Asian Business Environment - Case Study Example

Asian Business Environment Name Student ID Course Instructor Date Asian Business Environment China has a population of 1.3 billion and the country has sufficient labor supply. The rapid China’s economic growth is linked to the low-priced and limitless availability of labor in the non-agricultural sector and the industrial sector that manufacture goods for importation. However, before the year 2009, China experienced labor shortage and employers experienced challenges engaging labor migrants (Zhang et al, 2011, p.544).Currently, there are numerous arguments as to whether China had reached the Lewis turning point (LTP) or not. Some reports argue that China has not reached the Lewis turning; others claim it has achieved this point; and a small proportion argues that it is past this point. China had surplus labor supply but majority have been taken in by the industrial sector, an indication of the Lewis turning point. Lewis turning point may be an unavoidable stage in development and if China has not achieved this phase, it is almost there and will be past it soon (Cai, 2010.p. 111). On a personal perspective, China has achieved the LTP, much earlier than expected, but it is not yet past this phase. The LTP will have extensive impacts on the country’s economy. This phase is not definite and may last for several decades. China is an international manufacturing center and these effects will have significant impacts on the globe’s economy (Karlsson, 2012, p. 940).This paper seeks to assess whether China has attained the Lewis turning point and the consequences it will have on the globe economy. For the role of explaining of the developmental phases of any economy, the Lewis model was introduced by Arthur Lewis in the year 1954 and was realized in the early 1970s by Lewis, Ranis, and Fei. The model states that a young economy is identified by the presence of a dual economy (Knight et al, 2011, p. 591). A dual economy means that there are two economic compositions; the agricultural and the industrial sector (Fang, 2010, p. 5). When an economy approaches the LTP, the extension of the industrial sector draws labor from the agricultural sector until the surplus labor is drained. At this point, the industrial sector grows rapidly and most people migrate from the rural areas to the cities and it is referred to as urbanization phase (Peng, 2011, p. 586). Consequently, surplus labor in the agricultural sector is exhausted, labor in the sector continues to flow into the industrial sector due to high marginal productivity which leads to high wage rate until an equilibrium is attained (Tyers, 2013, p. 12).This point is referred to as Lewis Turning Point (Qu & Cai, 2011, p. 20). It is characterized by increase in labor costs, increase in capital investment in the sector (Du & Yang, 2014, p. 618). On the case of China, the country experienced labor shortages and there are numerous debates as to whether it has reached the Lewis turning point. Some reports show that China has achieved the Lewis turning point while some argue that China has not yet achieved the Lewis turning point. On the issue of surplus labor in china’s traditional sector, some reports have demonstrated labor inadequacy while other reports argue that there are significant amounts of unskilled personnel in the agricultural sector. This phenomenon is referred to as the China Paradox. Lewis turning point is identified by the extinction of surplus labor. A report given in the year 2010 indicated that China’s surplus labor has not decreased and it has increased significantly in the last few years. Costs associated with mobility and employment search has been identified as the major reason why there is surplus labor but very low labor migration (Yang, 2013, p. 1). Additionally, China has experienced rapid economic growth for the last the decades. The rapid growth has been associated to availability of cheap labor from the rural regions. However, the government has enacted some policies which include the one-child policy; hence, the demographic configuration has undergone change and some reports show that the surplus labor has reduced significantly in the past decade but has increased slightly in the recent years. The opponents base on this report, to argue that China has not achieved the Lewis Turning point. However, based on economic research, China was estimated to have 485 million productive individuals in the year 2010. Out of this figure, only about 200 million has moved to the industrial sector and the rest still remain in the agricultural sector (Fan, 2013, p. 1). Depending on the current China’s agricultural productivity, the sector requires only 170 million laborers (Fan et al, 2011, p. 50). Hence, there is a surplus labor of an estimate of more than 100million. Nevertheless, considering the age structure of China’s labor force, more than half of the surplus includes individuals above 40 years old while others are below secondary school education. Therefore, the total China surplus labor amounts to 46 million in the traditional sector, a figure that cannot satisfy the requirements of the rapidly growing industrial sector. In response to this data, China cannot be classified among the countries that have not yet reached the Lewis turning point; nevertheless, it has achieved this point a bit earlier than expected. In connection to these reports, the Lewis model states that; when an economy approaches the Lewis turning point, labor