Wednesday, February 29, 2012

Mass Immigration And The Lewis Turning Point

Ambrose Evans-Pritchard ponders the wealth of nations :

For China, the cheap labour era is over. It faces the "Lewis Point" where the limitless supply of migrants from the countryside dries up and urban wages surge.

Pay has already been rising at 16pc to 18pc annually in the Eastern cities for several years, and this is now happening in Chengdu and Chongqing in the heartland.

I'd heard vaguely before of the economist Arthur Lewis, the first black person to win an academic Nobel, and his famous model :

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 available an "unlimited" supply of labour from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. This results in higher returns to capital which are then reinvested in further capital accumulation. In turn, the increase in the capital stock leads the "capitalists" to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model (for example, that the profits are reinvested and that capital accumulation does not substitute for skilled labor in production), the process becomes self-sustaining and leads to modernization and economic development.

The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital accumulation begins to increase wages, is sometimes called the "Lewisian turning point" (or "Lewis turning point") and has recently gained wide circulation in the context of economic development in China.

So as long as there's a plentiful supply of new labour, our capitalist doesn't need to raise wages. In its original development context, we're talking early-to-mid nineteenth century - the stuff that people like Dickens and later Zola railed against (in Zola's case after it was well on the way out).

By the latter half of the nineteenth century the country had moved to town, working class living standards were rising - and they didn't stop until the 1970s.

Lewis was writing in a 1950s Britain where "Globalisation In One Country" was undreamt of. It didn't occur to him that a wealthy country might start to put in train the reverse process, bringing in millions of poor from all over the world (a process which a change of government shows no sign or intention of stopping) and stopping wage growth in its tracks, before reversing it. Inflation's been over 5% for three years now, wage rises around 1% a year. That's a hefty cut. Asset price inflation - especially housing - has been high for 25 years.

And, as Adam Posen will tell you, it's a lot easier to let inflation lower real wages than "crush" nominal ones.

But unlike China, where the Communist capitalists, having a concept of a nation and a national interest, won't start importing millions of foreigners the moment wages go up, Britain seems likely to see this "un-development model" continue indefinitely. There are only a finite number of peasants in China, and it's a big country. Eventually, if the Communist Party continue their impressive capitalist stewardship, the average Chinese may be comfortably off.

The UK is a very small country, and there are a lot more poor people in the rest of the world. It could be a very long time before the "limitless supply of migrants" dries up and the UK becomes the first world economy to experience a second Lewis point.

Maybe when I mooted the prospect of UK real wages reaching Chinese levels I was being over-optimistic.


Mr Grumpy said...

I think China is quite likely to go the way of Britain. It had a baby boom to which the Communists reacted by imposing the one child policy; the baby boom fuelled the economic boom, but since they were able to make the one child policy stick, the population is now ageing. I recently overheard a Chinese student on a bus saying that the boom would not last for this very reason.

So quite soon the options for the Party will be either Japan/Italy or Britain.

Anonymous said...

I think most people can see instinctively that this way of looking at capitalist development and modern economics in the west is correct. An opposite alternative to it might be called, oh , I dont know, national-socialism?

Anonymous said...

Good points raised Laban.

Britain has suffered a governing party, Labour abandoning its traditional voter base in favour of importing of millions of unskilled people from the third world to shore up its dwindling voter base. Such an action would be abhorrent to the Chinese and most other countries in the world.

If Labour are ever re-elected a 'Lewis Point' would never happen in Britain because Labour's policy focus is not economic, but simply to stay in power at any cost.

Rachel Leah said...

What I like about this blog is the serious economic and cultural anlysis of immigration today along with the links. I know nothing about economics and it was interesting for me to read Lewis Turning point links. I had no idea that this Lewis person existed.

The only downside is the odd loony (like Sgt Troy) on occasion in comments section that distorts the main articles and turns the site into a BNP rant rather than the serious place to read. Well they won't put me off and it's been great to see more interesting and intelligent comments both today and of late.

dearieme said...

Mark you, the Economics Noble isn't a real Nobel - it didn't feature in the old boy's will. It was made up by the Swedish Central Bank as a self-congratulation prize for economists. Still, well done to Lewis for winning it. It's what was available to him.

Anonymous said...

"I think China is quite likely to go the way of Britain. It had a baby boom to which the Communists reacted by imposing the one child policy"

Don't forget that the Communists created the baby boom by encouraging women to have more children (to fight the Americans, if I remember correctly).

China's population problems are a glaring demonstration of why central planning is an insanely bad idea.

Laban said...

"the population is now ageing. I recently overheard a Chinese student on a bus saying that the boom would not last for this very reason."

The last time an English student would talk about demography on a bus was probably mid-70s, after Paul Ehrlich's "The Population Bomb".

Demography is all around a student now, but discussing it would be doubleplusungood.

kanmani said...
This comment has been removed by a blog administrator.
John said...

The major impact of immigration in Britain is on house prices. Remember that a substantial number of immigrants are graduates (trained at British Universities then allowed to stay) so the Lewis argument does not apply. It is the loans based on the house prices that gave us the noughties boom - see Immigration, house prices and boom economics.