China's Challenge for the Ages
A crisis-weary world has been nervously watching China’s economic growth slow, most recently to 8.1 percent for the first quarter of 2012. This is the weakest economic performance since the third quarter of 2009. Efforts to contain inflation along with a shaky global economy have been the generally accepted culprits, although analysts have been debating the “hard landing” versus “soft landing” scenarios. The key question is: Will China’s growth moderate to a stable, sustainable clip or will it slow far more than necessary, with globally disruptive implications?
But there is another, perhaps more significant, question. Is the world’s second largest economy on the leading edge of a structural slowdown, with a weakening of potential growth? Like human beings, economies slow as they mature and almost inevitably China’s long-term growth will indeed moderate. But one aspect of this country’s architecture is unusual: demographics. China has a demographic profile that is more like that of a rich nation than even a rapidly developing economy. It is a country that, as many have noted, might be one of the few in history to “grow old before it grows rich.” The consequences for China’s economic development path could not be more significant and, as such, the Middle Kingdom’s demographic evolution will have a sizable impact on Asian development and, ultimately, global growth.
This is certainly an important story. Nonetheless, it is one that has been discussed for many years. It is somewhat surprising, therefore, to see an article on this topic in last week’s Economist. Lagging as it might be, however, the article highlights data points that should be monitored. China’s fertility rate has fallen well below the population replacement rate and is expected to stay there through the end of the current century. The richest regions of the country, such as Shanghai, have fertility rates far lower than the national average. Further, China’s demographic path has pushed it to the leading edge of a workforce contraction. The article cites United Nations projections in noting that between 2010 and 2050 China’s workforce is expected to shrink as a share of the total population by 11 percentage points. Its old age dependency ratio (the ratio of the number of people 65 and older to those in the 15 to 64 cohort) will soar. These are the demographic problems of advanced economies. They are challenging the world’s largest developing economy.
I published a paper on this topic in 2005 with conclusions that have a few similarities to some of the points presented in the Economist article, most importantly on the critical labor issue. I asserted that if the path of rapid national development continues (which, in spite of the global crisis, it certainly has) and if policies allow for the full maturation of labor and capital markets (better, but still a ways to go), then China will be at the stage where population matters a great deal to economic growth. At that point, I concluded, the most pressing demographic issue will be labor supply. The dwindling supply of labor will place upward pressure on wages, all other things constant. In concordance, the Economist article notes the increasing scarcity of cheap labor and concludes that as the workforce starts to shrink after 2013, these problems will worsen.
China is poorer than other aging nations and its demographic transition has been more abrupt. It must face up to this unique challenge with a solid pension structure and a modern, labor force enhancing immigration policy. Further, it must start to rethink the benefits of its one-child policy. As my 2005 paper demonstrated, the one-child policy is not, by any means, the only reason for low fertility and population slowing. But the policy must be dealt with as China’s population starts to confront downward pressures.
China’s leaders have only to look to Japan and Russia for examples of the daunting consequences of failing to confront demographic challenges. The rest of the world must understand that a unique set of population parameters will contribute to what might be a sooner-than-expected weakening in China’s long-term economic growth. Such a structural slowdown may very well be under way. It is yet another adjustment in what appears to be a world full of adjustments.