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Lewis Model Analysis of China, Identification of factors that affect the turning point
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IGTW presentationLewis Model: China
Group 3
Chinese key indicators
GDP - composition, by sector of origin: (2014 est.)
Agriculture: 9.2%
Industry: 42.6%
Services: 48.2%
Labour force: (2014 est.)
801.6 million
Note: by the end of 2012, China's population at working age (15-64 years) was 1.004 billion Country comparison to the world: 1
Labour force - by occupation: (2012 est.)
Agriculture: 33.6%
Industry: 30.3%
Services: 36.1%
Lewis Theory of Development• Also known as the two-sector surplus labor model
• Features of the basic model:
• Economy consists of two sectors- traditional and modern• Traditional sector has surplus of labor (MPL=0)• Model focuses on the process of transfer of surplus labor and the
growth of output in the modern sector
• The process of self-sustaining growth and employment expansion continues in the modern sector until all of the surplus labor is absorbed
• Structural transformation of the economy has taken place with the growth of the modern industry
Lewis Theory of Development
China
• With a 1.3 billion population, China is known as a labour-abundant
country.
• Cheap and unlimited labour supply from the agricultural sector with low
productivity to the industrial sector with high productivity has
contributed to China’s rapid economic growth in the process of its
export-oriented industrialization.
• Waves of labour shortage that hit the country in 2002, 2004 and 2009
• For a time employers in south-eastern coastal areas experienced
difficulties in recruiting enough migrant workers.
China
• Labour costs (including benefits) for blue-collar workers in Guangdong
rose by 12% a year, in dollar terms, from 2002 to 2009; in Shanghai,
14% a year.
• Roland Berger, a consultancy, reckons the comparable figure was only
8% in the Philippines and 1% in Mexico.
• China’s wage curves appear to conform to the Lewis model’s Turning
Point prediction.
China is gradually moving toward the Lewis Turning Point. IMF predicts that China
will reach the Lewis Turning Point between 2020 and 2025.
Indicators
Key Observations
• The agricultural wage has increased over time
• the marginal product of labor in the traditional sector has been increasing
at a faster rate than wages.
• Although the gap between the marginal product and wage is narrowing,
the average wage-curve as a whole still remains above the curve.
The Anomaly
• China faces the challenge of finding more productive
employment for a huge pool of underutilized rural labor.
• Also there is a tightening of the labor market in southern coastal
cities, and the consequent rise in wage rates in those areas.
• Reasons :
• China’s huge size which restricts migration
• administrative restrictions (such as Hukou) on internal
migration that still exist.
The arrival of the LTP also means China needs to make serious policy efforts
to realize the transformation of its economic development pattern, and to
avoid the so-called “middle-income trap”.
• Together, these results indicate that China is steadily progressing
toward the Lewis Turning Point, although it has not crossed that
point yet.
Lewis Turning point
• China’s labour-intensive and export-driven growth model will
gradually lose its competitive advantage.
• China will have to reorient its development strategy toward labour
practices that are more capital intensive and based on labourers’
skills .
Policy scenarios - i/ii
ONE-CHILD POLICY
• If China relaxed its one child policy
and people assume a very high
fertility rate the Lewis Turning
point might be delayed by a few
years
• higher fertility results in larger
working age population and larger
potential labor force.
• Changes occur with a delay as it
takes time for new larger cohorts
join the workforce.
HIGHER LABOR FORCE
PARTICIPATION RATES, HUKOU
reform
Growing share of older workers in the
labor force
higher disposition toward hiring
younger workers and a relatively low
retirement age
stability of the pension system
Higher participation rates
greater interprovince labor mobility,
e.g. accelerated progress in hukou
reform
Policy scenarios - ii/ii
FINANCIAL DEREGULATION
• If there’s financial sector reform, interest
rates will be deregulated
• higher deposit rates raise the return on
the stock of wealth
• households meet saving targets more
easily which reduces the supply of
labour.
• Whereas in the baseline the excess
supply of labour in 2020 was in the
range of 30 million, interest rate
liberalization would reduce this excess
to around 10 million, and the LTP would
arise shortly after 2020.
PRODUCT MARKET REFORM
Raising TFP is consistent with a
wide variety of policies
announced in 12th Five-Year Plan
Rise in TFP leads to a faster
decline of excess labour supply,
and a faster emergence of the
LTP
Conclusion
• Policy scenario analysis reveals that
• relaxation of the one-child policy, hukou reform will delay
LTP
• Financial reform and higher TFP accelerate the transition
to LTP
• through wealth effects and greater profitability of
firms, respectively.
• Market and policy responses to LTP transition will be
largely peripheral
• demographics forces play a dominant role in the
imminent transition to a labour shortage economy.
Bibliography
• Lewis Growth Model and China’s Industrialization Nazrul Islam
and Kazuhiko Yokota, May 2008
• IMF Working paper: Chronicle of a Decline Foretold: Has China
Reached the Lewis Turning Point?