China in Trouble

China is in trouble and economist W. Arthur Lewis may have known why. He argued that countries in the early stages of economic development typically have a small modern sector alongside a large traditional sector containing huge amounts of “surplus labor".

This surplus labor has two effects. First, for a while such countries can invest heavily without running into diminishing returns, because they can keep drawing on labor from the countryside. Second, competition among labor keeps wages low as the economy grows.

But eventually, the labor starts to dry up and with it, the inordinate growth rates.