Download Contemporary Logistics “Lewis Turning Point”

Contemporary Logistics 14 (2014) 1838-739X
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Contemporary Logistics
journal homepage: www.seiofbluemountain.com
The Discussing About the Trend of China’s Economics Based on
“Lewis Turning Point”
Yanyan GUO
School of Economics and Management, Beijing Jiaotong University, 100044, P.R.China
KEYWORDS
Lewis turning point,
Demographic dividend,
Pattern of economic growth
ABSTRACT
From 2004, a series of problems, such as labor shortage and recruitment difficulties, have
occurred in the southeast coastal region of China. And this phenomenon becomes more
remarkable around the Spring Festival of 2011, which indicates the pattern of China’s
economic growth depending on comparative advantage of labor has been changing. People
all concern about if the “Lewis turning point” has come, and how will the disappearance of
the “demographic dividend” influence Chinese economics. This thesis will mainly discuss
the influence of “Lewis turning point” on Chinese economics, and which measures should be
taken at present to accelerate the transformation of the pattern of China’s economic growth.
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1 Introduction
With the increase of labor cost in domestic labor market these years caused by the decrease of manpower’s supply, the appearance of
the “Lewis turning point” is more and more evident, which makes issues about “Lewis turning point” and domestic “demographic
dividend” attract more and more attentions.
Nowadays, lots of scholars argue that if China has arrived the “Lewis turning point”, the answer is still uncertain due to the special
country’s situation and system of organization in China, especially the problem of recessive unemployment happening widely in
China’s rural areas. No matter which answer is true, there is no doubt that the “demographic dividend” is disappearing sharply, and
the problems of manpower’s shortage and continual increase will impact the economic development in China seriously.
So from my perspective, the more important thing is that we should know the influence on Chinese economics and take measures to
accelerate it. That’s also the theme of this thesis.
2 “Lewis Turning Point” and “Demographic Dividend”
William Arthur Lewis, an American economist who had won the Alfred Nobel Memorial Prize in Economic Sciences in 1979. Lewis
published in 1954 what was to be his most influential development economics article, “Economic Development With Unlimited
Supplies of Labor” (Manchester School). In this publication, he introduced what came to be called the Dual Sector Model, or the
“Lewis Model”.

Corresponding author.
E-mail: [email protected]
English edition copyright © ST. PLUM-BLOSSOM PRESS PTY LTD
DOI:10.5503/J.CL.2014.14.003
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In this work Lewis combined an analysis of the historical experience of developed countries with the central ideas of the classical
economists to produce a broad picture of the development process. In his story a “capitalist” sector develops by taking labor from a
non-capitalist backward “subsistence” sector. At an early stage of development, there would be available an “unlimited” supply of
labor from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. This results in
higher returns to capital which are then reinvested in further capital accumulation. In turn, the increase in the capital stock leads the
“capitalists” to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model, the
process becomes self-sustaining and leads to modernization and economic development.
The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital
accumulation begins to increase wages, is sometimes called the “Lewisian turning point” (or “Lewis turning point”) and has recently
gained wide circulation in the context of economic development in China.
The demographic dividend is a window of opportunity in the development of a society or nation that opens up as fertility rates
decline when faster rates of economic growth and human development are possible when combined with effective policies and
markets. The drop in fertility rates often follows significant reductions in child and infant mortality rates, as well as an increase in
average life expectancy. In general, there is a positive correlation between “demographic dividend” and “Lewis turning point”.
3 The Current Situation of the Manpower’s Supply in China
During the Spring Festival of 2004, there was a problem of the shortage of manpower in the southeast coastal areas of China,
especially in the sector of manufacturing industries. Subsequently, the issues happened in some midland areas, such as Hunan and
Henna Province. Recently, the problem of manpower’s shortage has become more and more serious. According to the statistics of
China Human Resource Market Information Monitoring Center, the ratio of job wanted number reached approximately 1.07 based on
the data from 101 specified countries in the first quarter of 2011; this ratio had surpassed 0.98, which was the historical apex in the
period of 2007-2008. And the spring report on the situation of economics in Chinese industry sectors, announced by Chinese Industry
and Information Department, showed that 13 provinces have enhanced the minimum wage standard once again, including Beijing,
Chongqing, Jiangsu, Guangdong and so on, after the first enhancing minimum wage standard (the average range is up to 22.8%) in
30 provinces in 2010.
The Communiquéof the National Bureau of Statistics of the 2010 Population Census indicated that the population of the range from
0 to 14 accounted for 16.60%; the population of the range from 15 to 59 accounted for 70.14%; The population of the range above 60
years old accounted for 13.26%; the population of the range above 65 accounted for 16.60%, and the exact numbers closed to120
million. The analysis indicates that the acceleration of Chinese population’s aging will last to 2030 approximately. And in the next 20
years, the process of Chinese population’s aging will accelerate continually, which is a great challenge for Chinese manpower’s
supply in the future.
