A persistent narrative in Western media attributes China’s manufacturing dominance to suppressed labor rights and artificially low wages, portraying its success as the product of a “sweatshop” model. Yet this explanation collapses under comparative scrutiny. India, where millions of young workers earn less than their Chinese counterparts, has failed to develop a comparable manufacturing base; Africa, despite even lower wages and a vast labor supply, remains largely absent from global manufacturing; and countries such as Vietnam and Mexico have discovered that hosting relocated Chinese factories often entails higher production costs than operating in China itself. These realities suggest that low wages alone cannot explain industrial success.
As Raghuram G. Rajan—former Governor of the Reserve Bank of India and ex–IMF Chief Economist—argues in his May 24, 2024 Project Syndicate article “The Indian Election and the Country’s Economic Future,” India lacks the structural conditions to replicate the East Asian, and particularly Chinese, development model and should not attempt to do so. Taken together, these cases challenge simplistic cost-based explanations and point instead to deeper factors—such as industrial ecosystems, infrastructure, supply-chain integration, and state capacity—as the true foundations of China’s comprehensive manufacturing advantage.
Why the Division of Labor Remains the Foundation of Manufacturing Efficiency
From Adam Smith’s insight into the productivity gains of specialization to David Ricardo’s theory of comparative advantage, economic thought has long recognized a central truth: efficiency is born from the division of labor. By breaking complex production into simpler, specialized tasks, societies unlock higher productivity, lower costs, and sustained innovation. Nowhere is this principle more clearly demonstrated than in China’s manufacturing system.
Modern manufacturing depends on finely segmented production processes. In industries such as electronics, a single product like a smartphone is the result of dozens of specialized stages—chip design, screen fabrication, battery production, casing, and final assembly—each handled by firms that concentrate exclusively on their niche. This structure allows workers and companies to accumulate deep expertise, dramatically improving speed, precision, and output quality.
Repetition and focus further enhance efficiency at the shop-floor level. In garment manufacturing, for example, cutting, sewing, and ironing are performed by different workers who refine their skills through continuous practice. The result is higher output per unit time, fewer mistakes, and consistent quality—advantages that scale across entire industries.
Specialization also fuels technological progress. When firms focus on a single production stage, they are better positioned to refine processes and invest in targeted innovation. In China’s automotive and new energy sectors, engine makers, component suppliers, and battery producers have each pursued breakthroughs within their domains. This concentrated effort has enabled Chinese battery manufacturers, in particular, to reach the global technological frontier in electric vehicle energy storage.
Cost reduction is another direct outcome of specialization. Large-scale, standardized production lowers unit costs by optimizing raw material procurement, equipment use, and labor deployment. At the same time, stable processes reduce defect rates and production errors—often the most expensive hidden cost in manufacturing. As a result, Chinese manufacturers in sectors such as home appliances have achieved strong global price competitiveness without sacrificing quality.
Over time, specialization has given rise to dense industrial clusters supported by complete industrial chains. Regions like Dongguan exemplify this model, where component suppliers, assemblers, logistics providers, and service firms operate in close proximity. Such ecosystems minimize transaction costs, accelerate collaboration, and allow firms to respond rapidly to market shifts. They also provide fertile ground for industrial upgrading, innovation diffusion, and regional economic growth.
This tightly meshed system explains why rising wages alone do not trigger large-scale relocation of manufacturing out of China. Production costs are shaped less by labor expenses than by error reduction, coordination efficiency, and supply-chain reliability. Even as some capacity moves to ASEAN countries, East Asia’s integrated manufacturing network—anchored by China—retains an unmatched advantage. Alongside Germany, it stands as one of the world’s most complete and sophisticated embodiments of a simple economic truth: sustained efficiency flows from specialization.
Land, Labor, and Capital: The Structural Foundations of China’s Manufacturing Rise
Industrial development rests on three fundamental factors: land, labor, and capital. These elements are not merely theoretical abstractions; they are practical prerequisites without which modern industry cannot function. Land provides the physical space and legal basis for production, labor supplies human effort and skills, and capital enables scale, technology, and coordination. Only when these three factors are allowed to combine freely can sustained industrial growth occur. China’s experience before and after reform and opening up offers a clear demonstration of this principle.
