The ‘Lewis Turning Point’ and Its Impact on China

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,

https://economictimes.indiatimes.com/

2. Mitali Das and Papa N’Diaye, Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? IMF Working Paper