requirements increases and the labor market is strained by the extensive industrial growth. Therefore, it means that the unemployment rates are expected to reduce. Using the World Bank evidence, the GDP growth rate of China matches to the Lewis turning point. Records show that an economy reaches the Lewis turning point when the GDP ranges between $ 3,000- $4000 (Cai, 2012, p. 50). Hence, China has already achieved this phase of economic development despite the high percentage of labor in the traditional sector compared to other developed countries that underwent the same phase. On a personal perspective, the levels of labor in the traditional sector may be attributed to high population growth rate in the country. The country will undergo various changes after the Lewis turning point. The current reports have attempted to assess whether income inequality will reduce and the industrial composition at Lewis turning point phase (Huang et al, 2013, p 530). There are various debates as to whether the GDP growth rate will reduce when China is at Lewis turning point and to whether China will transform to a standard economy with low GDP growth but high inflation (Song & Zhang, 2010, p. 215). However, majority of the reports aim at studying the effects China will have on the globe economy. For over the past three decades, China plays a very significant role in the global economy. It is the globes industrial center; hence adjustments in the China’s economy will have extensive impacts on the globes economy. For instance, if the RMB exchange rate goes up, the costs of China exports will rise significantly and will affect the foreign exchange reserve. At the Lewis turning point, the rural labor will become exhausted leading to increase in labor-hire costs; hence China is not past this point. Many of the labor intensive industries will relocate to other developing countries with cheap labor such as some African and Asian countries. There will be development of Industries that no longer rely much on human labor. There will be increased requirement for machinery and oil which affect the prices in the international market. With regard to the above arguments, various simulation cases have been established using the Global Change Assessment Model (CAM model) (Yao, 2011, p. 60). The CAM model aims at explaining the latent effects of current global scenarios and the changing government policies on the word’s economic status in the long run. The model utilizes data from various countries where each continent has been fully represented. In China, the Lewis turning point is a very significant phase in the Chinese economy and requires crucial policies to make economy steady. These policies include the fiscal policy of expanding government expenditure and the monetary policy (Qu et al, 2012, p. 100). The fiscal policy will promote reliance on machinery as the main source of labor and promote investments in other developing countries with cheap labor. The monetary policy will stimulate a rise in the domestic costs and lower the income gap. The exchange policy will aim at reduction in the level of exports and reduce the overdependence of the economy on exports (Dorrucci, 2012, p. 1). All these factors will have immense effects on the global economy as China is the world’s manufacturing centre. Firstly, the global GDP growth will be affected extensively. For instance, in the year 2010, China’s GDP was estimated to be 10% while the globe’s total GDP growth rate was estimated to be 4.7 (Rajan & Beverinotti, 2012, p. 410). At the Lewis turning point, China will greatly impact the globe’s GDP. China is the second biggest EU international trade associate. China surpassed the United States about 6 years ago and became the Japan’s largest trade associate (Kanbur & Zhuang, 2013, p. 138). Hence, China’s rate of GDP growth has significant impacts on the EU and Japan who are among major drivers of the global economy. The East Asian countries, the US, and the developing countries’ economies are also associated to China because it is the major exporter of manufactured goods. China’s economy has slightly slowed down from the double digit rate from the previous decades which portrays that China’s economy is under control. If China goes beyond the LPT, the growth will continue to reduce significantly. Most developed economies may panic that they would suffer from China slow growth rate; however, it is anticipated that China’s growth rate cannot go below 7% before the year 2030. Secondly, the changes will impact the income per capital rates PPP. After implementation of the China’s policy package the government will spend heavily on infrastructure development; national security systems; employment provision; and economic development which lead to an increase in GDP (Milana & Wu, H. X. 2012, p. 100). The government expenditure in education and R&D will have long term effects on the productivity of the country. The monetary policy will result to a decrease in the percentage of personal savings and the level of non-governmental investments which results to an increased in the GDP For instance, four years ago, the income per capita at PPP of China was estimated to be 7000 US dollars; in Japan 28300 USD; in South Europe, 25500 USD; and in the US, 30800 USD (West et al, 2013, p. 1). If China implements the policy package to control its economy at the LTP, the CAM model estimates that it will have effects in global economies and the per capita income PPP by the year 2030 will be as follows: