Why China Grows So Fast

8/3/2019 Why China Grows So Fast

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Lewis Two-sector

Migration Model


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What s Happening 03/06/08The world's 25 richest billionaires:


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Model MotivationWhy do we need a two-sector model?

Basic economics problem: how to allocateconstrained resources more efficientlyMisallocation inefficiency in developing

countriesToo much labor in traditional agriculturalsector

Farmers not working at their full potential(efficiency)Underemployment/Hiddenunemployment/Disguised Unemployment

Industrial sector with a much higherproductivity, needs to absorb more labor intoworkforce

Potential efficiency gains from labor migrationto higher productivity sectors

Arthur Lewis (1915-1991)


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Why is this significant?


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The problem of surplus laborAt point g and thereafter, MPL=0, with more

labor working on the fixed amount of land, themore severe the surplus labor problem

becomes. This results in lower labor

productivity on average.

MPL=0

In other words, everyone

is not working at their full

potential, or at least some

of them are shading.


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Supply & Demand of Labor in Industrial Sector

When industrial sector offers awage that is slightly higher thanrural wage, it provides incentivesfor farmers to move out ofagricultural sector.

As the demand of labor in industrialsector increases, more and morerural labor migrate to urban area. Aton point (the kink point on supplycurve), surplus labor will disappearand MPL goes back to positive.

With fewer farmers left, the

agricultural output will notnecessarily fall as everyonepreviously was not working at theirfull potential. In fact, after pullout ofsurplus labor, productivity mayincrease, so does wage.


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Lewis Two-Sector Migration Model Dynamics

L

MPL/wage

RO

MPL/wage

UO

w

1A

1B

1L

2A

2B

2L

TL

Turning Point

No more

surplus labor

migration

TA

TB

'L

Tm w

'A

'B

'm

m


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Application: Why China Grows So Fast

According to Spence(2007):

High savings and investment

Including public investment in education and

infrastructurePeople are employed more productively

Labor migration from agricultural to industrial

More people work for private sectors, awayfrom State-Owned-Enterprises (SOEs), thesource of huge resources misallocation.

International trade

Technology / applied practical knowledge

2001 Nobel winner


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People are employed more productively

From agricultural (lower productivity) industrial and servicessector (higher productivity)

China Labor Force Share (%) by Sectors1978-2005

0

10

20

30

40

50

60

70

80

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

agricul tural indus trial services


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Application: Why China Grows So FastPeople are employed more productively

Declining role of State-Owned Enterprises

HMT: Hong Kong,

Macao, TaiwanInvested.


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Application: Why China Grows So FastPeople are employed more productively

SOEs are one big source of misallocation inefficiency


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International tradeSpence, There are no examples of sustained high growth in the postwarperiod that do not involve integration into the global economy .


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Application: Why China Grows So FastTechnology advancement: fast rising patent applications


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Application: Why China Grows So FastTechnology advancement:

Fast rising patent applications: comparison among emerging economies


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Application: Why China Grows So FastTechnology advancement: fast catch-up in R&D investment


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Application: Why China Grows So FastTechnology advancement: increasing sophistication of export?

Source: Amiti and Freund, An Anatomy of China s Export Growth .


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Why China Grows So Fast

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