IBUS60010 Report: Factors Shaping the Global Economic Cycle

This report analyzes the impact of low labor costs on the global economic cycle, focusing on the factor endowment theory and its implications for international trade. The report addresses two key questions: how low labor costs have shaped the global economic cycle, and whether this trend is likely to continue. It examines the examples of Germany and China, and identifies emerging economies like Thailand, Indonesia, Vietnam, India, and Malaysia as potential future drivers of the global manufacturing industry. The report further assesses the shift from labor-intensive to capital-intensive production, the increasing labor costs in China, and the potential for countries like India to compete. It also critically evaluates whether the economic cycle based on low labor cost is likely to continue, considering factors such as wage increases, the Lewis turning point, and the changing nature of the global workforce. The report concludes that while low labor costs have been a significant factor in the past, the shift towards capital-intensive production and the increasing skill of the labor force suggest that the economic cycle is unlikely to be solely dependent on low labor costs in the future.

ECONOMICS ASSIGNMENT

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Factors affecting the Global economic cycle
Prepared By
Student’s Name:
Date: 26th February, 2019

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Executive Summary
The global economy is usually characterized with the uncertainty along with the dynamic
changes caused by the numerous factors that gradually determines the future economic
landscape of the international business. In this assignment the impact of the low labor cost
factor endowment in shaping the global economic cycle and the probability of the continuance
of this scenario in the future have been analyzed with the help of a set of questionnaires
consisting of the two questions.

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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Main body...................................................................................................................................................4
Answer to Question No. 1...........................................................................................................................4
Answer to Question No. 2...........................................................................................................................7
Conclusion.................................................................................................................................................11
References.................................................................................................................................................12

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Introduction
The theory of the factor endowment in international trade says that higher the amount of the
factor endowment higher shall be the amount of the comparative advantage in terms of
international business and vice-versa. In our case the contribution of the low labor cost factor
endowment has been analyzed in the context of shaping the global economy in the following
section by addressing the two key aspects in the following section.
Main body
Answer to Question No. 1
Characterizing the global economic cycle based on low labor cost factor endowment
It has been evidenced from the study of the past trade history of the world that in general
when the per unit labor cost of the product has shown a declining trend then such trend
positively contributed towards the global trade of the country in terms of its export
performance. This perception can be justified with the help of the example of Germany that
had to lose its market share in the world trade in terms of its export of the industrial products
at the beginning of 1990 just because of the high labor cost. Thereafter it adopted the policy of
the moderate wage payment because of which it could claim back its previously lost market
share in world economy (Dosi, et al., 2019).
In this case the second-best example can be of China that has recently emerged as a global
economic leader and is in the way to replace the United States in near future. The
manufacturing sector of the China has clearly indicated the fact that it is the cheapest labor
sources that have been drastically employed in the assembly work of the manufacturing sectors
of the country for the various products being exported to European and north American
Markets. But recently the demand of the labor force in Chinese economy has shown a huge
increase as a result of which it is losing the cheapest labor cost. The new economies which are

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seen as significant ones to impact the future global economic cycle due to their low labor cost
factor endowment are Thailand, Indonesia, Vietnam, India and Malaysia just because of the fact
that they all are focusing on the production of the labor intensive products like basic consumer
electronics, textiles and toys etc. It is simply because of the abundance of the cheap labor force
and thus is going to dominate the world manufacturing industry (Oh, et al., 2019).
The major reason behind losing its dominance by the Chinese economy is that since 2010 it has
shown an increase of 80% in its manufacturing wages due to its major focus on the up
gradation of the industrial products from the medium to high technology based products as a
result of which the Chinese manufacturing is only 4% cheaper in comparison to the US
manufacturing.
It is the common theory of the international trade that lower the cost of manufacturing higher
shall be the prospect of the international trade in terms of export and shall contribute towards
the boom in the global economic growth.
As per an article of Matthias Lomas published on february18, 2017 as “which Asian Country will
replace china as world’s factory” India can prove itself one of the major competitor to china due
to its cheapest labor force that too particularly in the electronic assembly that was further
substantiated from the announcement made by the Chinese giant Huawei for the manufacture
of the three million smart phones in a year. This was further evidenced in the ear 2015 when
the global FDI receipt of India exceeded the amount of similar investment made by China
(Kweon, 2018).

