The Collapsing Dream of Cheap Labor in Asian Countries

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Can cheap labor be considered as a blessing for further development or is this just a collapsing dream, a particularly weaponized variant of exploitation for the third world economies?

Cheap labor is one of the key components that boost the modern capitalistic economic system. The rise of globalization and the socio-economic evolution during the last century promoted cheap labor extensively. In this era of globalization, exploitation has multi-faceted forms and cheap labor can be considered as one of the most influential means of such practice.

Cheap labor, by default, is encouraged through the colorful promises of elevated standards of living and subsequent overall economic development for the country/region. Modern capitalistic societies proclaim that these workers who are selling their sweat in exchange for quite a marginal wage are just obtaining what they actually deserve. But there are often controversies regarding this issue and despite being the life-blood of the capitalistic global economy, cheap labor is always criticized due to its incompetence in improving the overall standard of living for the workers in the long-run.

So, let’s figure out the actual nature of the modern-day practice of cheap labor. On one side, capitalists and industrialists are trying to convince the world that cheap labor is the primary step of further development — the ticket for the very long journey of converting an underdeveloped nation into a developed one. On the other side, the exploited voices are raised frequently against the oppression, demanding wage increases and the basic fulfillment of their necessities. So, it’s high time to find out what the actual scenario is. Can cheap labor be considered as a blessing for further development or is this just a collapsing dream, a particularly weaponized variant of exploitation for the third world economies?

Cheap Labor: How it all Started?

Certainly, cheap labor existed in all ages — from the ancient civilizations to the feudal societies. But the modern practice of cheap labor has some very distinguished features and was precisely initiated with the industrial revolution. One might consider cheap labor as only a phenomenon related to the developing/underdeveloped countries. But the very root of cheap labor was traced back to the era of the industrial revolution — in particular, the 18th century. During that time, the large influx of capital and mechanized means of production created a brand new economic system where the makers (labors) were not the owners of the products. Rather, it was the capitalists who had the ownership and the labors, the actual makers of the products were compensated by means of wage.

Now, this transformation of livelihood from the independent farmer/artisan to industrial labor would pose no problem if there were limited numbers of laborers available to the industrial sector. But practically the whole economic system was going through the transformation and those who were making a livelihood through independent means were forced to join the industrial workforce due to that transformation (their lands were snatched away and artisanship was compromised due to the massive industrial productivity). This enormous supply of labor pushed down the wage, increasing the competitiveness of those industrial endeavors. Thus, it was cheap labor that facilitated the industrial revolution in the first place.

Lewis Model, Globalization and the Shifting of Cheap Labor

As the industrialization process began with the support of cheap labor, the Lewis model of development economics (developed by Sir William Arthur Lewis) came forth. According to this model, there are two sectors in an economy — the capitalist sector and the subsistence sector. The capitalist sector offers more wages comparing to the subsistence sector; thus attracting the labor pool from the later one. So, with the inception of the industrial revolution, the transition to the capitalist sector began. During the transition, though more and more laborers entered the capitalist sector — the wage rate remained unchanged. The reason was the abundance of labor from the subsistence sector. Eventually, this labor reserve was exhausted and the dualistic economy integrated into one — triggering the Lewis turning point where wage rate started to rise.

The pioneering countries of the industrial revolution faced this situation which reduced the competitiveness of their industrial sectors to the other markets that still offering cheap labor. As their domestic labor supply was saturated, they started to look forward to alternatives. This was the precise point when the practice of cheap labor was shifted to the underdeveloped/developing Asian nations from those developed one.

Globalization played a crucial role here as the advanced transportation and communication systems enabled the dynamic and efficient logistics facilities and the free flow of information. Moreover, it’s globalization that created a multi-cultural, diversified business environment, further helping the shifting of labor-intensive industries to the Asian countries.

Cheap Labor in Asia

Western industrial powerhouses started to confront the Lewis turning point and they began to shift the industries to the countries with abundant labor force and lower wage rate. With almost 60 percent of the world’s total population, Asia was the most lucrative destination for cheap labor. Most importantly, this continent was historically enriched with resources — raw materials, skilled manpower, a business-friendly community and a huge untapped market. However, the biggest Asian labor pools, China and India were primarily continuing the legacy of the restricted economy until the 1990s when both the countries went for extensive economic liberalization.

