What
is the Lewis turning point?
It
is based on a development model created by Nobel prize winning economist Arthur
Lewis, who looked at the dual aspect of a developing economy. The first is represented
by its agricultural sector, which engages a major part of the labour force, and
the second by the modern market-oriented sector, which is primarily engaged in
industrial production.
The
growth of the economy is driven by the modern sector with the support of
unlimited supplies of labour, which is mainly drawn from the agricultural
sector. This migrant labour force accepts low wages corresponding to the living
standards prevalent in farming. The modern sector (also called the capitalist
sector) is able to reap profits and generate savings. The growing savings
finance the capital formation for expansion.
However,
a point is reached when no more labour is forthcoming from the underdeveloped,
or agricultural, sector and wages begin to rise. This is known as the Lewis
turning point.
Why
is it important for China?
China
has continued to grow for the last three decades due to the cheap labour it
gets from its vast rural hinterland, which is still a traditional, or
subsistence, economy. But due to various administrative measures taken by the
government, such as the one-child policy, their demographic structure is
changing and surplus labour is decreasing. China has also experienced labour
strikes and shortages and wage increases, prompting many researchers to debate
whether the Lewis turning point had been reached.
What happens to growth?
For any country that reaches the Lewis turning point, its industrialised sector slows down as cheap labour is no longer available and consequently its growth too starts declining. Is that Malaysia’s case?
We have the foreign labour force that supports sectors requiring
labour —— construction, agriculture, retail and others.
Unlike China, we welcome labour, albeit grudgingly, into those sectors that are
deficient. It is when we halt import of foreign labour and wages start to turn
higher that we reach the ‘Lewis turning point’. We then need to move-up the
value chain and undertake enterprises just like Singapore, Taiwan or South
Korea. For that, we need funds of 3-4% of GDP to invest in innovation and
upskilling the workforce. Are we planning or prepared for this?
Reference:
1. Rishi Shan, What is ‘Lewis
turning point’ and its importance for China,
2. Mitali Das and Papa N’Diaye, Chronicle of a Decline Foretold:
Has China Reached the Lewis Turning Point? IMF Working Paper
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