Beijing is now well aware that decades of its one-child policy have finally started to deprive the Chinese economy of workers and growth potential. The first sign of recognition came in 2016, when the government finally repealed this almost 40-year restriction on family size. Although there has been little public reaction and birth rates remain below the replacement rate, the country has so far avoided an outright decline in the population only because longevity has allowed the population aged retirees to develop. China still faces a shortage of young labor entering its workforce, a condition that will only worsen, slowing the rate of growth of the economy and making it less flexible.
China is already facing a dire demographic profile. According to the 2020 tally, some 13.5% of the country’s population is over 65. This figure is up 9 percent in 2010 and a record high. Some 18 percent of the population is under 15, up slightly from 16.6 percent in 2010, but still historically low. People of working age – the 15 to 60 age group – have fallen from around 7 percent over the past decade to just under 63 percent of the population. China now has just over 4.5 people ready to work for every retiree. These people must support themselves and their dependents and produce more than a fifth of what a retiree needs. The situation leaves the economy with a limited surplus of manpower for investment and is nowhere near the nine working-age people for every dependent retiree that China had when it began its great development 40 years ago. years. Even in the unlikely event that the birth rate increases, it will take 15 to 20 years to affect the workforce. The United Nations predicts that China by 2040 will be barely three years of working age for every dependent retiree, in dire need of working hands and minds.
There is no doubt that today’s authorities in Beijing regret that Deng Xiaoping implemented his one-child policy or that their ruling predecessors maintained it for as long as they did. China likes to boast that it has more patience than the West and a longer view, but in this case it was all so short-sighted. Demographers warned about the policy early on. Now the authorities, beset by this unnecessary mistake, are looking for ways to mitigate its effects. They gave four responses: 1) raising the average retirement age; 2) shifting the focus from production to higher value products so that fewer workers can produce more wealth; 3) focus on robotics and artificial intelligence (AI) so that manufacturing can continue to grow even with a limited workforce; and 4) locating production facilities outside of China, what the Americans call “offshoring”. Even taken together, these responses can only mitigate, not reverse, the negative economic effects of China’s demographics.
Efforts to get more Chinese people to work later in life can help. China has room. Currently, the retirement age in China is 60 for men and 50 to 55 for women. This is considerably lower than the OECD average of 64 for men and 63 for women. Switching to the OECD standard would provide China with an admittedly aging workforce to fill the shortage of young workers. But even that has limits. Retirees might not want to return to work, and even Beijing wouldn’t risk the social discord that this force would cause. For similar reasons, not even the autocratic government in Beijing would try to induce a return to work with a sudden halt in pension payments. The only possible option would then be to seek a gradual change, for example by raising the retirement age for people five years or older before eligibility. This approach might work in the longer term, but it would delay any relief from demographic pressures for years.
Two other avenues mentioned to mitigate the harmful effects of demography – the shift to higher value-added production and the use of robotics in the production process – could have an even longer lead time. After building its initial growth on a relatively cheap and unskilled labor force producing low value-added items for export, China has already started its transition to more mechanized production techniques and low-cost production. higher added value. But the movement has been slower than initially expected. To fully implement these alternatives, China will need a better trained and better educated workforce than it has. Certainly, there is a lot of talk about the number of engineers graduating each year in Chinese universities, but this effort for a generalized upgrade of production techniques, as well as the production of products with higher added value, requires more than training. elite. This will require a general upgrading of education and training of the workforce in general. No doubt the Chinese people could live up to the need, but it will take time. Today, the median education level of the Chinese workforce is only eight years and is highly skewed in a few regions, mainly Beijing and Shanghai. Even if China suddenly devoted much more resources than it does now to large-scale human capital development, which it does not appear to be doing, the working population could not support a significant change in product or process for years to come. .
An indication of the difficulty of this change in process and products is shown in the rate of productivity growth. Even with all the improvements announced by Beijing and all the money invested in robotics in recent years, productivity growth in China has not increased as fast as expected nor certainly enough to make up for the growing labor shortage. artwork. According to research done on global productivity by the University of Groningen in the Netherlands and the University of California at Davis, the productivity of labor and all factors of production adjusted for inflation, after soaring in China at a remarkable rate of 2.0 per year between 1980 and 2005, has since expanded to an annual rate of only 0.7% and just when China has been working the hardest to implement robotics and AI.
Most interesting is Beijing’s plan to compensate for part of the demographic disadvantage by offshoring production. Europe, the United States and Japan have long engaged in offshoring, mainly to find cheap labor. Indeed, China served as a destination. There is no doubt that the 2019 “trade war” with the United States has accelerated the Chinese relocation process, with Chinese producers avoiding American tariffs by locating production in subsidiaries elsewhere, in Vietnam for example, or in Indonesia.
Now that Beijing is looking to expand the process for demographic reasons, it will face a particular problem with China’s approach to economic organization. Businesses in all countries resent the loss of control when setting up facilities overseas. China’s top-down command approach to the economy will be particularly hard to come to terms with this loss of control, especially when it involves state-owned enterprises (SOEs) that dominate much of Chinese industry and which will need to be involved if the offshoring is to have an impact. Perhaps the Belt and Road Initiative (BRI) reflects Beijing’s efforts to close this circle by using loans to retain more overseas control than would otherwise be the case.
These four responses to China’s demographic challenge could help alleviate the economic constraints implicit elsewhere in the demographic situation, but as should be obvious, they cannot outweigh all the adverse effects. Each mitigation effort would take a long time to implement, time that China does not have. Raising the retirement age could help a lot, but for social peace, it must be done gradually. The stages of modernizing Chinese production and improving the added value of its production will require fundamental educational adjustments that Beijing does not seem to have even started. The BRI is only just beginning and is already meeting some resistance from countries to which Beijing had hoped to accede. These responses may keep the Chinese economy on a growth path when demographic imperatives would otherwise dictate decline or stagnation, but they are insufficient to maintain the kind of growth and flexibility that China has become accustomed to and that the world now waits by reflex. It is ironic that the whole problem is the product of the authoritarian economic system of command that Beijing still clings to.
Milton Ezrati is an editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University of Buffalo (SUNY), and chief economist for Vested, the New York-based communications company. His latest book is “Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live”.
The opinions expressed in this article are those of the author and do not necessarily reflect those of The Epoch Times.