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IGTW presentation

Lewis 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
Chinas 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.
Chinas wage curves appear to conform to the Lewis models 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 :
Chinas huge size which restricts migration
administrative restrictions (such as Hukou) on internal
migration that still exist.

Lewis Turning point


Together, these results indicate that China is steadily progressing toward
the Lewis Turning Point, although it has not crossed that point yet.
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.

Chinas 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 .

HIGHER LABOR FORCE


PARTICIPATION RATES, HUKOU

Policy scenarios - reform


i/ii

Growing share of older workers in the


labor force

ONE-CHILD POLICY

If China relaxed its one child policy

workers and a relatively low retirement

and people assume a very high

age

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 disposition toward hiring younger

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

PRODUCT MARKET REFORM

If theres financial sector reform, interest

rates will be deregulated

wide variety of policies announced


in 12th Five-Year Plan

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.

Raising TFP is consistent with a

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 Chinas Industrialization Nazrul Islam
and Kazuhiko Yokota, May 2008
IMF Working paper: Chronicle of a Decline Foretold: Has China
Reached the Lewis Turning Point?