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The labour cost advantage and china

Introduction China has an emerging economy and therefore, produces many products. On the European market, there is a large demand for these products. China has relatively low production costs, which makes China an interesting country to import from. Chinese wages have risen sharply with globalization, average wages in China have increased every year since 1978. The average wage in urban areas was 21.000 Yuan in 2006, which is four times higher than the average wage in 1995. How will the wages develop in China? The question for this research is:
Has China the labour cost advantage?
Content Has China the labour cost advantage? 1
Introduction 2
Content 2
Offshoring in general 3
Why are companies outsourcing to China? 3
Employment in China 4
What was China’s economic reason to enter the WTO? 4
How have wages been developed in China? 6
Wages by Ownership 7
Wages by Region 9
Wages by Sector 10
Wages compared with other countries in Asia 11
Has China the labour cost advantage? 12
Bibliography 13
Offshoring in general Offshoring is defined as the movement of a business process done at a company in one country to the same, or another company, in another country. Most of the movements to lower-costs destinations take place in the own management. Outsourcing is the movement of an internal business process to an external company in the same country and the movement of an internal business process to an external company in another country. Offshore outsourcing occurs most often. [1]
Why are companies outsourcing to China? There are different reasons why companies outsource to China, but some of these reasons are similar. Several reasons for outsourcing to China are [2] :
Cheap Labour:
China offers savings up to five times compared to the U.S. The labour costs in China are 50 percent lower than in India.
Labialization of laws and government policies:
Government has passed laws which protect private ownership and intellectual property in the country. It has also embraced public/private partnerships and domestic/foreign partnerships.
Existence of offshore manufacturing and physical proximity to major markets:
China is the manufacturing plant of the world, which provides sound base for outsourcing, strengthened by risk mitigation and greater stability.
Employment in China Although China is still a developing country with a relatively low average income, it has a tremendous economic growth since the seventies (9.1 percent in 2004). This can be related to a great extent of an economic liberalising policy. The Gross National Product raised with 400 percent between 1978 and 1998 and the international investments grew tremendous during the nineties. The agriculture is by far the most important sector. Figures of 2007 show that 41 percent of the total population of China is employed in this sector. Nevertheless, the agricultural land limits to around 11 percent of the total Chinese land surface. Since the seventies, the agriculture is privatised, which yield a tremendous production growth.
Figure 1: Economic growth, percentage per year [1] 4
What was China’s economic reason to enter the WTO? Joining the WTO is a very important event for the development of China at the beginning of the 21st century. WTO membership opens up China’s market for more international trade and investment, and opens up the world economy for China’s exports. Some researchers see it as a positive force for China’s economic development while others are concerned that the competition of foreign imports and foreign enterprises in China might destroy important domestic enterprises in China’s agricultural, manufacturing and service sectors.
The main motivation of Premier Zhu Rongji in promoting China’s entry into the WTO was to use foreign competition to speed up economic reform in both the industrial and service sectors. In the late 1990s, reform in both sectors was slow due to the inertia coming from vested interests of a group of formerly appointed managers holding on their positions. [3]
How have wages been developed in China? Average wages have increased every year since 1978. In 2006, the average wage in urban areas in was 21.000 Yuan, which is four times higher than the average wage in 1995.
However, as wage levels increased, so did discrepancies between different sectors, types of ownership and regions. In general, average wages were higher in share-holding, foreign-owned and state-owned enterprises, and were lowest in locally funded enterprises, with wages in enterprises owned by Hong Kong and Taiwanese businesses in the middle.
A more significant gap emerged between different occupations and industrial sectors, and especially between low-skilled and high-skilled workers. In 2006, the average wage of employees in primary industries was only 786 Yuan, which is a quarter of the average wage of employees working in financial services (3.273 Yuan) and one-fifth of those working in the computer industry (3.730 Yuan).
Wages by Ownership Between 1995 and 2007, the average annual wage for employees grew more than four times, from 5.600 Yuan to 22.700 Yuan. Figure 2 shows the average annual wages of staff and workers by type of ownership from 1995 until 2007. In China, there were three “periods” of wage reform. The first period of reform started around 1985. Before this year the average wage growth was around 4.9 percent per year. In the period 1986 until 1997, employment in jointly owned enterprises experienced a tremendous growth. The average wage growth per year was still quite low, with an average of 3.9 percent, which was partly due to a negative growth in 1988 and 1989 (because of inflation and political upheaval).
The third period was from 1997 until 2007. From 1999 on, the average wages were rising rapidly with an average of 14 percent per year. This could be because of China’s preparation for getting into the WTO, as well as the restructuring of state-owned enterprises which started in 1998. Wages in the state sector began to increase in the late 1990s, reaching 14.358 Yuan in 2003, surpassing private sector wages by a narrow margin for the first time since reform began. By 2007, the average wage in the state sector was about 11 percent higher than in the private sector.