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Sources/: ResearchGate
In 2017 the amount of the production made by the Chinese economy was $23.12 trillion that
made it the world’s largest economy. One major factor to be noticed here is that it is due to the
lower standard of living of the Chinese population that’s why their labor force is ready to work
at lower wages too.
Sources: The Hindu business Line

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It is not only the manufacturing sector but also the agricultural sector in which its labor force
has significantly contributed towards the agricultural production, because of its high population
that has assured he availability of the cheapest labor in the same sector and the same trend has
also been noticed in the service industry of the china.
But recently the increase in the standard of living of its workforce as supported by the huge
increase in its wage cost has brought a big trouble for its own and world economy too because
of the inflationary trend shown by the same. But at the same time, it has the positivity
associated with it. The main positive factor is that because of the wage increase the consumer
spending in the Chinese market and the consequential demand of the manufactured product
and services too have been increased. But the same is diverting its focus from labor intensive
production to capital intensive production thereby providing the resource efficient gains to its
economy and in future can continue the cycle of growing demand (Cayon, et al., 2017).
Hence it is quite evident that the factor of lower labor cost endowment is no more significant in
now a day when the world is focusing on the capital-intensive production by diverting itself
from the labor-intensive production and thus costly labor force is also no more a hurdle in the
way of global economic growth and international business.
Answer to Question No. 2
Critical assessment whether an economic cycle based on low cost labor factor endowment is
likely to continue.
As per one of the articles published in the chinaDaily.com though the major reasons behind the
rapid growth rate in the Chinese economy in last decades and the consequential effect on the
world economy was lower labor cost, but the same is not be continued in future. This is clearly
reflected from the two basic facts, first the rate of increase of its wage is 213% in the financial
year 2016. This is due to the significant shift in its production structure which is primarily
focused on the high technology based production as a result of which the apparel industry

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production has been significantly shifted to the countries like Bangladesh, Malaysia etc. in
which the labor cost is significantly lower than it and moreover these economies are still
dependent on its labor intensive production (Boghossian, 2017).
Second one of the major reasons behind the lower labor cost in past decades in China was the
rapid growth of its population, but in recent year the rate of such growth has shown a declining
trend.
Most probably that is the reason why it is being observed that the china is heading towards the
Lewis turning point that talks about the depletion of the surplus labor force of the China and
the consequential increase in the amount of wages and other benefits associated with the labor
force.
It is because one of the major reasons behind the Chinese dominance in the world economy
was its cheapest lower force that is facing strong competition from the countries like Indonesia
and Vietnam (Awasthi, et al., 2018).
Further there was a time when there was abundant labor in China, but now it is struggling with
the shortages of labor supply and its implication on the Chinese and Global economy is quite
noticing too. It has somewhere distorted the extensive growth model of china because the lack
of sustainability is easily evidenced from the last few years. Its effect on the global economy can
be easily seen from the fact that rising labor cost shall directly affect its income, prices and
profit of the corporate groups in China as it is finally going to affect its international trade too. It
is because foreign manufacturer would likely to resist in making investment in the Chinese
production houses as they must pay more to the local Chinese laborers rather shall prefer to
deploy their domestic labor force. From the trading viewpoint too, there shall be less demand
of the Chinese products that is becoming costly due to the significant increase in the cost of
production because of the wage increase (Berg, et al., 2019).

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Source: Hallward-Dreamier and Nayyar (2018)
Though often it is being said that due to the rising labor cost the manufacturing jobs are going
to move towards Africa and Latin American countries, but at the same time it is to be made
clear that they are not in such a technological advantageous position so that they can grab it so
quickly. Though in terms of demographic feature it is being told that the ratio of the Chinese
elderly population group is going to be too high by 2050, but it is to be checked that it is the
workforce which is to be checked not the age (White, et al., 2018).
Though in last few years the growth of the Chinese economy has shown a slowdown nature,
but it is not because of the cyclical downturn.

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It is quite evident that the low labor cost endowment in china has been shifted towers the
country like Vietnam etc., but the rise in labor cost too is not going to hamper the extensive
growth of the world economy to recover it from the past recessionary stages. It is because
increase in labor cost is obvious as now the major countries of the world which are significantly
contributing towards the growth of world trade are driven by capital intensive production by
shifting their focus from labor intensive production. Moreover, the quality of the labor force too
has been drastically changed in last few years. They have become more skillful and efficient and
in such a case denying their justified demand shall be too be difficult. But focusing on high
technology-based production too shall contribute the future boom trend of the economy. In
other words, it may be said that the low labor cost based economic cycle of growth cannot be
expected to be continued in future. Though at the same time the higher labor cost is also not
going to destroy the world economic growth.
Moreover, it is also to be kept in mind that rich world growth also needs the real growth in the
wage rate too. It simply means that only increase in the wage is not sufficient enough to ensure
the growth of the economy and the world economy rather it is the control over the inflationary
pressure that shall ensure the real growth. That simply denotes the figure that wage increase
should be justified with the increase in the labor’s productivity too. If the productivity grows
then there shall be no effect on the wage increase in the cost of the production. Hence it is to
be focused that wage increase is to be counterbalanced with the productivity increase.
Like in recent years it has been noticed that in US there was shortage of labor supply for those
jobs which were low paid. There is another side of the fact being associated with the wage
increase. The increase in the labor cost should not only been considered as increase in the cost
of production, but also a source for spending on goods and services that are ultimately the
revenue and profits for the business.
Hence from the above it is seen that in the present scenario it is difficult to expect that the low
labor cost endowment can contribute to the world economic cycle of growth or they may be
continued.

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Conclusion
From the above it is quite evident that in the present economic scenario the applicability of the
labor cost endowment theory in the growth of the world economy is not justified.