On Demographics, Part 1: “China will turn grey before it escapes poverty”

“Demographics is Destiny” is a common phrase used by historians and geostrategic thinkers. It isn’t entirely true. But demographics does play a major role in the rise and fall of civilizations and world power.

The Telegraph has an article on Japan’s shrinking population. Most of it is old news:

Japan is slowly shrinking. Last year it became the first nation in modern history to tip over into outright demographic contraction, pioneering a path that will soon be followed by Italy, Germany, Spain, and most of Eastern Europe, with China close behind.

Then there’s the economic woes that come with such a decline in the population:

The population peaked at 128m in 2005 and is expected to fall below 100m by the middle of the century, when 36% will be 65 or older. The dynamics of decline are already contaminating every aspect of the economy. The trend rate of growth has dropped to 1.5%. The blistering 10% pace of the early 1970s seems like a distant dream.

Wages have fallen for the last five months in a row, vastly complicating efforts to stave off deflation. Officials at the Bank of Japan blame the subtle effects of ageing. A bulge of baby-boomers is retiring at the top of the pay scale, to be replaced by younger workers – many on part-time contracts, at half the rate. Salaries have fallen 8% over the past decade.

That’s Japan. Yet what makes the article interesting is how it describes China’s future perils in a few short years, which are far greater than Japan:

It will be much worse for China, where the workforce peaks in just eight years before plunging into the fastest downward spiral ever seen in peacetime. The one-child policy of 1980s and 1990s has already baked a population crunch into the pie, whatever is done now…

China’s development is 40 years behind Japan on most indicators, and its return on investment (incremental capital output ratio) is a dismal 4.4, far worse than those of Japan (3.2), South Korea (3.2), and Taiwan (2.7) during their growth spurts.

When the crunch comes around 2015, China’s per capita income will be a sixth of Japanese and western levels. The society will turn grey before it escapes poverty.

The conclusion to be drawn from the article defies all conventional wisdom — it turns out that, if you look at the demographic realities, China isn’t going to be the superpower of the 21st century, but an aging country with an enormous population and an inefficient industrial economy that is barely rich enough to pay the pensions of all the oldies running around.

What of the rest of the world and the future of the balance of power in the 21st century? More on that in part 2, to be posted in 48 hours.

About Curzon

Lord George Nathaniel Curzon (1859 - 1925) entered the British House of Commons as a Conservative MP in 1886, where he served as undersecretary of India and Foreign Affairs. He was appointed Viceroy of India at the turn of the 20th century where he delineated the North West Frontier Province, ordered a military expedition to Tibet, and unsuccessfully tried to partition the province of Bengal during his six-year tenure. Curzon served as Leader of the House of Lords in Prime Minister Lloyd George's War Cabinet and became Foreign Secretary in January 1919, where his most famous act was the drawing of the Curzon Line between a new Polish state and Russia. His publications include Russia in Central Asia (1889) and Persia and the Persian Question (1892). In real life, "Curzon" is a US citizen from the East Coast who has been a financial analyst, freelance translator, and university professor; he is currently on assignment in Tokyo.
This entry was posted in General and tagged , , , , , , , , . Bookmark the permalink.

17 Responses to On Demographics, Part 1: “China will turn grey before it escapes poverty”

  1. Strategist says:

    Fascinating. China seems to be on the horns of several dilemmas, a greying population being one, the environmental destruction brought on by rapid industrialization another.

  2. Chief Wiggum says:

    Almost all social welfare plans to support old people in retirement are Ponzi schemes, which depend on an ever-increasing population. Once people get some kind of “entitlement,” they seldom give it up and vote out politicians who try to cut it back or eliminate it. Can this be fixed short of allowing the system to collapse?

  3. zenpundit says:

    Interesting post.

    Possible effects here could be a turn in policy by Beijing to welcome immigrants en masse to China as cheap labor for further industrial expansion once young peasant demographics are exhausted; another is separatism as economically dynamic regions seek to lower their costs by secession from poorer regions.

  4. Dan tdaxp says:

    It seems that much depends on how much autonomy China grants the elderly. Western-style welfare societies are predicated on the belief that retired individuals should live like individuals — on their own — rather than as persons in a multigenerational family.

    Deng Xiaopeng introduced the “Family Responsibility System” early in his tenure, I remember. Doubtless care of old folks will follow suit.

  5. Curzon says:

    Chief, I fear that your description of social security as a Ponzi scheme is right on the mark. For all the problems discussed in the US, America has it easy compared to Japan, which is facing a public pension crisis that will only get worse over the coming years.

    Zenpundit: Where is China to get these immigrants? (Or Japan or Russia, which has a far greater current need for new people.) Neighboring countries that could supply the people are India, Pakistan, Vietnam, the Philippines and Indonesia, and farther off, Africa and Latin America. But frankly, if you think France has a tough time with immigrants, developing countries would be even more draconian, and the social problems that would come with large scale immigration to any of those countries is breathtaking to even contemplate.

  6. Kurt9 says:

    I see people here suggesting immigration to solve this problem.

    Perhaps they may try thinking “out of the box” and try this as a possible solution to the problem: http://www.sens.org.

  7. Kurt9 says:

    I think the Telegraph article is silly, because it tells only half the story. Much of traditional industry (agriculture, construction, shipping, etc.) in Japan is heavily regulated and cartelized. This is the reason for the high prices and for the 12 year recession during the 90′s. The Japanese have steadfastly refused to deregulate these industries and liberalize their economy. The reason? Because, like all economic liberalizations, such reforms would result in massive unemployment.