China ($43000); Japan ($50000); UK (46000); US (65600) which is a very significant difference (Hung, 2013, p. 1345). Additionally, at the LTP, the personal income will improve and the rates of economic inequality will be minimized which will lead to expansion in the China’s domestic spending resulting to a situation whereby the China’s economy is driven by domestic spending. The CAM model shows that the policy package will lead to an increase in the overall global domestic expenditure from 3.5% to 13.5% by the year 2030 (Golley & Meng, 2011, p. 559). The global prices and cost inflation will also increase significantly. However, in majority of the developed countries such as the US, Japan and the EU, this effect is not significant. The policy package will transform China from an increasing GDP with low inflation economy to an economy of a stable GDP with high levels of inflation. Due to the increase in domestic spending as the economy undergoes transformation, there will be increased demand for goods which will result to high demand for labor as industries expand to satisfy the growing consumption. According to the neoclassical theory, an increased consumption and government spending is an indication of the boom cycle which results to employment of majority of the residents (Démurger & Li, 2013, p. 35). At the LTP, the level of employment in China is estimated to increase significantly by 3.5% in the coming decade (Bowman & Conway, 2013, p. 1). When surplus labor becomes exhausted, the cost of labor hire will rise significantly. Most companies will invest in the less developed countries due to provision of cheap labor which will have overall effect of the global employment structure. For instance, the CAM model estimates that in the US the employment will increase from 60.2% -60.8%. In the UK, the employment rates will increase from 67.75 to 69.55 (Fang, 2010). Also, the overall global exchange rate will affected greatly at this phase of economic development. Currently, there are numerous arguments that the China RMB is not properly appreciated. Some countries such as the United States link it to trade discrepancy to China importations. It is argued that if the RMB is appreciated, there would be a balance between the two countries. Additionally, some reports argue that in the reality, the US trade discrepancy originates from the country’s industrial formation and the extensive growth in the finance capital (Cai, 2010, p. 108). Reports demonstrate that the finance cost in the US consumes more than 70% of the GDP because it does not manufacture most goods but imports them from countries such as China (Winiecki 2012, p. 315). The development system of the United States has resulted to inequality in the world economy. Developing economies such as China manufacturer products and export them to the US and build up extensive exchange reserves, which is used to strengthen the ties between the two countries. If the RMB is appreciated above the current level, its export prices will become less competitive in the global market. The developing economies will suffer high expenditures for electronic goods. Additionally, appreciation of China’s currency will mean an increase in prices for other countries which might lead to a decrease in the level of the country’s exportation and a fall in the exchange reserves. Four years ago, the exchange reserve of China was estimated to be almost partially equal to the GDP (59%) (Zhang et al, 2011, p.548). With the same rate, the exchange reserve for China is estimated to grow up to 94%, but after the implementation of the policy package, the CAM model estimates that the country’s exchange reserve will reduce to 86% (Fukumoto and Muto, 2012, p. 70). This scenario will have significant impacts on the economy of both the developed and the developing countries in the globe. When the costs of the Chinese commodities increase, the consumption demand from the developed countries will shift from China to other developing countries. Consequently, these developing countries will enable these developing countries accumulate exchange reserves. In conclusion, this paper has assessed whether China has attained the Lewis turning point and the consequences it will have on the globe. On a personal perspective, China has achieved the Lewis turning point, a little earlier than expected. This point may last for several decades and significant changes will be experienced in the country; the labor hiring cost will significantly increase and majority of manual industries will relocate to other developing countries with cheap labor-force. There will be development of industries that are not labor intensive and the government will raise its expenditure on R&D and schooling. There will a great percentage of urban migration. These changes will have significant impacts on the overall global economy. The policy package which will be implemented at Lewis turning point and will have significant effects on other developed countries in the globe. The current constant and rapid economic growth in China is very significant to the globe economy. However, China should work to reduce its overdependence on export revenue as it surpasses the Lewis turning point. Bibliography Zhang, X., Yang, J. and Wang, S. 2011, China has reached the Lewis turning point. 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Understanding China's workforce competitiveness: a macro analysis. Journal of Chinese Human Resource Management, 2(1), pp. 8-22. Read More