Prior to reform, all three factors were heavily constrained. Land was rigidly controlled: urban land was fully state-owned and administratively allocated, while rural land was collectively owned and tightly restricted, making industrial use extremely difficult. Labor mobility was severely limited by institutional barriers, trapping hundreds of millions of rural residents in low-productivity agriculture and preventing human capital from realizing its value. Capital was scarce, as domestic accumulation was slow and foreign investment faced substantial legal and political obstacles. Under such conditions, industrialization could only proceed at a glacial pace.
Reform and opening up fundamentally altered this situation by gradually loosening control over these three factors. Foreign capital was introduced to compensate for insufficient domestic accumulation, and with it came new demands for labor and land. Rural residents were increasingly allowed to migrate to cities and coastal regions, forming the backbone of the emerging manufacturing workforce. Crucially, these workers were not primarily drawn from state-owned enterprises (SOEs), which in the 1980s still offered relatively secure employment, but from the countryside. By the late 1990s, the overwhelming majority of employees in foreign-invested enterprises were migrant workers, many with limited formal education but abundant willingness to work.
At the same time, land reform—particularly the innovation of transferable land-use rights—broke a critical institutional deadlock. Pioneered in Shenzhen and later adopted in other cities, the paid use and leasing of land allowed governments to convert land into a usable production factor without formally privatizing ownership. This enabled large-scale industrial and commercial development, attracted foreign investors, and transformed cities such as Shenzhen from undeveloped areas into modern manufacturing and financial centers within a remarkably short period.
The influx of foreign-invested, market-oriented enterprises exposed the structural weaknesses of China’s SOEs. Lacking scale, efficiency, and competitiveness, many SOEs incurred persistent losses and became a heavy fiscal burden. The crisis of the 1990s, marked by massive layoffs and large-scale debt restructuring, underscored a hard reality: protected labor alone does not constitute productive human capital if land and capital are misallocated. Industrial growth depended not on legacy institutions, but on the effective recombination of land, labor, and capital under market conditions.
It is therefore misleading to attribute China’s manufacturing rise primarily to low wages or to accession to the World Trade Organization. Long before WTO entry, China had already attracted vast amounts of foreign investment and assembled extensive industrial chains. Moreover, within China itself, wages in inland regions were for decades far lower than those in coastal areas. If low wages were the decisive factor, manufacturing should have developed inland first. Instead, industry clustered along the coast, and only much later—after inland wages had risen significantly—did large-scale industrial transfer occur. This pattern shows that firms have always evaluated a comprehensive set of conditions: land availability, energy supply, transportation, information flows, legal institutions, public services, policy stability, and government coordination. Low wages are neither a sufficient condition nor, in many cases, a primary one.
In sum, China’s early manufacturing development was driven by the progressive liberation and recombination of land, labor, and capital. Reform and opening up did not succeed because of a single policy event or cost advantage, but because it dismantled long-standing barriers that had prevented these core factors of production from interacting efficiently. Once those constraints were relaxed, industrial growth followed as a natural and powerful consequence.
The De Facto Low Tax Rate and the Driving Force Behind China’s Economic Miracle
For decades, China has maintained relatively high nominal tax rates, yet in practice, many small and medium-sized enterprises (SMEs) have enjoyed a de facto low tax burden. Individual businesses often pay fixed amounts of tax, regardless of size, and many private SMEs operating largely in cash avoid rigorous accounting, effectively escaping business and income tax. This leniency, combined with widespread labor mobility, has fueled the largest internal migration in history, as millions of rural residents flocked to cities despite official restrictions.
Land, although formally nationalized or collectively owned, has been readily accessible to enterprises. With basic infrastructure already in place and simple approval procedures, factories could be rapidly constructed. In regions such as the Pearl River Delta, collective land was frequently converted into industrial parks, office buildings, and even residential complexes, often disregarding formal restrictions. As a result, many local land controls proved largely ineffective.
Economist Steven Ng-Sheong Cheung attributes much of China’s rapid economic growth to inter-county competition—a phenomenon in which counties, governed primarily by their own officials, compete to attract investment. Local governments engaged in this competition by offering favorable conditions: low taxes, open land policies, and flexible labor migration. While Cheung accurately describes this phenomenon, the underlying mechanism driving it is decentralization. Local officials possessed significant autonomy and were encouraged by Deng Xiaoping to innovate and take bold initiatives, with economic performance as the primary evaluation criterion.
