Opinion - News Analysis   

Labour no more cheap in factory of the world

Pallavi Aiyar

The shortages China is experiencing in migrant workers coupled with its rapidly greying demographic profile constitute a challenge to the sustainability of its current economic model.

"THE CHINA miracle," an economic renaissance that has seen the country metamorphose into the factory of the world has largely been powered by a cheap, ostensibly bottomless pool of labour that has helped make the price of "made in China" products unbeatable the world over. In the last couple of years, however, the inconceivable appears to be happening. China is running out of cheap labour and precisely in the area of maximum manufacturing demand: the Pearl River Delta (PRD).

The PRD, which encompasses the southern Guangdong province and Hong Kong, is the country's weightiest economic powerhouse, churning out almost a third of the country's exports. Choc-a-bloc with factories producing textiles, shoes, toys, and other light industrial products, Guangdong province is currently experiencing a labour shortage of almost two million workers, according to local media reports.

Earlier this month, the provincial administration thus announced a sharp hike of some 18 per cent in minimum wages across the region, in an attempt to alleviate the situation and make the province a more appealing destination for the 23 million migrant workers that form the bulk of the province's workforce.

These migrants tend to belong to China's poorer interior provinces and often travel for days to find work along the coast. This extraordinary degree of mobility has been a dream for businesses since it has meant that factories have been able to cluster along the coast, surrounded by their suppliers and near the container ships that take their goods abroad.

Through the 1990s the supply of migrant workers far exceeded the jobs. Zhang Zhi Tao, director of the Labour Bureau in Dongguan (a city near Shenzhen), recalls the days when he had to go into the streets to persuade job-seekers to return to their homes. There were simply not enough jobs to go around.

Since 2002, however, he says the situation has dramatically reversed.

It is not that China has suddenly run out of workers. Rather as Mr. Zhang explains, workers are no longer willing to sell themselves cheap and put up with the sweatshop conditions in which for years they laboured without complaint.

A range of farm subsidies following the central government's determination to build what has been dubbed "the new socialist countryside" have helped boost agricultural incomes.

According to official figures, the average rural per capita income in 2005 increased by 6.2 per cent over the previous year, to touch 3,255 yuan ($403). As a result more workers are choosing to stay at home, where incomes are still lower than in coastal cities, but so is the cost of living.

In an effort to lure workers back to the factories, cities across the southern coast have repeatedly raised minimum wages in the recent past. Thus for example last year Guangzhou, the capital of Guangdong, and the special economic zone of Shenzhen, pushed up their minimum wages by a third, to $83 a month.

This month's hike sees minimum wages increase to 780 yuan ($97.5) in Guangzhou and 810 yuan ($101) in Shenzhen.

According to the Xinhua news agency, Fang Chaogui, director-general of the Guangdong Provincial Bureau of Labour and Social Security, told a press conference in Guangzhou that this was the seventh time Guangdong province had raised minimum wages in the past 12 years. He added that this latest hike was the biggest yet.

The upshot of the labour shortages is that while Chinese salaries might remain low by Western standards, other Asian countries including India are increasingly looking more cost-effective.

PRD manufacturers on the whole operate on thin profit margins so that rising salaries and the resultant increase in production costs could force them to either move operations to the interiors of the country, closer to workers' homes or alternatively move outside of China to Southeast Asia or India.

A move to the interiors would, however, bump up the costs of business substantially, since infrastructure is less developed and logistics more complicated away from the coast.

Attractive option

Relocating to other lower-wage countries thus may prove to be an option manufacturers are increasingly inclined to consider. Dream International, the world's largest maker of stuffed toys, announced last year that it would hire 6,000 workers in Vietnam this year to fill expanded factories, but none in China. The company is operating at 80 per cent capacity in China but it simply cannot find enough workers.

Minimum wages in most parts of India range from $1-2 a day, well below the equivalent wage level in China. Even in Kerala, which has one of the highest wage standards, the daily minimum wage is only Rs.134. In 2003, the average compensation per hour for a worker in heavy manufacturing was $0.43 in India as opposed to $0.75 in China, according to the IMD competitiveness yearbook.

The recent increase in minimum wages in China thus makes India's competitiveness on labour costs even stronger. For Beijing, the shortages China is experiencing in migrant workers in the PRD coupled with its rapidly greying demographic profile constitute a fearsome challenge to the sustainability of its current economic model. For India, however, these may constitute a window of opportunity.

Of course China's challenges will not automatically translate into higher growth for its southern neighbour. In order to benefit, India will require concerted policy efforts aimed at improving human capital, creating productive jobs as well as greater labour flexibility. If India is successful in these, a decade or so down the line, the dragon might finally have met its match.

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