Is this the new Minsky moment? Economists and commentators grasped at the theories of Hyman Minsky in explaining the summer’s credit crisis. He who argued that stability breeds instability – as stable markets induce people to take excessive risk and overborrow in the final stages of a credit bubble.
Now we hear that there’s a growing argument that China is approaching its Lewis Turning Point. Never heard of it? You’re not alone.
Standard Chartered’s Stephen Green notes that one self-evident and dependable truth has always been that China has millions of folk sitting under-employed in the countryside waiting to migrate into urban factories. But this is now being questioned.
“Worker shortages, which began three years ago, continue to cause headaches for our clients,” says Green, citing a study earlier this year that found only 22 per cent of firms reported they were fully staffed and pointing at accelerating migrant wages as suggestive of a tighter labour market. Now an influential book, “The Coming Lewisian Turning Point and its Policy Implications”, edited by Cai Fang, has given academic credence to these complaints.
Arthur Lewis, it turns out, won a Nobel Prize for arguing in a 1954 paper that a developing country with “surplus” agricultural labour could grow its industrial sector for years without wage inflation as it absorbs that surplus.
Professor Cai argues that China has already entered its Lewis Turning Point, with its surplus labour pool disappearing, and predicts that by 2009, labour shortages will be widespread and structural.
From the point of view of Lewis’ theory, says Green, there are two turning points we must worry about. The first is when urban real wages start to rise – when the growth rate of the manufacturing labour force exceeds the growth rate of the total labour force. And the second when an urban worker’s real wage has caught up enough to be equal with “the marginal product” – when the surplus disappears and the two sectors of the economy, traditional/stable agriculture and modern/dynamic industry are unified.
Professor Cai argues we are past the first and approaching the second. The growth of the labour pool has slowed, while demand has exploded over the past five years.
Green meanwhile thinks there’s good reason to be sceptical – on which he promises more another time.
But this is worrying. We keep being told that we’re relying on China to get us through our Minsky Moment and the economic consequences thereof. If China hits its Lewisian Turning Point, how long can we continue living in Draaismaland? But then Morgan Stanley’s superbull has cautioned that this gung-ho market began, and will probably end, in China.