World relies on Xi Jinping's economic moves
Whether is it a matter of policy moves or a deeper issue of economics, the world will be hoping the new leader can find the right answers
As the United States has been consumed by its own political transition, or lack thereof, it has paid scant attention to the one occurring in China.
Yet how the new leadership navigates its economic challenges may well be far more important to the global economy than how the fiscal-cliff drama plays out in Washington.
The Communist Party's 18th national congress this month, which will usher in the presidency of Xi Jinping, has been accompanied by a variety of indicators that the economy is strengthening. But there is reason to worry that Xi will not enjoy such good economic news throughout his tenure.
Academic studies warn that economic growth 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 make the transition already have gone.
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 Prize-winning economist Arthur Lewis. If China is at or near its Lewis turning point, Xi will face an extraordinary economic challenge, with far-reaching ramifications.
Estimates by Zhu Xiaodong of the University of Toronto provide some sense of how large the historical gains from shifting workers from agriculture to manufacturing have been.
In 1978, agriculture accounted for 69 per cent of employment. And because average labour productivity outside agriculture was six times as much as inside it, shifting workers across the sectors generated huge productivity gains. By 2007, however, agriculture accounted for only 26 per cent of total employment.
As a result, since 1997, migration rates have risen, on average, less than 5 per cent a year, down from 10 per cent between 1985 and 1997.
At the same time, the relative quality of the migrant workers appears to be declining. For example, their average age has been rising because most young workers, who presumably are better suited to factory work, have already left.
A slowdown in growth of the pool of productive workers can be expected to generate wage pressures in the coastal manufacturing regions, and that is indeed what Li Hongbin , Li Lei, Wu Binzhen and Xiong Yanyan Xiong of Tsinghua University have already found.
In 1978, the annual wage of the average urban worker was US$1,004 in 2010 terms. By 2010, it had risen to almost US$5,500. Wages have grown especially fast for more highly educated workers, but they also have risen noticeably for the less-educated. Somewhat surprisingly, wages are higher at non-exporting companies than at exporting ones.
What's more, the Tsinghua University researchers say, the nation is "already experiencing labour shortages". They point to survey data from the Ministry of Human Resources and Social Security suggesting that, in a sample of 117 cities, the number of newly created jobs now exceeds the number of job seekers.
In 2001, by contrast, this same survey found that new job seekers exceeded newly created positions by 50 per cent.
Not everyone considers this to be evidence that China has reached the Lewis turning point. Jane Golley and Xin Meng of the Australian National University say there is still little to suggest rising wages are the result of a shortage of unskilled labour.
"China still has abundant workers who are underemployed with very low income in the rural sector," they said. "We argue that China's unique institutional and policy-induced barriers to migration have prevented many rural workers from migrating to cities."
This interpretation is much more encouraging, as it suggests that China could reopen the tap of migration with policy changes.
The IMF says that reality is that the economy will reach the Lewis turning point between 2020 and 2025, which is about the time Xi's term ends.
Even after that point has been reached, high growth is still possible, but will be more difficult.
Xi will face enormous difficulties. As my former colleague Larry Summers puts it, China represents a greatly leveraged bet on economic growth, and if growth is much harder to achieve, that bet may turn sour.
So for Xi's sake, and the world's, let's hope the growing evidence of wage pressures, reduced migration and labour shortages reflects obstacles that he can remove, rather than an inherent constraint on growth.
Peter Orszag is vice-chairman of corporate and investment banking at Citigroup and a former director of the Office of Management and Budget in the Obama administration