4 The Influence on the Economic Development in China
The appearing of “Lewis turning point” indicates that the epoch of infinite surplus manpower’s supply will soon come to an end.
Meanwhile, “demographic dividend”, which supports economics to increase rapidly these years, will disappear gradually and so will
the comparative advantage of manpower.
4.1 The current situation of economic development in China
Considered the domestic economic development, China’s economic growth has formed a pattern relying on production inputs too
much in these 30 years since China’s reform and opening up. Currently, the pattern of promoting economic development based on
boosting productivity has still not existed. For a long time, we have big advantages in the amount, quality and price of manpower,
which has formed and remained a high level of savings and rate of capital accumulation. In one word, China’s economic growth
depends on inputs too much. However, this can not be long lasting. As all we know, there are three main factors promoting the
economic growth: consumption, investment and net exports. But when we review the process of our economic development, we find
that the double-digit GDP growth in China is mainly depending on the investments and net exports recently, the consumption hasn’t
become the effective factor to promote economics.
Since the Subprime Mortgage Crisis out broke in 2007, China had taken series of easy monetary policy, this leads to the currency
issues of excess, as a result huge asset bubbles appeared and the efficiency in the use of monetary unit had been falling. On the other
hand, bank credit risk had been increasing continuously, which makes our domestic environment of investments in entities economics
become worse and worse.
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35%
30%
25%
20%
15%
10%
5%
2004
2005
2006
2007
2008
GDP Growth rate
2009
2010
2011
Loan growth
Figure 1 The rate of bank credit growth and GDP growth in the first quarter from 2004 to 2011
It was clear that the bank credit growth rate is far more than the GDP growth in Figure 1, which indicates that there exists asset
bubbles in our current investment projects, and excessive virtual economy has increased investment risks to the economy of the
whole society.
2
1.8
1.6
1.4
1.2
1
0.8
2000
2001
2002
2003
2004
2005
M2/GDP
2006
2007
2008
2009
2010
Loan balance /GDP
Figure 2 The rate of M2/GDP and loan balance /GDP from 2000 to 20101
The efficiency of domestic monetary can be mainly described by M2/GDP and loan balance/GDP. M2/GDP can be used for the
analysis of the relationship between real economy and monetary aggregates. In Figure 2, we can see that the rate of M2/GDP presents
a rising trend, which indicates that each unit of GDP supports more and more money supply. Furthermore, the growth of money
supply is faster than real economy, this is not good for the industrial recon structuring and economic transformation in China and this
will increase the country’s financial risks as well. Meanwhile, the extending trend can be seen from loan balance /GDP, which
indicates that the GDP created by the unit of loan reduced gradually. Loans play a significant role in GDP growth, but high loans may
induce the raising price.
In general, the current situation of China’s macroeconomic puts a very difficult situation in front of us. The accumulation of
contradictions in the economic development process during the period of reform and opening up gradually began obvious. There is
the slowing trend in economic growth, and on the other hand, domestic inflation is also detrimental for the economic development in
the coming stage.
4.2 The influence on domestic economics by the appear of “Lewis turning point”
The advantage of manpower is decreasing gradually, which will ultimately impair China’s economic growth pattern, and then it will
have the huge influence on the future economic development. In particular, there are the following aspects:
Firstly, it will weak the competitiveness of export enterprise and impairs our country’s economic entity’s development. As the
appearance of “Lewis inflection point” and the disappearance of “demographic dividend”, the costs of labor are rising, which
improves the export enterprise’s cost of production and reduces the profit of the company greatly. Especially for the current situation
of RMB Appreciation, there is no doubt that the increasing of the manpower’s cost will strike export-based enterprises seriously.
1
Data recourse: http://www.pbc.gov.cn/publish/diaochatongjisi/3172/index.html
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Furthermore, if the growth rate of manpower’s cost is greater than the enterprise’s profit, there will be a large number of export-based
enterprises facing collapses, which will induce the number of unemployment. Thus, it will be harmful to the development of real
economic, and so will our society’s stability.
Secondly, the high level of domestic inflation may make the domestic economy reach the deadlock of “stagflation”. For a long time,
the reservoir domestic surplus labor force has restrained the domestic inflation and even restrained the inflation in world’s economics
by trade products. Because of years of the high level of inflation rate, the changing trend in manpower market will improve the
domestic price level. If the increase of the domestic production efficiency can’t surpass labor cost in the future, China will fall into
the problem of “the trap of middle income” in a long term. And the demand-pulled inflation will transform to the demand-pulled and
cost-pushed inflation in a short run. Then we can’t avoid the “stagflation” with the process of deficiency and high costs.
