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China’s New Leaders Face an Economic Turning Point

Author: Peter R. Orszag, Adjunct Senior Fellow
November 14, 2012
Bloomberg.com

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As the U.S. has been consumed by its own political transition (or, more precisely, lack thereof), it has paid scant attention to the one occurring in China.

Yet how the new Chinese leadership navigates its economic challenges may well turn out to be far more important to the global economy than how the fiscal cliff drama plays out in Washington.

The opening of the 18th National Congress of the Communist Party of China this month, which will usher in the presidency of Xi Jinping, has been accompanied by a variety of indicators that the Chinese economy is strengthening a bit. But there's reason to worry that Xi will not enjoy such good economic news throughout his tenure.

A growing body of academic studies warns that economic growth in China might slow substantially in the years and decades to come. One crucial reason is that, in the past, it has been driven disproportionately by workers moving from farms to factories. That method of raising productivity may now be largely exhausted -- because most of the workers who could successfully make the transition already have.

The point at which moving workers from agriculture to manufacturing no longer leads to economic gains is called, in the literature of economic development, the Lewis turning point -- after the Nobel-winning economist Arthur Lewis. If China is at or near its Lewis turning point, Xi will face an extraordinary economic challenge, with far-reaching geopolitical ramifications.

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