This decentralization created a system in which legal constraints were often bypassed. To attract foreign and domestic investment, local officials tolerated informal practices, overlooked tax underreporting, and facilitated rapid industrial expansion. The result was a virtuous cycle: investment flowed in, economic activity surged, and local officials achieved higher performance metrics. Though such practices also led to corruption, the root cause was the complex web of regulations rather than the officials themselves. In many cases, tacit approval replaced strict enforcement, allowing vibrant industrial clusters to emerge.
The city of Dongguan, particularly Humen Town in the Pearl River Delta, exemplifies the outcomes of this system. Humen’s GDP exceeds 70 billion yuan, twice that of Poyang County in Jiangxi and seven times that of Le’an County. Satellite imagery reveals a dense, seemingly chaotic mix of factories, homes, office buildings, and residential developments, yet this “disorder” has been the engine of immense industrial productivity and innovation.
China’s manufacturing prowess cannot be solely explained by policy reforms, as similar reforms in other countries, such as India, did not yield comparable results. The key difference lies in the combination of a de facto low tax rate, accessible land, labor mobility, and decentralized governance that fostered intense local competition. Local officials, motivated by economic performance, created conditions conducive to entrepreneurial activity, leading to the rapid growth of the manufacturing sector.
In sum, China’s economic miracle is rooted not only in formal policy reforms but also in practical flexibility: a de facto low tax rate, decentralized decision-making, and competitive local governance. This combination enabled private enterprise to flourish, infrastructure to expand rapidly, and industrial clusters like Dongguan to emerge as global manufacturing powerhouses.
Why China Owes Its Economic Rise to Western Welfare States
In the past half-century, East Asia’s economic transformation has puzzled many global economists. Why have countries like Japan, South Korea, Taiwan, Hong Kong, and now China and Vietnam surged ahead, while other regions with cheap labor, such as India, Africa, or South America, lag behind? The answer lies not simply in labor costs or WTO membership, but in a subtle interaction between global capital flows and the constraints imposed by Western social democracy.
Free-market thinking assumes people respond to incentives. Welfare programs, especially if poorly designed, are often seen as reducing the incentive to work, save, or acquire skills. The concern is not that most people want to avoid work, but that even small disincentives can scale into large economic effects over time. From a market-oriented perspective, welfare can act as a price distortion in the labor market. If the government supports substitutes for wages, employers and workers may make decisions that do not reflect real productivity, weakening efficient job matching and slowing economic growth. In Europe and America, high taxes, comprehensive social programs, and labor protections created just such distortions, gradually reducing the attractiveness of domestic manufacturing.
This environment prompted Western companies to seek lower-cost, less regulated regions. Yet they did not relocate indiscriminately to Africa, South America, or India, despite cheap labor and some cultural ties. Many of these regions had adopted social-democratic principles themselves, implementing labor protections, free healthcare, and high welfare systems that mirrored the regulatory burdens in Europe. In contrast, East Asia—lacking these cultural and ideological constraints—offered both cheap labor and a regulatory environment conducive to production. Taiwan, Hong Kong, and South Korea, for instance, developed welfare systems only after establishing robust industrial bases, and labor unions wielded minimal influence. China followed a similar path, institutionalizing predictable social security contributions rather than unpredictable, individualized costs like those in the United States.
The result is what might be called a “certainty premium.” Investors and manufacturers value predictable costs, stable labor relations, and minimal supply chain disruptions. In the U.S., high labor costs are compounded by unpredictable healthcare expenses, litigation risks, and union negotiations. In China, these costs are standardized and transparent, allowing companies to plan long-term investments, accumulate skills, and grow productivity. Far from exploiting workers, China’s labor system resolves disputes through legal channels, ensuring fairness while maintaining operational stability.
Regarding industry unions and professional monopolies, Western social democracy has often entrenched barriers that restrict competition. Doctors, lawyers, and other professionals face certifications with low pass rates to maintain monopolistic profits. Trades like plumbing, hairdressing, or air conditioning similarly restrict entry, while pressure groups use legislation to enforce higher wages, shielding workers from market forces. Auto workers’ unions in the US impose industrial policies and import restrictions, leaving consumers with overpriced, lower-quality goods. In such systems, individuals and businesses are simultaneously exploited and protected, creating a mutually destructive economic dynamic.
