Commentary on China’s interest rate hike

A paper posted at VoxEU: What does the Chinese rate hike tell us? | vox – Research-based policy analysis and commentary from leading economists

Quote: “Economists and government officials still dispute the notion that China is rapidly approaching the Lewis turning point. But every business person in China agrees that it is happening. It is increasingly difficult to find additional workers and labour costs are skyrocketing.”

An analysis at Bloomberg provides some detail on labor costs in China:

“As growth soaks up cheap labor and wages rise, China is losing the competitive advantages it had previously, said Robert L. Tignor, a professor of modern and contemporary history at Princeton University in New Jersey and author of the book “W. Arthur Lewis and the Birth of Development Economics.”

“Arthur would have been really pleased to see that his theories have proven to be pretty valid when it comes to countries like China,” he said in a telephone interview.

Countries with lower wage costs such as India and Vietnam stand to benefit in attracting manufacturing. Minimum wages in Shanghai are $141 a month, compared with $77 in Mumbai and $74 in Hanoi, according to Morgan Stanley calculations based on Japan External Trade Organization data.”

What’s the Lewis turning point? The moment when “developing countries’ industrial wages begin to rise quickly at the point when the supply of surplus labor from the countryside tapers off.”

Arthur Lewis (economist) – Wikipedia, the free encyclopedia

Lewis was awarded the Nobel Prize in economics in 1979.

“Lewis published in 1954 what was to be the most influential development economics article, “Economic Development with Unlimited Supplies of Labour” (Manchester School). In this work Lewis combined an analysis of the historical experience of developed countries with the central ideas of the classical economists to produce a broad picture of the development process. In his story a “capitalist” sector develops by taking labour from a non-capitalist backward “subsistence” sector. At an early stage of development, there would be “unlimited” supplies of labour from the subsistence economy which means that the capitalist sector can expand without the need to raise wages.”


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