China's Rural Labor Migration and Its Economic Development. Xiaoguang Liu

them as the riddle of China’s rising return on capital, the riddle of China’s rising rate of saving and the riddle of “Okun’s law” not applicable to China. Solving these issues is the key to understanding China’s model of economic development. This book comprehensively explains the three riddles of development from the perspective of the transfer of agricultural labor through theoretical and empirical analysis. One of the important practical implications of this book is that the impact of the current slowdown or even stagnation in the transfer of agricultural labor on China’s economy is not only marginal but also directional. If it is expected to maintain fast economic growth, it is absolutely a sensible choice to put more effort into promoting the transfer of agricultural labor at both the national and urban levels. It is not only out of fairness but also for the development of the city itself to give due recognition to the contributions of migrant workers to urban construction.

      Liu Xiaoguang

      Research Building of Renmin University of China January 2017

       Preface

      Since the reform and opening-up in 1978, China has achieved remarkable progress in economic development. By 2014, the average annual GDP growth rate was nearly 10% and the total GDP increased 28-fold, a miracle in the history of world economic development. However, with the outbreak of the global financial crisis, China’s economic growth has gradually declined, from a peak of 14.2% in 2007 to 6.9% in 2015, arousing widespread concern about the sustainability of China’s rapid economic growth, especially the controversial imbalance in its economic structure caused by high investment and high savings. Fortunately, China’s job market still seems to be in good shape without being significantly affected in the context of the economic downturn. How to understand China’s economic development, economic structural imbalance and recent labor market performance becomes a major concern for academics and policymakers.

      A review of China’s economic developmental experience in recent decades reveals the following three basic characteristics. First, since the reform and opening-up, China has maintained an extremely high rate of investment, 39.4% per year on average, nearly 50% in recent years, which is almost twice the world average. For a long time, however, China’s return on capital has shown a sustained upward trend rather than a downward trend. Second, since the reform and opening-up, China’s national rate of saving has been rising steadily; especially in the 21st century, it has risen faster, from 37.6% in 2000 to 52.6% in 2010, and it fell to 49.5% in 2014. Third, no significant inverse relationship exists between China’s GDP growth rate and the existing data for the unemployment rate described by “Okun’s law”, which seems to indicate a lack of necessary correlation between China’s macroeconomic cycle and the changes in the labor market. These three characteristics involve China’s investments, savings, economic growth and labor market, so that they are the key to understanding China’s model of economic development. They can be summarized as the riddle of China’s rising return on capital, the riddle of China’s rising saving rate and the riddle of the “Okun’s law” not applicable to China.

      The aforementioned three basic characteristics or riddles of China’s economic development can be understood from different perspectives. This book attempts to make an analysis from the transfer of agricultural labor to gain some preliminary understanding of China’s model of economic development. Before the reform and opening-up, China implemented a strict household registration system to control the flow of farmers into cities, thus forming a separated urban–rural labor market. However, since the reform and opening-up, China has gradually relaxed the restrictions on the flow of farmers in policy. The agricultural labor force has been shifting to non-agricultural sectors at an annual rate of 8 million for more than 30 years. The year 2014 witnessed the fact that the peasant workers with a number of 270 million accounted for more than 50% of the total number of employed people in non-agricultural sectors, and the number of migrant workers accounted for more than 60% of the total number of peasant workers. The continuous large-scale transfer of agricultural labor has not only completely changed the fundamental characteristics and the efficiency of the configuration of China’s labor market but has also profoundly affected China’s investments, savings, technological progress, urban–rural income distribution and macroeconomic fluctuations, and more importantly, it has played a vital role in the rapid development of urban sectors.

      Thus, this book first of all combines the theory of the development of a dual economy and the theory of endogenous growth to analyze the three basic characteristics of China’s economic development from the perspective of the transfer of agricultural labor on the basis of an overview of the basic picture of the transfer of agricultural labor. This book argues that the key in the understanding of China’s high amount of investment and high amount of savings is to understand China’s capital return and productivity improvement, and further to understand the backup technological progress and continuous mass transfer of agricultural labor. The transfer of agricultural labor in turn contributes to the unique pattern of the relationship between China’s labor market and the macroeconomic cycle. Finally, this book proposes some policy suggestions for China to develop macro policies and developmental strategies based on the results of the research. The book consists of the following six chapters.

      The first chapter gives an introduction, which states the research background and ideas of analysis of this book. Considering the three basic characteristics of China’s economic development, this paper further brings forward the three riddles to understand China’s economic development, namely, the riddle of China’s rising return on capital, the riddle of China’s rising rate of saving and the riddle of the “Okun’s law” that is not applicable to China. On this basis, the author proposes the idea of research to interpret and analyze these aspects from the perspective of the transfer of agricultural labor.

      The second chapter specially introduces the situation of the transfer of China’s agricultural laborers, and discusses the general situation and the driving factors of the transfer of agricultural labor, and the supporting role of the improvement of agricultural productivity in China’s economic transformation. The description of the general situation of the transfer of agricultural labor helps to understand the past, the status quo and the prospect of the transfer of agricultural labor. Analysis suggests that the driving factors of the transfer of agricultural labor are the improvement of the urban–rural income gap and the level of infrastructures, the increase in the economy and the return on capital, and the development of private sectors in China, and the existing biased factors such as financial development and public spending on education are unfavorable for the transfer of agricultural labor. With an analysis of the evolutionary trend of China’s agricultural labor productivity in the context of the transfer of agricultural labor, this book investigates the supporting roles of the improvement of the efficiency of agricultural production in China’s economic transformation. Since the reform and opening-up, great progress has been achieved in the efficiency of China’s agricultural production, which can even be regarded as an agricultural revolution. It not only addresses the problem of the security of China’s food but also plays a fundamental role in supporting the contemporary economic transformation.

      The third chapter solves the riddle of China’s rising return on capital through theoretical and empirical analysis. The structural transformation of China’s economy is re-examined from an endogenous perspective, and an expanded model of a dual economy is constructed based on the emphasis on the transfer of agricultural labor and the effect of technology spillover in order to explain the coexistence of the high investment rate and the rising rate of capital return in China. The expanded model relaxes the hypothesis of unit elasticity of the “knowledge spillover model” on the effect of technology spillover to indicate the strong and weak conditions for an economy of different stages to maintain or increase its return on capital. The theoretical research shows that the requirement on the effect of technology spillover is turned from a strong condition to a weak condition for the transfer of labor to realize rising return on capital, and besides, the combination of the transfer of labor and technology spillover is the key to explaining the rising capital return in China. The empirical analysis reveals that the effect of China’s technology spillover meets the weak condition and backs up the rising return on capital in conjunction with the continuous transfer of the labor force.

      The