East Asia, by contrast, benefited indirectly from this global arrangement. Western capital, seeking higher returns and escaping the rising costs and regulatory burdens of domestic welfare states, flowed into regions with production-friendly environments. This inflow fueled industrial growth, infrastructure development, and skill accumulation, enabling East Asian nations to escape poverty far faster than other regions with similar labor costs. China’s economic rise, therefore, owes a significant debt to the social-democratic policies of Europe and America—not as a source of guidance, but as a push factor that redirected capital to East Asia.
Today, even as social-democratic influences gradually expand in East Asia, the region retains a comparative advantage in labor predictability and industrial efficiency. While welfare programs grow and labor rights expand, the foundation laid during decades of regulatory freedom continues to attract investment. The lesson is clear: China’s prosperity is not just a result of domestic policy, globalization, or cheap labor—it is also a byproduct of the constraints and inefficiencies imposed by welfare states elsewhere. In a sense, the Chinese should thank the welfare-state policies in other parts of the world for providing the conditions that made their rapid industrialization possible.
Stable Living, Predictable Savings: How China’s System Reduces Workers’ Fixed Expenses
In discussions comparing Chinese and American labor, wages alone do not tell the full story. While U.S. workers may earn higher nominal wages, much of this income is absorbed by fixed expenses such as rent, cars, and healthcare. These costs, combined with a tax system that heavily relies on income taxation, often leave American workers living paycheck to paycheck despite seemingly high earnings. Surveys indicate that between half and nearly 70% of U.S. workers describe themselves this way, reflecting the strain of housing, commuting, medical costs, and childcare on disposable income.
In contrast, Chinese workers benefit from a fundamentally different structure of expenses. Many manufacturing companies provide meals and dormitory-style housing, effectively minimizing the largest fixed costs—rent, commuting, and daily living expenses. When combined with China’s generally lower cost of living, this system allows workers to save and send money home. Their lifestyles may not be luxurious, but they are far more stable and predictable than those of many American counterparts.
The difference extends beyond personal expenses to infrastructure and systemic design. China’s extensive network of high-speed rail, subways, expressways, and ports reduces both commuting costs for workers and transportation costs for industries. Public land ownership and price-capped land auctions allow the government to regulate housing development, controlling costs and preventing excessive financialization. These measures not only stabilize workers’ living conditions but also lower manufacturing and logistics costs, strengthening the country’s industrial competitiveness.
The contrast with the U.S. highlights the role of institutional path dependence. American housing and transportation policies are shaped by historical land revenue models, automotive industry interests, and decentralized governance, which have created a low-density, car-dependent development pattern. Housing is treated as a private investment, and public transport is underfunded, resulting in high rent, long commutes, and rigid living costs. Even in times of economic growth, these structural factors place sustained pressure on workers’ disposable income.
Healthcare further illustrates this divergence. While the U.S. system provides advanced, specialized treatments, the cost is high and often inequitable, with millions struggling to afford basic care. In contrast, China treats healthcare more as a public good, aiming to contain costs and expand access. Combined with minimized fixed living expenses, Chinese workers can allocate a greater share of income to savings and family support rather than being burdened by systemic inefficiencies.
Ultimately, China’s developed manufacturing sector is supported not merely by wage suppression, but by predictable living conditions and systemic efficiency. By reducing the financial stress of rent, commuting, and daily expenses, China creates a workforce that can focus on skills development, innovation, and long-term productivity. The true determinant of standard of living is not absolute wages, but the structure of disposable income—and in this regard, Chinese workers benefit from stability and certainty that is often absent in the U.S.
Final Thoughts
China’s manufacturing dominance cannot be explained by low wages or weak labor rights alone. Although suppressed wages and limited labor power played a role in the early stages of industrialization, cost advantages by themselves have proven insufficient—countries with cheaper labor have failed to replicate China’s industrial depth. China’s enduring strength instead lies in structural fundamentals: an extreme division of labor, dense industrial clusters, tightly integrated supply chains, reliable infrastructure, and strong state capacity that minimizes coordination and error costs. These features enable scale, speed, and resilience that low-cost competitors cannot easily match.
This system emerged from the post-reform recombination of land, labor, and capital, facilitated by labor mobility, flexible land-use arrangements, foreign capital inflows, decentralized local governance, and intense inter-regional competition. Western welfare states indirectly reinforced this trajectory by pushing capital toward lower-cost, more predictable environments in East Asia. While worker constraints persist, China’s advanced manufacturing today is no longer built on cheap labor, but on scale, skills, capital intensity, infrastructure, and state coordination—making labor suppression a diminishing, not defining, source of competitiveness.