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A tomato farmer in Veitnam
Reuters/Nguyen Huy Kham
More lucrative than it used to be.

Asian factories will need to mechanize or move to stay competitive

By Nikhil Sonnad

We’ve heard for some time that the rising wages of industrial workers in Asian manufacturing hubs are eroding the region’s low-cost advantage. Cities aren’t the only places where labor is getting more expensive, though. A new Overseas Development Institute report on rural wage growth shows that even the cheapest labor in Asia isn’t quite so cheap anymore.

“Rural wages rose in the 2000s in almost all cases observed,” the report’s authors noted. “For example, in Bangladesh, the average (male) rural wage rose in real terms by 45% between 2005 and 2010, in India by 35% between 2005 and 2012 and in China by 92% between 2003 and 2007.” They found similar trends in other countries for which data are available, including Vietnam, Indonesia, Malaysia, and Thailand.

Overseas Development Institute

The wages of agricultural workers are on the rise in large part because of changes happening in cities. As Asian workers left farms for jobs in industrial centers, farms had to figure out how to do more with fewer workers, raising productivity. The report indeed finds that productivity rose in all countries studied save Pakistan, and seven of these saw average productivity growth of more than 2.5% per year. Also, food prices rose alongside the wages of industrial workers, bringing more cash to farmers.

“Rural wages are key as they mark the lowest returns to labor on offer,” report author Steve Wiggins told Chinese official news agency Xinhua. But now that these have begun to mirror the rising wages of industrial workers, manufacturers in Asia won’t be able to employ their decades-old cheap labor strategy of bringing farmers to their urban operations. Even farm workers will be too pricey.

This leaves Asian manufacturers with two options: robots or relocation. Together these alternatives threaten to replace tens of millions of Asian workers, either with automated substitutes or cheaper labor from other parts of the world. Justin Yifu Lin, formerly chief economist at the World Bank, thinks China will have to lose 85 million manufacturing jobs. The country already is the world’s largest robot market. Meanwhile, unskilled labor there costs four times what it does in Ethiopia, according to the World Bank—and that gap looks set to grow wider, as Chinese metropolises and even Bangladesh have been raising their minimum wages.

In short, it’s more evidence that Asia won’t be the world’s factory for much longer.