China's Economic Growth, Structural Change and the Lewisian Turning Point

Kyoji Fukao, 京司 深尾, Tang jun Yuan and 堂軍 袁

No 2012-04, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: In 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.

Keywords: China; Lewisian turning point; Labor market; Purchasing power parity; Equilibrium exchange rate (search for similar items in EconPapers)
JEL-codes: F31 F41 F42 F43 J20 J30 J43 J61 O11 O14 O41 O53 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2012-11
New Economics Papers: this item is included in nep-dev and nep-tra
Note: 41214
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/28435/wp2012-4.pdf

Related works:
Journal Article: CHINA'S ECONOMIC GROWTH, STRUCTURAL CHANGE AND THE LEWISIAN TURNING POINT (2012)
Working Paper: China's Economic Growth, Structural Change and the Lewisian Turning Point (2012)
Working Paper: China's Economic Growth, Structural Change and the Lewisian Turning Point (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2012-04

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