China’s Looming Demographic Problem Moves Steadily Up Over The Radar

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 China’s birth rate has plummeted while the number of elderly people has risen only gradually. As a result its “dependency ratio”—the proportion of dependents to people at work—is low. This has helped to fuel China’s prodigious growth. But this “demographic dividend” will peak in 2010. China’s one-child policy will keep birth rates low, but as life expectancy continues to increase, so will the dependency ratio, reducing the country’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.

Update

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.

This entry was posted in A Fistful Of Euros, Economics and demography, Governments and parties, Political issues by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

7 thoughts on “China’s Looming Demographic Problem Moves Steadily Up Over The Radar

  1. There is one thing to keep in mind : most of the chinese workforce is still in the countryside so the future “labor shortages” may well be vastly overestimated….

  2. Old people: unrevolutionary, wealth-sucking and politically active! We can expect such a thing will keep China’s fledgling military-industrial complex in check. This sort of development is what will ensure peace through the world from Vancouver through Berlin to Vladivostok.

    Those between Seattle and Key West however have another generation aimless wars of peace on some unsuspecting corner of world, a few countries more will find themselves “nation-built” into the dust.

  3. with over two trillion in foreign reserves, they could easily afford to hire a few million unemployed americans to empty their bedpans..

  4. rjs:
    They will spend all their reserves to bailout the biggest credit bubble in the world, which is now being inflated. On the surface it looks like a enviable GDP growth.

    As to China’s demographic challenge, it’s not difficult to imagine mandatory euthanasia for old people being introduced in a similar fashion as “one child policy”.

    In a civilisation where human life is valued at next to nothing, everything is possible. Which is by the way the reason why China would never really rule the world. Few people would like China as the role model for their own country.

  5. obviously, my comment was an attempt at wry humor; to the point, however, even without a one child policy, a similar demographic problem is also facing japan, russia, and most Euro countries, what will your solution be?
    in the US, our demographics have been supplemented with substantial immigration…

  6. Erik is correct: labour shortage, what labour shortage? China has a loong way to go before their agriculture is fully mechanized, so more available jobs in the cities just empties out the villages faster, and good riddance to village life, too – as for the rest of the world.. the rising dependancy ratio is as much a “side effect” of increasing lifespans as it is of declining fertility, and if it starts to result in honest-to-goddess labour shortages of the “unemployment just hit 0.5%, and falling” kind we saw in the post wwII era, immigration restrictions can be lifted, and retirement ages can be raised.

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