Is Australia approaching Lewis turning point? How to tackle it?

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Is Australia approaching Lewis turning point? How to tackle it?

Australia on its way to a Lewis turning point?
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Highlights 

  • The Lewis model depicts the situation where surplus rural labour is completely absorbed into the capital-intensive sector, like manufacturing.
  • The labour migrating to the technologically advanced sectors is already surplus in the subsistence sectors.
  • The Lewis turning point essentially marks a shift towards a largely middle-income economy.

The field of economics is full of interesting concepts and ideas, which help understand the performance of financial and other markets. Those keeping up with the economic concepts might be familiar with the theory conceptualised by Sir Arthur Lewis, known as the Lewis turning point, which is an integral part of the study of “Development Economics”.

Essentially, the Lewis turning point represents a situation where surplus rural labour is completely absorbed into the capital-intensive sector, like manufacturing. In a way, the model depicts how a shift in labour supply from high-labour intensive sectors to more capital-intensive sectors is only limited to a point beyond which wages tend to increase. This point has been given the name of Lewis turning point.

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For those perplexed, an easier way to understand the Lewis model would be to examine China’s growth over the last two decades. The Chinese economy of the 2010-2015 period is often described as the perfect example of an economy experiencing the Lewis turning point. The early 2000s were a period of a massive boom in the Chinese economy as more and more labour shifted from subsistence to capitalist sectors. Here is what these terms mean:

Difference between subsistence and capitalist sectors
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What is the Lewis turning point?

Sir Arthur Lewis highlighted that developing economies usually see a rapid shift in labour from subsistence sectors to capital intensive sectors. The labour migrating to the capital-intensive sectors is already surplus in the subsistence sectors. This shift is followed by a period of robust economic growth due to increased productivity.

However, there comes the point when the capitalist sector can no longer efficiently incorporate the labour coming from the subsistence sector. This happens due to the following reasons:

  • The cost of removing labour from subsistence sectors becomes detrimental for the economy as it is no longer negligible.
  • Wages rise across all sectors as an increasing percentage of labour is now highly productive compared to before.
  • Economic growth can no longer be sustained simply by shifting labour but also requires increased productivity.

A similar trend was observed in China, where manufacturing and industrial sectors overtook the more traditional segments of the economy. Labour increasingly poured into these capital-intensive jobs, leading to high economic growth until the Lewis turning point arrived.

The question arises - Is Australia also heading towards a Lewis turning point in its economy?

What’s happening with Australia?

Australia has witnessed a shift in labour from traditional to more advanced segments such as manufacturing. These manufacturing segments have risen on the back of increasing exports within the country. This shift in Australia has become more pronounced with the opening of the domestic economy to the rest of the world.

Growing shift toward manufacturing sectors.

Meanwhile, in recent times, economic growth has come to a standstill. One can blame multiple factors for the same, including the freshly inflicted pandemic, which has been the cause of a much greater slowdown on a global level. However, there are ways to curtail the drop in productivity, probably occurring due to the Lewis turning point.

This involves focusing on the agricultural or “subsistence” sectors, experiencing a growing decline in labour. The loss of each unit of labour from the agricultural sector to the capitalist sector can no longer be ignored. Thus, the government needs to focus on aiding the traditional sectors. Meanwhile, transitioning labour should be compensated for by increasing the productivity in the agricultural or subsistence sectors. A major source of increased productivity can be increased mechanisation in the agricultural sector.

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Bottom Line

In a nutshell, the Lewis turning point essentially marks a shift towards a largely middle-income economy. Most developed nations are now comfortably sitting with the title of being middle-income economies. However, to shift from a middle-income to a high-income economy, countries must ensure that their subsistence sectors remain productive, even amid booming industrial sectors.  

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