China's multiple crises, its "Lewis Turning Point" and implications for the world economy

Jean-Pierre Lehmann is Emeritus Professor of International Political Economy, IMD, Switzerland, founder of The Evian Group, Senior Fellow at the Fung Global Institute in Hong Kong, and visiting professor at Hong Kong University. He is also one of my best friends. In his latest article here for Yale Global Online, he outlines how China is reaching a turning point of multiple crises - political, social, economic, environmental, demographic and geopolitical. How China would be able to overcome these crises would "influence the fate of the world", he opines.  As China is so embedded in the global order, Professor Lehmann's assessment is no exaggeration.

On the economic front, in a working paper "The Lewis Turning Point in China and its Impacts on the World Economy" dated February 2012, Click here Andong Zhu and Wanhuan Cai, respectively Associate Professor and Post-Doc Fellow, School of Marxism, Tsinghua University, Beijing, show how China's successful implementation of a host of reform measures to overcome the Middle-Income Trap marked by the Lewis Turning Point could impact the rest of the world''s economies.

The Paper's abstract states -

"On the basis of perusing Lewis’s own writings and his followers’ works on the Lewis economic growth model, this paper adjusts the meaning of the Lewis turning point (LTP) according to China’s specific institutional system and economic reality: the Lewis turning point is a period of time rather than a time point; and undergoing the LTP is considered as a trend or process of development, during which the supply of labor decreases and the cost of labor increases. With the passing of the LTP, China will not promote its economic growth with a cheap and unlimited labor force; the labor-intensive export oriented economy should be altered, independent technology innovation should be promoted, and industry structure should be adjusted. Changes and transitions in China’s economy will have great significance to the world economy, and the impacts are estimated in the paper with Cambridge-Alphametrics Model (CAM) initially developed by the University of Cambridge. The arrival of the LTP also means China needs to make serious policy efforts to realize the transformation of its economic development pattern, and to avoid the so-called “middle-income trap”.

The Paper's quantitative findings show that China's success in overcoming the middle-income trap would result in the case of China's many trading partners but also others, better employment rates, lower government expenditure as % of GDP, higher income per capita, little impact on low inflation, strengthening of real exchange rates and the build-up of more exchange reserves in those countries to which China's tradional low-cost manufacturing will have been diverted.

How China would be able to successfully negotiate the Lewis Turning Point would therefore be of momentus benefit not only to China herself but to the rest of the globe.

On the political, social, environmental, demographic and geopolitical fronts, however, China's challenges are more intractable, especially during China's leadership transition.

A whole swath of reforms is already on the cards, supposedly supported by Li Keqiang, China's presumed Premier-in-waiting, as embodied in a historic 468-page report of the World Bank in partnership with the Development Research Centre of the State Council. This report calls for major reforms to provide a more meaningful social security net, addressing the "hukou" system which marginalizes migrant workers. regulating the modus operandi of local authorities, promoting civil society, reforming the State-owned enterprises in favour of a larger role for private business, further liberalisng the economy and financial sector including the RMB, and creating a green economy. The report is aspirationally entitled "China 2030: Building a Modern, Harmonious, and Creative High-Income Society." Click here

There is no guarantee that China would be successful in transforming herself in face of all these crises. It thus behoves the rest of the world not so much to fear China's continuing rise but to channel it constructively so that a benigh, rising Chinese tide could benefically lift all boats.

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