Thirdly, expanding domestic demands, we can amplify the consumption’s role in boosting the economy. The root of the low
consumption level in China is that the labor income accounts for little of the national income. The national income has been mainly
divided to government and enterprises. On the other hand, increase of labor cost will induce the redistribution of national income,
which is good for the boost of national income, domestic consumption, and it will weak the economic dependence on exports and
investments. The proportion of China’s residence income increasing is always below the number of GDP’s. Low income level and
incomplete social security system, inducing to the extending savings gap, make domestic demand scarcity, which lead to the
structural problems of economic growth in China. Furthermore, the shortage of domestic demands will lead to the problems of
circulations in investments.
Fourthly, it will assuage the pressure on RMB Appreciation and promote the reformation of the exchange rate system of RMB. In
July of 2010, McKinnon, an American economist, asserted that there is an alternative relationship between salary increasing and
RMB appreciation. And salary increasing is more favorable for China’s economics. At present, the numerous foreign exchange
reserves caused by large trade surplus impair the independence of China’s monetary policy seriously. The primary reason is the funds
outstanding for foreign exchange issued by the central bank for its purpose of buying foreign exchange reserves. The increase of
labor cost can reduce the enterprise foreign export and foreign exchange created by enterprises, which can alleviate the pressure of
the RMB appreciation to some degrees.
Fifthly, the increase of manpower’s cost can make inferior enterprises go bankrupt, which is good for the transformation of industry
structure. China’s traditional export industries are mostly labor-intensive industries, which has a low level of mechanization in
processing and manufacturing and depends on labor force severely. These inferior enterprises just rely on the advantage of lower
manpower cost to expand the scale of exports, so the increasing of manpower cost will make these enterprises either go bankrupt or
turn to choose the new path of relying on intensive technology and capitals.
5 Conclusion
As “demographic dividend” is closer to the end, the “Lewis turning point” will surely come, which will impact China’s economics
greatly and make the path of Chinese economic growth transform as well. So promoting the industrial upgrade has been a pressing
task to complete the path of Chinese economic growth. For the labor is becoming scarce elements gradually, which causes
diminishing returns to capital, the pattern of economy growth depending on inputs of production factors has come to an end.
Nowadays, Chinese industrial economy stays in the stage of depending on low value-added and low content of science and
technology. Therefore, we must accomplish industrial upgrade and boost the level of science and technology as soon as possible to
enhance the efficiency of Chinese economic development. The main distinction between economic giants and economic powers is
the different position in the global industrial chain. And the essence of industrial upgrade is the procession of growing of the
productive industry proportion. To achieve this goal, we should advance in these ways below:
Firstly, we should strive to construct emerging industries of strategic importance on one hand, which is good for accelerating the
transformation of the pattern of economic growth and enhancing the level of industries. This can contribute to forming our new
advantages in international competitions. On the other hand, we should form a new pattern of renewing traditional industries and
making new industries expand to weed out inferior industries. The pattern of Chinese economic growth should transform to
endogenous development mode from foreign demand’s pulling mode. The pattern of high inputs, high consumption and high
emission should also be changed into the pattern leaded by science and innovation. Furthermore, we should take intensive economic
growth mode to replace the extensive style of economic growth mode. To sum up, we should raise the salary to avoid the
appreciation of the RMB and improve the scientific level to the Chinese industries upgrade and strengthen Chinese competitiveness
in international economic stage.
Secondly, we should attach more importance of boosting the wage level to expand consumptions. It involves improving
environmental conditions around laborers, raising wages and improving their living conditions. Absolutely, the bolstering of social
security system is also very important for its significant effects on expanding the consumer market.
Thirdly, we should coordinate the development of urban, rural and regional areas, to make more job opportunities. Since the reform
and opening in China, we have formed a gradient development pattern from coastal areas to interior areas to western areas, which
must be adjusted with the transition of job placements. In this way, we can create more job opportunities and keep a balanced growth
between urban and rural areas.
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Lastly, accelerating transform urban-rural dual structure may have a positive effect on promoting the process of urbanization. The
urban-rural dual structure is the main institutional reason causing “sufficiency of workers” and “shortage of workers”. So making
effective policies to set up these laborers in cities is the foremost thing to solve the problem of “shortage of workers”.
References
[1]. CAI Fang. Growth and Structural Changes in Employment in Transitional China. Economic Research, 2007 (7): 4-14 (in
Chinese)
[2]. William Arthur Lewis. Economic Development With Unlimited Supplies of Labor. The Manchester School of Economic and
Social Studies, 1954: 139-191
[3]. TAO Qunshan. Binary Economic Structure Analysis on the Expanding Income Gap Between the Urban and Rural Areas in
China. Techno Economics & Management Research, 2009 (3): 116-119 (in Chinese)
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