It has been said that China could "get old before it gets rich." True or not, what is seldom realized is how close the country is to a tipping point. A demographic change that has already happened will slash annual economic growth to the 5-6% range, from the 10% of the past decade.
But that will be no bad thing, particularly if personal incomes grow faster than national income, enabling Chinese households to continue to see rapid gains in living standards.
This year sees the first of several indicators defining a fundamental change in growth prospects. 2010 is when the percentage of the population of working age (15-64) peaks at 71.9%, the culmination of a steady rise over 30 years. Together with the birth bulge which preceded the introduction of the one-child policy in 1980 this propelled workforce growth of 33% in 30 years.
Another important marker is just five years away: the absolute size of the working age population will peak by 2015 at the latest and then begin to decline gradually. In practice, the peak of available workers is already close as more young people remain in full-time education for longer and so don’t enter the workforce until well past their 15th birthday. The participation of women in the workforce at 70% is as high as it is likely to get.
Spring has sprung
The change in the age composition of the workforce will be as important as alterations to its size. For almost two decades, rapid economic growth has been possible partly because of the mass migration of young people from rural areas to the towns, driving urbanization and fueling industrialization. Though mostly unskilled, their productivity in manufacturing has been much higher than in agriculture.
But this spring of youth escaping rural drudgery is drying up. For China as a whole there are currently only 106 million people in the 15-19 age group, compared with 122 million in the 20-24 group. The continuing decline in the number of the young and mobile has been greatest in rural areas. The pace of urbanization will inevitably slow sharply. China now has 378 million people in their 40s and 50s, but only 273 million under 20. This means the country will have to find other ways of sustaining worker productivity growth.
The omens are mostly good. Fast-rising standards of technical education are one factor. Another is high savings rates, which enable investment in machinery. Labor shortages will push up wages, which have long lagged productivity, and spur companies to greater efficiency. Corporate profits may fall, but household incomes and consumption will rise. Labor market forces should begin to reverse the income imbalances that have become so extreme over the past decade. More consumption will make for greater long term economic stability than today’s lop-sided focus on investment regardless of its rate of return.
Less natural pressure for urbanization will also make it easier to finally end the inequality imposed by the hukou system.
There are challenges. What will happen to agriculture as rural populations get ever older? Will consolidation of land holdings, now that transfers of agricultural land are allowed, happen on a large enough scale to allow the rapid mechanization of farming? Will China be able to combine already very high land productivity with big gains in labor productivity, all the while conserving increasingly scarce water resources?
Then there is health. It will probably not be long before the medical problems of late middle age begin to impact the economy. The very high rates of diabetes, hypertension and smoking-related diseases are likely to take many of out of the workforce before 65.
The really big problems of an aging society, however, don’t hit till after 2030. The new decade is thus still one of huge opportunity to raise income and skill levels and reduce inequality at the expense of headline growth.
The party leadership needs to start managing expectations so that 5-6% growth from a static labor force is seen as a worthy achievement. Attempts to sustain 8-10% growth rates through force-feeding investment by state entities may work in the short run, but will be a wasteful drag longer term and hold down real household incomes.
The demographic data alone tell us that quality must now substitute for quantity.