China's Economic Growth, Structural Change and the Lewisian Turning Point
AbstractIn a country such as China, which maintains strict controls on foreign exchange and frequently intervenes in the currency market, it is not surprising that the local currency is persistently undervalued in nominal terms. Normally, one would expect such a policy of deliberate currency undervaluation to result in a sharp rise in domestic prices, with abnormally low prices reversed not through an appreciation of the nominal exchange rate but through a rise in domestic prices. Why is this not occurring in China? A possible explanation is that, due to certain structural reasons, the equilibrium real exchange rate for China is considerably lower than that of other developing countries. Taking this hypothesis as our point of departure, we examine how undervalued the Chinese yuan is in terms of purchasing power parity by comparing China's experience with other developing countries and the development process of developed countries in the past. In addition, we construct an open economy growth model with three sectors, where - similar to the Lewis growth model - there is surplus labor in the primary sector. Using this model, we analyze the relationship between the economic growth process and the level of absolute prices (real exchange rate). We show that the absolute price level will not increase until the economy reaches the Lewisian turning point. In addition, we show that in an economy like China, where there are strong barriers to the migration of labor to the manufacturing sector and where the ratio of net exports of goods and services to GDP is high, the economy will not reach the turning point until GDP per worker reaches a certain level.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd12-267.
Date of creation: Dec 2012
Date of revision:
China; Lewisian turning point; Labor market; Purchasing power parity; Equilibrium exchange rate;
Other versions of this item:
- Fukao, Kyoji & Yuan, Tangjun, 2012. "China'S Economic Growth, Structural Change And The Lewisian Turning Point," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 53(2), pages 147-176, December.
- Fukao, Kyoji & Yuan, Tang jun, 2012. "China's Economic Growth, Structural Change and the Lewisian Turning Point," CEI Working Paper Series 2012-04, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
- FUKAO Kyoji & Tangjun YUAN, 2012. "China's Economic Growth, Structural Change and the Lewisian Turning Point," Discussion papers 12056, Research Institute of Economy, Trade and Industry (RIETI).
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- J43 - Labor and Demographic Economics - - Particular Labor Markets - - - Agricultural Labor Markets
- J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
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