China Surplus Labor to Disappear by 2025, IMF Researchers Say

China’s economy will probably cross a threshold between 2020 and 2025 when the supply of low-cost workers runs out, necessitating a shift in the nation’s growth model, International Monetary Fund researchers said.

The world’s second-largest economy will reach the so-called Lewis Turning Point in that period, IMF economists Mitali Das and Papa N’Diaye wrote in a working paper released this week. The concept, named after the late economist and 1979 Nobel laureate W. Arthur Lewis, is associated with rapid losses of competitiveness for sweatshop industries in South Korea and Taiwan in the 1980s.

A “precipitous” drop in the working-age population will push China toward the turning point, and the nation can delay or accelerate its onset through changes such as relaxing the one-child policy or allowing deposit rates to rise, the IMF researchers wrote. Ma Jiantang, head of the National Bureau of Statistics, said Jan. 18 that a decline in the workforce last year was of “great importance.”

“China is on the eve of a demographic shift that will have profound consequences on its economic and social landscape,” Das and N’Diaye wrote. “China would need to invest less, but in better, capital. This would imply switching to a more ‘intensive’ growth model with a greater reliance on improving total factor productivity.”

That involves speeding up the government’s efforts to rely more on private consumption for economic growth and less on investment, the researchers said.

The IMF economists’ finding differs from that of a 2010 paper titled “China Has Reached the Lewis Turning Point” from the International Food Policy Research Institute which said that “dramatic” increases in inflation-adjusted wages since 2004 indicate the “era of surplus labor is over.”

The IMF gave an initial summary of its researchers’ findings on the Lewis Turning Point in its last annual report on China in July.

— With assistance by Scott Lanman

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