The state-owned sector has been restructured in the 1990s. In the planned economy, they had low productivity, disguised unemployment (because of China’s political function of maintaining low
unemployment) and limited profits. They had a wage system which was dependent on seniority. In the 1990s, the Chinese government would not include the losses of their enterprises. This is why they began with restructuring. They started by allowing privatisation of small and medium state-owned companies. After that, the government started with a more aggressive restructuring. The objective was to shut down loss-making companies and establish modern forms of corporate governance. These reforms led to many layoffs in state-owned companies. From 1996 to 2002, around 40 million employees were laid off.
As can be seen in figure 3, the Chinese government succeeded in downsizing the employees and the productivity in the state-owned sector increased.
Figure 2: Annual wages of staff and workers by type of ownership in thousand Yuan
Source: China Statistical Yearbook
Figure 3: Employment share and labour productivity for state owned enterprises
Wages by Region Figure 4 shows the annual wage of employees divided in different regions in China. The 30 provinces are divided by the National Bureau of Statistics of China in six regions: Bohai (Beijing and surrounding
provinces), Southeast (including Shanghai, Guangdong and other coastal provinces), Northeast, Central, Southwest and Northwest China. Tibet is not listed, since there is limited information about this region. Figure 3 presents the real annual wage of employees across the six regions in China, showing the different wage patterns.
During the first period of reform, the average wages were grouped. Later on, the wages in the South-eastern and Bohai regions began to rise. As can be seen in figure 4, the wages in the South-eastern and the Bohai regions now have the highest average wages. The difference between these two regions and the other four regions is around 30 to 40 percent.
The highest growth in the past 20 years has occurred in the South-eastern and the Bohai regions, the coastal areas where cities as Beijing, Guangzhou, Shanghai and Shenzhen are located.
Figure 4: Annual wages by Region in thousand Yuan (Source: China Statistical Yearbook)
Wages by Sector The wages by sector have about the same pattern as the wages by regions. In figure 5 the wages across sectors are showed. Remarkable is that the wages across sectors stayed clustered until 1993. After 1993, the average wages for Banking

Determinants And Effects Of An Oligopoly Economics Essay

What is an oligopoly?
In the harsh, unsympathetic world of business, businessmen and women everywhere seek to maximize his or her profits. Thus, it would be very much of their interest to have greater control over the goods or services which they produce. Bigger and more established companies would often weigh a much broader spectrum of influence to control market prices, driving other new or upcoming companies to leave the industry all together and discouraging other interested ones. Competition is restricted only between those few large companies. This is an economic reality existing in our world today called oligopoly.
The online Oxford dictionary defines oligopoly as a state of limited competition, in which a market is shared by a small number of producers or sellers. Oligopolistic firms offer identical or homogenous products, such as petrol; but these companies may also produce differentiated products that may be similar in nature but differ in physical as well as qualitative aspects, like sneakers. These many products can be identified in the market by an ingenious idea called branding. For instance, the market for petrol in Malaysia is controlled by Petroliam Nasional Berhad (National Petroleum Ltd. – PETRONAS), as well as other foreign companies like Shell and Caltex; while Nike, Adidas and the likes control the market for sneakers. In reality, because of the limited number of producers, their actions would bring substantial effect to the balance of the market. These companies may act together as an entity in a whole to form a monopoly – lowering their productions while raising the prices above marginal cost, or they make decisions independent of each other (acting as a competitive market). Therefore, a key feature of oligopoly is the tension between cooperation and self-interest.
Factors of success for a collusion The many individualistic elements of an oligopolistic market may or may not make an agreement, whether open or tacit, about the quantities to produce or prices to change. When this arrangement is made, it is called a collusion; and the group of companies colluding amongst each other may be called a cartel. Once the agreement is made, the cartel effectively functions as a monopoly, and would then need to decide on two important factors – efficiency and equality, regarding to the nature of their cooperation; in order to ensure their success. In general, there are many factors that would determine the outcome of a collusion. There must be limited number of firms; firms must also be equally efficient; and the colluding firms must successfully dominate a defined market.
The ability to regulate prices among the various members of the cartel depends on the number of firms in participation. Technically speaking, coordination is more difficult among larger number of individual components. Successful price fixing depends on the synchronization between the firms to effectively adjust and allocate only desirable levels of resources to their output, and this can be done successfully when the number of firms is small. Besides that, it is much more difficult to detect a defector among the ranks when the number of firms rises. For instance, if ever Northrop, Boeing and Lockheed formed a cartel to monopolize the aviation industry in the US, a significant increase in one company’s production level would in turn increase substantially the cartel wide output too. Therefore, the ‘traitor’ is easily identified. Compare this to say a collusion of clothe companies (there are probably hundreds, or even thousands in the US alone) – even a significant rise in one firm’s production level would hardly make a bulge in the cartel wide output. On the other hand, successful collusion requires a noteworthy amount of communication between the various administrative members of each firm. A larger number of firms would make this increasingly difficult and risky (especially for a tacit collusion) as the probability of being detected by a third party rises too. In a theoretical aspect too, the price of goods would fall further with an increase of producers. Therefore, prices would cease to be of oligopolistic nature – that is lower than the monopolistic but above the marginal cost – and approach the competitive market’s level.
