As Israeli blogger “Nobody” points out for us,the Economist has been giving increasing coverage to global demographic issues of late, and this week it is China’s problem that has caught their eye.
As the Economist point out, the impact of so many years of one child per family policy is going to be significant, and while changing it now will be too late to avoid short term damage, in the longer term such a change is essential, if the country ever wants to return to some kind of structural stability.
SINCE the 1970s Chinaâ€™s birth rate has plummeted while the number of elderly people has risen only gradually. As a result its â€œdependency ratioâ€â€”the proportion of dependents to people at workâ€”is low. This has helped to fuel Chinaâ€™s prodigious growth. But this â€œdemographic dividendâ€ will peak in 2010. Chinaâ€™s one-child policy will keep birth rates low, but as life expectancy continues to increase, so will the dependency ratio, reducing the countryâ€™s potential for growth. The government could yet salvage the situation by loosening its one-child policy. More children would increase the dependency ratio until they were old enough to join the workforce, but reduce labour shortages in the long term.
Again, no one really knows what the present Chinese TFR actually is. The US census bureau have just revised down their estimate to 1.5 from 1.8, but many internal studies put it at nearer 1.3, which, if accurate, is bound to produce a major structural distortion in the population pyramid. The economic consequences – for the whole planet – are also bound to be significant, as “Nobody” points out:
Meanwhile, given the general propensity of China to rapid economic growth and no less dramatic deceleration of its population growth (the workforce will stop growing pretty soon actually), the next superpower is about to transform itself into a huge vacuum machine sucking off labor surpluses from around the globe. Inside China labor shortages will develop and wages shoot up pushing labor intensive industries out of China and generating demand for these products from outside China. In short, after a decade or something, the global economy, and even more so the economies of the third world, may get a friendly push forward from the world’s next superpower, and a very massive one on that occasion.
What China’s demographic deficit has in store for all of us a decade or so from now is actually far from clear, but one thing is certain, it will be a roller coaster ride. Get ready to fasten your seatbelts.
Quite coincidentally, a new blog was born yesterday – the anarchist banker – written by a young Portuguese economist who is a unabashed fan of Fernando Pessoa. His first post reviews a paper – The End of Chimerica – written by Niall Ferguson and Moritz Schularick.
For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with US overconsumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China’s economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.
I would just note in passing that the China-United States nexus was not the only export-lead/excess consumption duet we just left behind, there was the Sweden-Baltics/Ukraine one, the Germany-Southern Europe one, and the Japan-RoW one (rest of the world). As we wave bye-bye to one era, it is just worth noting than we don’t seem to have a very clear idea of what the one which lies ahead may look like.
Anyway, thanks to the anarchist banker blogger for drawing this all to our attention. As the author himself admits, posting may be infrequent (anarchic?), but they should always be worth the read.