Other Asian countries like the Philippines, Indonesia, Vietnam, Malaysia etc. became the immediate hub of cheap labor and massive industrial projects were shifted to these countries from the developed economies. Following these efforts and after the economic reforms in India and China, cheap labor became the key competitive advantage for Asian countries.

The Asian countries, with their underdeveloped/developing status, found this massive influx of FDI and other forms of industry repositioning quite lucrative. After all, the Lewis model was exemplified in front of them by the developed nations. Now, these Asian nations also started their journey towards industrialization with the generous offering of cheap labor — the first step for being developed! The actual scenario was a bit different though.

The Dream and the Reality

In case of the developed nations, cheap labor provided the initial boost required for the industrial revolution. When the labor transition towards the industrial sector completed, the cheap labor pool was drained — resulting in the scarcity of labor that ultimately pushed up the wage.

The Asian countries dreamt the same. They opened themselves for the sourcing of cheap labor for developed countries in various formats — exporting labor-intensive products, supplying personnel for the relocated industries, providing highly qualified yet cheap service personnel, exporting skilled and unskilled personnel and working on outsourcing service industry. Following the Lewis model, there should be a significant positive impact of these initiatives in these countries’ economic stance. In fact, Asian economic powers like China, Malaysia, and Indonesia have already shown the symptoms of reaching the turning point of the Lewis model.

Quite a large numbers of other Asian countries are also facing extreme pressure for enhancing the wage. For instance, China and Malaysia are no longer considered cheap labor sourcing countries due to the considerably increased minimum wage. For this reason, the industries seeking cheap labor are relocating in still cheap Asian countries like Bangladesh, Vietnam and some African nations.

And the Dream Collapsed!

Despite the considerable economic development of Asian nations, the harsh reality contradicts the dream. First of all, though the cheap labor provided the initial foundation of industrialization, most of these Asian countries are still lagging behind with a very weak and vulnerable industrial foundation which is not adequate for reaching the goal of the desired level of economic development.

Second, countries like China and Malaysia are facing the challenges of the middle-income trap which may restrain the growth of these countries in the future.

Third, the economic growths of Asian countries are highly contributed by the capital flow from the developed economies — resulting in the massive outflow of economic benefits and leaving these third world economies in their sorry state.

Fourth, the extreme and ever-increasing inequality in wealth and income distribution is causing severe societal disorder — chaos, humanitarian disasters and pretty insignificant societal welfare. For instance, thousands of Indian farmers still commit suicide each year despite the envious economic growth of the country.

Fifth, the over-dependence on labor-intensive industries is increasingly crippling the economic potentials of these countries.

The Reason Behind the Ordeal

Well, there are certain causes behind the collapsing dream of cheap labor in Asian countries –

  • A large portion of capital is obtained from foreign sources that are reaping the benefits. It’s quite natural that the capital providers are using these third world economies for their own advantages and leave them drained from resources.
  • The produced products are mostly export-oriented. Thus, the citizens cannot consume (they either don’t have the money or the demand for that particular product) those products which lead to a stagnant standard of living.
  • The lack of proper education and technological know-how is a serious problem. The massive unskilled labor force is also unutilized. When the industrialized countries reached the Lewis turning point, they were armed with the precise skill sets and technological know-how which pushed them upward from the middle-income trap. But the Asian countries are deprived of such means of survival.
  • The extreme level of corruption in every level of society and lack of administrative efficiency and political stability are also posing serious problems over the path of development.
  • The developed countries are equipped with economic and military superiority through which they’re continuously exploiting the developing ones.

Cheap labor is like a two-edged sword for Asian countries. Though this is their most powerful weapon for competing in the global marketplace, cheap labor is also responsible for their vulnerability to global-scale exploitation. Without the increasing level of wage, there will be no sustainable economic development; thus all these economic endeavors will be in vain. So, Asian nations should look forward to increasing the internal demand and subsequent wage and standard of living. Only then, they can pass through this cheap labor dilemma and economically flourish in the long run.

Written by

“Dreamer-Thinker -Storyteller -Writer -Researcher -Economist” @treasury fund manager @fx trader ##Website: www.economaven.com

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