China could lose its competitive edge

COLUMBUS — With the Chinese Communist Party’s recent publication of its blueprint for reform, economists worldwide are focusing on a key question: Will the economy of the most populous country on Earth, which has seen a rise in workers’ wages by nearly 14 percent per year over the last decade, soon lose its competitive edge in the global economy?

Ian Sheldon, the Andersons Professor of International Trade at Ohio State’s College of Food, Agricultural, and Environmental Sciences, predicts yes.

“Despite the global recession, the value of China’s total trade accounted for 48 percent of the country’s GDP in 2011,” Sheldon said.

Factor

“This expanded participation in international trade, a significant factor in China’s economic growth, has been driven by its transition to a market-oriented economy involving rural-urban migration of over 150 million workers, industry gaining access to foreign technologies, capital and intermediate inputs, entry of multinational firms, and accession to the World Trade Organization.”

Sheldon said as China’s share of the international trade arena has grown, so too have livelihoods of its people.

“By the end of the 2000s, average real wages had risen by 13.8 percent per annum, outstripping China’s average real GDP growth rate of 12.7 percent per annum,” he said.

“If this continues, average real wages will rise to $20,000 by 2020, with the potential of reducing China’s competitive advantage.”

Rising wages in China have been driven by labor market reforms linking wages to productivity levels, the one-child policy for urban citizens which has caused labor force growth to slow, and an imbalanced labor migration system resulting from the country’s historic laws linking a person’s residency status and their eligibility for state benefits to their place of birth, Sheldon said.

Additionally, factors such as rising education levels and private and national investment in research and development have contributed to a rise in labor productivity supporting rising wages in the country, he said.

Economic reform

However, if China is to remain a key player in the global economy, economic reforms are needed to rebalance the Chinese market, Sheldon said.

“If China wants to transition smoothly to a more skill-intensive, middle-wage economy, labor and rural land market reforms are essential,” he said.

Options

Sheldon highlighted possible options to attempt this rebalance, including removing restrictions on rural to urban migration, the establishment of land ownership rights for rural farmers, and a move to focus on rural citizens as consumers since their savings accumulation tends to be at higher levels than their urban counterparts.

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