Third world development-Lewis Turning Point

What is Lewis Turning Point ?

Lewis Turning Point (LTP) is an economic phenomenon of developing countries at which labour wages starts to take off and required higher technology investment to sustain economic growth.

China’s economic development in the past decades could be best described by Lewis Arthur’s dual sector model with LTP. Lewis (1954) showed that the capitalists in the industrial sector of an underdeveloped country; in the initial economic development stage; can expand and accumulate capital with further reinvestment for a long period of time without increase in wages as the vast labor surplus in the agricultural sector can continuously enter the industrial sector to make up the demand. When the surplus labor in the agricultural sector is depleted the Lewis Turning Point would have arrived and wages will start to increase sharply then the economy will be moved from a labor intensive economy to capital intensive economy. The implication is tremendous structural change in the economy will take place after the LTP.


Wang and Weaver (2013) showed that during 1978, China’s rural area started with 82% of the total population of 956.2 million, because China’s agriculture sector is not mechanized during that time so the marginal product of labor (MPL) is almost zero. According to Lewis (1954) this provided the capitalists in the industrial sector almost unlimited supply of surplus labor at
subsistence wages. Wang and Weaver (2013) showed that the number of people living in the urban area in 2011 was 51% of the total population of 1.344 billion, vast number of rural population has absorbed into the modernized sector.

Furthermore, Huang and Jiang (2010) showed that China’s labor shortage started in 2004 when employers in the Pearl River Delta and Yangtze River Delta experienced difficulty in hiring migrant workers from the rural area, the subsequent rise in wages eased the situation as it attracted further labor supply from China’s west inlands, but the labor shortage hit the country again in 2009 despite the economic slowdown from the Global Financial Crisis. China is on the eve of demographic shift due to the One Child policy, the population growth rate in the working age between 20-39 started to slow down from year 2000 and it was zero in 2010. These signs of labor shortages and rising wages indicated that China might have reached the Lewis turning point (LTP) around 2004.

Structural changes 

After 2004, Asian countries which poorer than China with large population start to take off in economic growth in manufacturing, Vietnam is the perfect example, many foreign companies has moved their operations into Vietnam for the low wages as China's labour became much more expensive. 

Final thought

Have you ever wonder why the developed countries like US/Western Europe printed so much money since the Global Financial Crisis in 2009 but inflation never take off ? US pumped almost $US 8 trillions into the economy but inflation remained low until recent months. This is because of the low wages in the manufacturing sectors of China and other Asian countries that kept the cost of goods very low. Developed countries large spending demand seems never out run the supplies of low cost goods from Asia especially China in the past decades.

So where is all the printed money gone ? well into the stock market/bonds/Crypto/properties. The rich gets richer, the middle class suffers increasingly from high property price that their hope of having a nice house/apartment with quality life become vain. Many poor, however, escaped poverty and have greater chance to join the middle class which is still beter for them.   

For Inflation in the world, I think the recent inflation will be transitory due supply chain issues from COVID 19. It will be normalised because there are still endless supplies of cheap labour in the world, currently poor Asian countries are cushioning the demand from developed countries despite huge amount of money printed.


Reference:

Huang, Y. P. and Jiang, T.S. (2010), What does the Lewis turning point mean for China? A computable general equilibrium analysis, China Economic Journal Vol. 3, No. 2, July 2010, 191–207.

Wang, X. and Weaver, N. (2013), Surplus Labour and urbanization in China, Eurasian Economic Review, 3(1), 2013, 84-97

Zhang, X. B., Yang, J. b. and Wang S. L (2011), China has reached the Lewis turning point, China Economic Review 22 (2011) 542–554.