China And The Lewis Turning Point: It Is Here

Business, China, Company Strategy, Economics, Europe

LewisCurve6May2015

By John Richardson

FOR the last four years, my fellow blogger Paul Hodges and I have been consistently arguing that China was about to hit the Lewis Turning Point.

This is the point at which any country runs out of surplus migrant labour, after enjoying a manufacturing-led boom resulting from the movement of lots of workers from the countryside to the cities. Crucially, these workers are prepared to toil for very low wages and so give developing countries a big competitive edge in low-value manufacturing for export markets.

The West Indian economist, Sir Arthur Lewis, who, gave his name to this turning point, described how after around 20 years (see the above chart), a developing country typically runs out of surplus migrant labour. It then has to try and escape the “middle income trap” – i.e. to start making higher-value goods to justify higher wages – otherwise it is unable to raise its average per capita income above around $10,000.

“What on earth are you worried about this for? Have you become an economist or something?” asked one of my contacts, who works for a European-headquartered polyolefins company in 2012. His view was that worrying about the Lewis Curve in China was pointless as it was too far away to be relevant to any corporate planner in any chemicals company anywhere.

Perhaps this is because far too many chemicals companies are only equipped to plan from one quarter to the next, due to how stock markets work.

Or maybe it’s more the fact that most people are so busy doing their “day jobs” of selling and producing chemicals that they do not have time to think about such “big picture” issues. Of course, though, seeing the big picture should be the job of your CEO, provided he or she is not too fixated on the next set of quarterly results.

But Chinese economist Huang Yiping said, in an important article in yesterday’s Financial Times, that it is now “obvious to everyone” that China has reached the Lewis Turning Point.

Huang, whose work I read as part of my research for chapter 6 of our book, Boom, Gloom & The New Normal, added: “When I wrote an op-ed in 2004 called ‘A labour shortage in China my friends laughed at me.”

This is no laughing matter for any chemicals company that failed to foresee where China is today. Here are just a few of the reasons why we should all be  worried about China reaching the Lewis Turning Point, from the same FT article:

  • China’s GDP growth is forecast to slow to 6.1% per year from 2016-2020, from 9.8% 1995-2009, according to estimates by Cai Fang, vice-president of the Chinese Academy of Social Sciences, which advises the government. A shrinking labour force is the main factor behind this decline. And these are just the official projections for growth. But real GDP growth, as opposed to the highly unreliable official numbers, could  end up being a lot lower.
  • The dwindling flow of migrants is one aspect of China’s shrinking labour force. But the slowdown in urbanisation is coinciding with a rapid ageing of the population, another key shift underlying the Lewis Turning Point.
  • China’s one-child policy created a “demographic dividend” for the economy between roughly 1980 and 2014. Now that dividend is turning into a deficit. The population of Chinese aged between 15 and 64 peaked in 2013, Mr Cai notes. The ratio of children and elderly to working-age Chinese — the dependency ratio — began rising in 2011. The one-child policy was introduced in 1979, but the birth rate kept rising into the 1980s. Annual births in China hit 25m in 1987 and have steadily dropped ever since, hitting about 20m a year by 1997 and falling to 16m last year.

The great news for China is that its leaders understand that you cannot defy demographics – hence, they have come up with  visionary new economic policies built around China’s demographic realities. If only this were also the case in the West.

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