Issue 1, pp. 12-30, 2013. Available at SSRN: http://ssrn.com/abstract=2202634 or http://dx.doi.org/10.1111/twec.12022 * Lee, Forest. “China's On-going Reform Calls for Better Economic Illumination.” People's daily online., 15 August 2002. http://english.people.com.cn/200208/13/eng20020813_101406.shtml * Yang, D. T., Chen, V. W. and Monarch, R. (2010), RISING WAGES: HAS CHINA LOST ITS GLOBAL LABOR ADVANTAGE?. Pacific Economic Review, 15: 482–504. doi: 10.1111/j.1468-0106.2009.00465.x * "Consumption in China." Pop Culture China! Media, Arts, and Lifestyle. Santa Barbara: ABC-CLIO, 2007. Credo Reference. 9 Jan. 2009. Web. 13 Apr. 2013. <http://www.credoreference.com.trexler.idm.oclc.org/entry/abcpochine/consumption_in_china>. * http://www.worldeconomics.com/ China%20Growth%20Monitor_cac90741-8882-4311-969e-3ae0e3e2575c. Graphs attached for reference