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Lewis Turning Point in China's Economy: Judgment and Policy Options —— An analysis based on rural household data from the National Bureau of Statistics
Jul 23,2015
Liu Shouying, Zhang Yuan & Shao Ting
I. Judgment Method of Lewis Turning Point and Major Research Findings
1. Judgment method for Lewis Turning Point
As proposed by Arthur Lewis, founder of Lewis Turning Point theory, the point could divide the development of an economy into two stages. Before arrival of the turning point, the infinite surplus labor from rural areas means zero marginal productivity. Rural labor migration will not lead to the decrease of total agricultural output and labor's wage long remains on a stable subsistence level. When the turning point is passed, the economy enters the second stage where excess labor in rural areas is fully absorbed into urban areas and rural marginal productivity becomes greater than zero. At this stage, further migration of rural labor will lead to less total agricultural output. Urban sectors will have to raise wages in order to expand employment by drawing further labor from rural areas. According to this definition, when other agricultural production factors remain unchanged, the advent of the turning point is theoretically signaled by the marginal productivity of agricultural labor input that becomes greater than zero.
However, development economists are confronted with technical obstacles when using this theory to judge the turning point. On the one hand, the marginal productivity of agricultural labor input might be greater than zero even before the turning point is reached. On the other hand, the same marginal productivity may increase gradually before the advent of the turning point, due to the progress of agricultural technologies, the improvement of the livelihood of farmers, the utilization of improved seeds, and the evolvement of the ways of organizing production, etc. Therefore, whether the marginal productivity of agricultural labor input is zero could not be used to serve as a satisfactory standard for determining the turning point in actual practice. Development economists, therefore, turn to the leapfrogging point of the marginal productivity of agricultural labor input for solution. After a period of leapfrogging growth, the marginal productivity of agricultural labor input enters a stage of steady rise. In other words, in the process of rural labor migration and rising marginal productivity of agricultural labor, only a leapfrogging point which signals distinct increase can be said to represent the Lewis Turning Point in its real sense.
When the turning point is reached, the structure of agricultural input, the level of wages, and the agricultural production mode will change accordingly. Therefore, besides the leapfrogging point for the marginal productivity of agricultural labor, changes in other factors of agricultural production serve collectively as supplementary indicators for the judgment of the turning point, such as the sharply rising agricultural labor wages, the drastically shrinking agricultural labor force, and the distinctively changed agricultural input mode, etc.
Table1 Measurements of Japan's Marginal Productivity of Agricultural Labor
(unit: yen/person/month)
|
Year |
1915 |
1925 |
1930 |
1940 |
1950 |
1960 |
1963 |
|
Marginal productivity |
40 |
43 |
46 |
47 |
58 |
127 |
162 |
Note: Marginal productivity refers to the monthly output created by one agricultural labor.
Source: Minami Ryoshin, The Turning Point in the Japanese Economy, The Quarterly Journal of Economics, Volume 82, 1968.
Japan's Actual Agricultural Wage Level
Note: The solid line marks the result after subtracting the Consumer Price Index while the dotted line marks the result after subtracting the Price Index of Farm Products.
Source: Same as Table 1.
The method discussed above has been used by development economists to identify the Lewis Turning Point in the economic development of Japan, South Korea, and China's Taiwan Province. Japan, South Korea, and China's Taiwan province were found to have reached the turning point in 1960, 1975, and 1968 respectively（Minami, 1968; Bai, 1982; Li Yue, 2008）. Take Japan for example. It can be seen from Table 1 that Japan's marginal productivity of agriculture labor began to show a rising tendency as early as in the 1920s, but Japan's economy did not reach the Lewis Turning Point then. Japan's marginal productivity of agriculture labor only began to rise distinctly after 1950 and the exceptionally clear leapfrogging point did not show itself until 1960, when Japan truly reached the Lewis Turning Point.
Japan's actual agricultural wage was on the rise in the 1920s. Its development tendency became consistent with that of the marginal productivity of agricultural labor in the 1960s and experienced the same soaring growth (see below). This confirms the judgment that Japan reached the Lewis Turning Point only in the 1960s.
2. Major research findings and conclusions
Based on the sample survey by the National Statistics Bureau of approximately 70 thousand rural households nationwide from 2003 to 2012 , we tried to identity the leapfrogging point in the marginal productivity curve of China's agricultural labor input since 2003, which could serve as a key indicator to determine whether China has reached the Lewis Turning Point. Major findings are listed below:
First, the prevalent notion in the academic circle that China's economy reached the Lewis Turning Point around 2005 is not accurate. Table 2 shows the changes in the marginal productivity of agricultural labor input, the most important indicator of whether the turning point has reached or not. From 2003 to 2005, the marginal productivity of agricultural labor input did rise by 46 percent. From 2005 to 2007, it increased by another 33 percent. However, the growth rate dropped sharply to 8 percent from 2007 to 2009.
The marginal productivity of agricultural labor input began to rise around 2005, but no distinct leapfrogging point was reached. For the following few years, no stable growth was observed despite the leapfrogging growth of productivity. This shows that the rising point in China's marginal productivity curve of agricultural labor input around 2005 is not the real Lewis Turning Point.
Table 2 National Marginal Productivity of Labor Input of Rural Households
(unit: yuan/person/month)
2003 2004 2005 2007 2009 2012 329.41 367.24 480.57 638.57 687.44 1188.00
Note: Marginal productivity refers to the marginal income of one rural household resulting from its labor input in agricultural production per month.
Source: Calculations based on rural household sample survey by the National Bureau of Statistics.
Second, China's economy on the whole reached the Lewis Turning Point around 2010. It can be seen from Table 2 that the marginal productivity of agricultural labor input of rural households across the nation rose 109 percent from 2003 to 2009, up 13.07 percent annually. From 2009 to 2012, the accumulated growth rate jumped to 72.8 percent, or about 20 percent annually. The marginal productivity of agricultural labor input experienced a highly distinct leapfrog around 2010, even more notable than that around 2004. Therefore, judging from changes in the key indicator of marginal productivity, China's economy reached the Lewis Turning Point around 2010 on the whole.
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