China Will Get Old Before It Gets Rich

Jonathan Low’s post on “The Lowdown” titled “China Will Get Old Before It Gets Rich draws attention to the issue that I highlighted here: China’s Economic Time Bomb: The Approaching Crisis and here: Slowing Chinese Economy Impacts Multinationals.
In it, he discusses how China’s one child policy, originally developed to address the economic and health issues after its revolution in 1948 (“too many people and insufficient resources”) has led to the problem of an ageing population with too few working age citizens to support the economy.He provides some telling excerpts of Leith van Onselen’s book “Naked Capitalism.” Here are a few of van Onselen’s key points:

Origins of the Problem

  • China’s ageing problem stems from its ‘one child policy’brought into effect in 1979 that prevented around 400 million births between 1979 to 2010.
  • This policy initially produced a population pyramid optimal to economic growth – that is, where the largest segments of the population were neither young nor old, but in the middle (i.e. working age).
  • China’s fertility rate (the number of births per woman) is now close to 1.2 – well below Japan’s 1.4.

Unintended Consequences:

  • The United Nations forecasts that the number of working aged people to dependents is set to almost halve over the 50 years from a peak of 1.9 workers to dependents in 2015 to only 1.0 by 2065.
  • One of China’s top demographers and National People’s Congress standing committee member Cai Fang has warned that a slump in the country’s birth rate to Japanese-style lows or worse threatens to slash the supply of new workers and undercut the nation’s rapid economic growth.
  • Fang predicted that China’s dependency ratio (children and elderly to the working-age population) would equalize next year (2013) – the fastest such change in modern history.

But Isn’t This Happening Everywhere?

Not nearly to the extent that is is in China.

  • Professor Cai, director of the Chinese Institute of Population and Labour Economics, said China has been taking only 9 years to reach the the equalization of its dependency ratio next year (since the so-called “Lewis point” at which the supply of cheap agricultural labor for city factories started to decline in 2004.
  • The same demographic process has taken 30 years in Japan and 40 years in South Korea.
  • China will hit the point where there are more dependants than workers next year, 3 to 4 times faster than during the economic development of Japan and South Korea
  • This imposes major economic modernization challenges while “our potential long-term growth rate will decline,” according to Professor Cai.

It Will Be Much Worse than Elsewhere

  • The well-known likelihood of China facing an aging population before becomes a middle-income country will be accentuated by the faster-than-expected decline in its fer­tility.
  • “When Japan faced the end of the demographic dividend (when there are a rising number of workers to dependants) it was already rich and had 30 years to adjust,” according to Cai.
  • Just as the Japanese economy hit the wall in 1991 with the collapse of a property and stock market bubble just as its working population began to shrink, China faces an equally huge property bubble and very similar demographics as Japan’s at that time.
  • Japan’s dependency ratio in the 1990s – i.e. the ratio of the non-working population, both children (< 20 years old) and the elderly (> 65 years old), to the working population – is very similar to China’s in 2010. The profiles of the number of working age people per dependent is very similar in the two countries.
  • However, Japan was a very wealthy country when its demographic time bomb exploded, with per capita incomes exceeding that of most other Western nations, while China’s per capita income is well below the West.

“Interesting Times” Ahead

The future that Leith van Onselen’s facts point to are sobering. While China achieved in 50 years what it took most European countries a century to accomplish – increasing life expectancy from the 40s to over 70 – its 60+ population will now increase dramatically – from 200 million in 2015 to over 300 million by 2030.

But the question of how to meet the rising demand for health care services and retirement benefits remains unsolved.  With a virtually non-existent government pension and social welfare systems, Chinese leaders will need to shift resources away from investment and production in the coming decades.

Today, China’s 65+ population is only around 8%, which is a lot lower than that of the US, Germany, or Japan (around 20% for all three). But they’ll catch up in about 30 years, when they may face the same problems that have led to Japan’s current economic stagnation: a declining labor supply, aging population, and increased public spending obligations.

Making matters worse, China’s elderly population won’t be able to rely on the traditional Chinese retirement plan: Having many children to look after them in their old age.

In addition to this problem, the gender imbalance and ratio of females in the labor force is also likely to create additional challenges for a society which traditionally has left elder care to its women (especially daughters-in-law).

The new census data show that little progress is being made to counter this troubling trend. Among newborns, there were more than 118 boys for every 100 girls in 2010. This marks a slight increase over the 2000 level, and implies that, in about 20 or 25 years’ time, there will not even be enough brides for almost a fifth of today’s baby boys—with potentially vast destabilising consequences.

The Brookings Institute report summarizes the outlook on China’s looming demographic crisis:

China’s slow recognition and inaction in the face of its impending demographic crisis….reflect policy makers’ lack of understanding of the changing demographic reality. Inertia also results from the resistance of the country’s birth-control bureaucracy, which formally employs half a million people….The looming demographic crisis will largely define China in the twenty-first century. Given that demographic changes take time to develop, and that their ramifications are not only massive but also long-lasting, China’s inaction has already proved costly—and will only grow more so the longer it persists.

The famous expression,”May you live in interesting times“, often referred to as the Chinese curse, is reputed to be the English translation of an ancient Chinese proverb, although it may have originated among the English themselves. No known user of the English phrase has supplied the purported Chinese language original, and the Chinese language origin of the phrase, if it exists, has not been found, making its authenticity, at least in its present form, very doubtful.

However, in this case, the curse of one child per household is one that the Chinese authorities have brought upon themselves, and its consequences could well be “interesting times” for China and the rest of the world.