Lewis Turning Point Forces China Scrap One-Child Policy
China has just announced the roll back of its more than three decades long one-child policy. This policy helped China to control its population - the world's largest . It is reported to have prevented the birth of millions of babies. However with the scrapping of the one-child policy now every year 3 to 6 million extra babies can take birth.
The Communist bosses of China have now permitted every Chinese family to have two children. The earlier policy was stressful to couples who wanted more than one child or the first one was a girl. The replacement ratio of population had gone down. China was fast turning into an aging country. This was and would affect its working population adversely affecting the industrial productivity in the long run.
With a stagnant economy showing signs of shrinkage China could ill afford an aging population which would have depleted the labour supply. Reducing labour availability would result in increasing labour wages and this would seriously dent the comparative advantage that China has versus other countries. Its cheap manufacturing industries would lose its edge in the international market adversely affecting exports, which are contributing nearly 40% to its GDP.
One-child policy meant that China would start feeling shortage of young manpower from third and fourth generation on wards after it was implemented. When a couple has only one child it means for every two couples only one couple replaces them in the second generation and further reduction takes place in the third generation. At this rate two scenarios emerge. The share of aging persons in the population goes up and the share of younger persons goes down. Shrinking labour force means shortage of manpower for existing and incoming industries. The gap will have to be met by importing labour from other countries if economic momentum is to be maintained. This prob;em is being faced by many European countries which are seeing increasing immigration which actually is desired by them to feed their labor market to keep industries and services running.
America realized this many decades ago and has put in place a controlled system of permitting immigration to oil its economic progress. In the process it is able to maintain its economy at a high level and also control influx of immigrants in a legal manner. Another country which has prospered by allowing immigration especially of Asians is Australia which other wise was going to stagnate economically.
China with a huge population obviously would not like to reach a stage where it has to import or allow immigration to run its industries and services. When China was a poor country with an economy of a least developing country in the fifties and sixties of the last century, existing high population and its high growth rate was identified as a main reason coming in way of attaining high economic growth rate. Being a single party and non democratic country they not only introduced one-child policy but also ruthlessly implemented it. However reports indicate there were many who found ways of breaking the rule, which is not important here. However the male female ratio got skewed in favor of the male and finding brides became difficult for increasing number of males in China.
After the failed Cultural revolution and the death of Chairman Mao, China launched itself on the capitalist path of economic growth although the ruling party continued to be Communist. It is so now only in name. Cheap labour and absence of opposition parties saw rapid economic growth over the years. The American industry shifted almost its entire labour intensive manufacturing industries to China and imported its requirements at rock bottom prices. This benefited the american consumer but brought in flood of dollars into China. Soon the world was importing from China. It also attracted global biggies to set up plants in areas of electric, electronics, metals and chemicals and has today become the manufacturing hub of the world in almost all sectors of the economy.
The exports galloped and it exports nearly 40-45% of its production to all countries. The huge earnings boosted its capital formation. China has used these funds to dramatically improve its infrastructure and the skyline of its cities has catapulted it to first world country from a third world country in a period of around three decades or more. China has become the second largest economy and is a superpower challenging USA in high seas.
But its vast population, relatively low per capita incomes compared to USA, low wages and high volume manufacturing capacities are now exerting a pressure on its economy. Chinese do not enjoy democratic freedoms but have perhaps kept quiet because of the high growth rates the Communist rulers have been able to sustain since many years now. However with signs of slowdown in the economy, shrinking growth rates and an aggressive neighbour like India opening up its economy by its Make in India programs, the Chinese have also been hit by a phenomena known as Lewis Turning Point,
It states that in a developing country the labour force is primarily engaged in the agricultural sector. As the economy develops and becomes market-oriented the industrial production sector attracts increasing labour from the agricultural sector. The growth of the economy is driven by the unlimited supplies of labour, mainly drawn from the agricultural sector. This migrant force willingly accepts low wages corresponding to the living standards prevalent in the farm sector.
The developing modern sector also known as the capitalist sector is able to harvest profits due to the low labour costs and generate savings. These savings act as capital formation for expansion. However this can not go on indefinitely. As the economy rapidly develops a point is reached when no more labour is coming from the underdeveloped or agricultural sector. This causes wages to rise. This is known as the Lewis Turning Point.
China has grown in the last three decades due to the abundant cheap labor it gets from the vast hinterland for its predominantly coastal industries. But due to many reasons and one of them being the one-child policy the amount of surplus labour has decreased as the demography has undergone changes. Economists are of the view that China has perhaps reached the Lewis Turning Point.
The Chinese labor are resorting to strikes and industry is facing labour shortages. Wages are forced to be raised in the last two years. This is affecting the ability of China to continue to be a low cost supplier of goods in the export markets. Recently they tried devaluing the currency to offset some of the increase.
Therefore China has taken a decision to scrap the one-child policy to ensure that in the coming years the labour market becomes supply surplus to ensure lower wages and sustain its position as as the number one supplier of the lowest cost goods in the international markets. This is also essential because China has concentrated and invested heavily in export oriented industries. Low wages are not translating into demand for absorbing the surplus export goods in the domestic markets. Domestic demand can be boosted if purchasing power of the population is raised by wage increases. But if that happens production costs go up. So China is presently caught in a economic cycle at the Lewis Turning Point.
In order to move away from the point they have taken a long term decision of scrapping the one-child policy. Let us watch its economy.
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