For a collusion to be successful, it would be better for all the members of a cartel to be of equal quality, efficiency and size. Other things being equal, firms with lower efficiency – that is with a higher production cost – would certainly want to lower production and raise prices as to maximize profit. Therefore, even if there is a commitment in place, the inequalities experienced by firms in a cartel would definitely induce some of them to cheat. The same concept applies in relation to the companies’ size. Generally, if the firms colluding with one another are of equal size, they would generally like to allocate resources on an identical scale; and same to for a larger firm. However, smaller firms prefer a pro rata concept, which is an unconditional reduction for the larger firms’ part. This would generate an opportunity for a dispute to arise.
Collusion among firms is also easier when there is product homogeneity. When the goods or services produced by those companies are similar, competition is only limited to these firms and therefore, would benefit them directly. As an example, compare a cartel between Nike and Adidas with a cartel between the former with Calvin Klein. While the first group is a collusion between sports footwear producers, the latter is between a sports footwear with a formal footwear producer. In these cases, evidence would point that the first collusion would be more successful than the second one. There is more coordination between producers of homogenous products because the demand for these goods are unique to that specific industry. On the other hand, collusions between producers of heterogeneous would not work out that well because there are different demands for the goods sold. Hence, the target market is dissimilar and coordination is rather difficult to occur in two separate and unique audiences.
The elasticity of the goods or services produced can also determine the outcome of a collusion. In general, the goods or services provided by the firms in a cartel must be inelastic. When there are no close substitutes for a particular product, and consumers cannot easily change their buying preferences, the effect would be that the oligopolistic firms can benefit substantially when a collusion is made and the goods’ prices rise above the competitive level. This can be reflected in the $150 million investment of Microsoft in non-voting shares of Apple in 1997. Although this is seen as a legitimate business deal between the two giant computer operating system producing companies, this factual account can explain why inelastic goods would lead to a successful collusion. Operating systems for computers are relatively very inelastic, contributed by the fact that there is a boom in the number of computer users in the US (and indeed, the world) but only a handful of operating systems to choose from. Therefore, when Microsoft ‘helped’ Apple, computer users cannot easily change their choice even when the prices rose. In reporting its fiscal 1998 first-quarter financial results, Apple clocked in a profit of $45 million and its stocks rose 20%, while Microsoft, already the most popular and preferred choice of operating system, got a huge boost in public relations.
Effects of oligopolies on public interests Generally speaking, a cartel of oligopolistic firms has many negative impacts towards the consumers. This happens because as a cartel, the firms effectively behave much like a monopolistic entity and therefore, retain much of the undesirable elements of a monopoly.
Firstly, prices are overcharged beyond the market level whenever a collusion is formed. The price would normally be above the marginal cost, but below the monopolistic level. Therefore, firms usually would receive supernormal profits compared with the zero economic profits they would have earned if they remained perfectly competitive. Look at the graph below:
The oligopolistic firms would choose an output level where their combined marginal revenue equals their combined marginal cost. The price is then determined by the market demand of the same output level. The profit received by the companies is the area of the rectangular box ‘abcd’. Therefore, like a monopolistic firm, the prices concurred would actually be a burden to the general public. Wages of the public, where most would be in the middle-income group, are usually stagnant in the short-run. Thereby, the public would sometimes need to make uncomfortable adjustments to their lives to make do with the rise in price of a usually inelastic need; as what we can and frequently see whenever OPEC (Organization of the Petroleum Exporting Countries) raises the price of oil.
In addition, whilst the price rises, the quantity produced would dwindle instead. This would definitely produce a shortage in the market, creating a conducive environment for market discrimination to happen. When this happens, the goods may not be bought by customers who value them the most. Thus, the market surplus as a whole becomes a lopsided affair. While producer surplus is outrageously maximized; the same cannot be said about consumer surplus. Questions of efficiency and equality are without doubt being subjugated. This is definitely not in the best welfare of the public. This is one reason why antitrust measures, such as the 1890 US Sherman Antitrust Act and the position of the Competition Commissioner of the European Union are created.
Besides that, there are many other adverse effects of oligopolies on the public. High prices in the market do not guarantee quality. Once again, the public is cheated of their right for prices corresponding to the quality of the goods or services. High entry barriers prevent smaller enterprises to compete on the scene – preventing the prices to fall further towards the more ethically fair level of the perfectly competitive one. Freedom of choice is also being restrained, as consumers are forced between choices of goods only provided by the colluding firms. There, is no questioning the rationality of policymakers (who had, in the US and Europe, recognized this problem since before the 19th century) that curtailing collusion would be for the best interest of not only the public, but the welfare of the nation involved.