    However, in the case of Japan, most of the workforce in these traditional industries is set to retire in the next 10 years anyways. Thusly, Japan can reform and free-market liberalize its industries in the next 10 years WITHOUT generating the massive amounts of unemployment that would otherwise result from such economic liberalization (Russia, for example). The same will be for China. Most of the older people work in the state-owned enterprises that are bankrupt anyways. Once these people retire, the SOEs can then be safely shutdown, without the massive unemployment that would otherwise result.

    It is in such a manner that the coming depopulation of China and Japan that will actually make it easier for these countries to reform and liberalize their economics.

    The second very, very profound trend that the article fails to account for is the acceleration of technological innovation. Reduction in labor supply will accelerate developments in automation, robotics, and artificial intelligence. It will also accelerate efforts in understanding and eliminating the aging process in humans (click on the link in my previous post).

    Technological innovation always increases productivity FAR more than any increase in population, especially when much of the population increases today are amound the low-skill parts of the world with screwed-up cultures (with regards to technological innovation, economic enterprise, and human accomplishment in general). The Japanese are far ahead of the curve, as far as I’m concerned.

    Perhaps the Japanese will be the first to create the technological singularity?

    Depopulation is an opportunity, not a menace, for the East Asian countries of China and Japan. I still think that Japan and China will lead the world in 2050.

  8. Jing says:

    I can’t believe how everyone is oblivious to the obvious. Welfare-statism is so deeply ingrained that even to so-called conservatives cannot see beyond it. A little bit of critical thinking goes much further than stale pithy memes. China cannot be compared to either Japan, the U.S, or the U.K. in regards to a social-security system. Simply put, China doesn’t have one. Government revenues do not primarily stem from individual income taxes as it does in developed states nor does government outlays go primarily to paying pensions and welfare payments. What existed of the earlier communist social welfare system, even then underdeveloped in comparison to Eastern Europe and the Soviet Union, has already collapsed. Present pension payments, if even paid in full or not late, are quite meager. While a democratic government with an extensive welfare system in which voting power skews towards the elderly can ill afford to allow the social security system to collapse, China is under no such constraints because a) it’s welfare system is practically nonexistent and b) the Communist Party is not subject to direct influence because people can’t vote. The Chinese will just have to make do like everyone else has for the past few thousand years, by working for a living. Private charity and personal savings should be enough, and if it isn’t, then you starve.

  9. zenpundit says:

    Hi Curzon,

    China would have substantial difficulties moving from a traditional country of emigration to one that welcomes immigration but it is nonetheless a shift that could be driven by acute and longitudinal labor shortages. There’s nothing magical about Mexican immigration to the United States that could not be replicated in China with North Koreans, Burmese, Vietnamese and so on.

  10. Michael says:

    Kurt9, my apologies in advance for picking on you, but you’ve reminded me of the problem I’ve always had with the “Depopulation is good” argument. Where do you draw the line? Whether it’s an environmentalist’s “We have too many people” or your “This is a good way to speed reform”, at what point does a society decide it’s shrunk enough and stabilize?

    Does it put a sunset clause on the law, a date or a particular set of conditions? Over a long period of time, that would have limited effect.
    Does it trust in its descendents to know when to stop? That assumes that they’re able to stop.

    The only method of safe population reduction I can think of that might actually work is to start the process now and hope that whatever it’s trying to accomplish is accomplished by the time they have things stabilized. And of course, this assumes that they’ll be able to deal with the consequences not having these things accomplished:P

  11. Curzon says:

    Kurt: I think your comment on technology overlooks the biggest issue with people living longer: they don’t want to work for a longer period, they want to retire for a longer period. And that’s what places the stress on a nation’s economy. Automation allows us to produce more with less, but does not make up for taxpaying workers.

    Jing: I don’t think we’re talking about China bankrupting itself with welfare payments in the same way as Japan and Europe. As China will age before it gets rich, it may never have the chance to get to even the most basic welfare state institutions. And while there are some benefits to the “private charity, personal savings, or starve” option, will China really have a competitive advantage if its shrinking workforce is never able to support a social security/public pension system?

    Zenpundit: I know this horse has been beaten to death, but the unique history of the US (i.e. “we’re all immigrants”) does make it easy. China has a hard enough time accomodating and assimilating the non-Han Chinese within its own borders.

  12. Jing says:

    A shrinking workforce is not too critical for mega-population countries like China. The shrinking workforce will necessitate higher capital investment per worker to increase output, always a good thing. At present and even decades into the foreseeable future, the amount of capital spent per worker in China will be relatively low vis-a-vis developed states and there is much room for improvement.

    The problem with the logic in assuming an aging population will affect economic growth in China in a similar fashion as it does in the developed world is that it relies on the assumption that almost all other variables being equal and consistent. Practically nothing is.

    The lack of a social welfare system will contribute at least three major push factors for China. It increases the propensity of the population to save, which will have the side effect of bolstering the banking system (I can go into this in further detail but the doom & gloom stories about a Chinese banking collapse are depending on how you look at it, either years too late or years premature. Just about everything the popular media reports about the Chinese economy is bass ackwards, but thats a whole ‘nother topic). Increases the retirement age of the average worker out of simple necessity. Finally it may (or may not) increase socio-economic competitiveness among the general population at large if the Friedmanistas are correct.

    I can’t believe how many people forget this simple fact, but it is not warm bodies that drives economic growth, it is productivity increases. Simply put, China’s workers are only a fraction as productive as Japan’s, let alone the United States. Shedding workforce I feel is irrelevant as long as capital investment per worker continues to increase, and in China’s case there is plenty of room to grow as a majority of the labor force remains only marginally tapped. This is where the difference lies in demographics regarding China and the developed world, a declining workforce in Europe or Japan increases the economic welfare burden on remaining workers (decreasing economic efficiency via wealth transfer). In China’s case, since there remains a significant number of unoptimized labor, in the magnitude of 700 million or so, increasing productivity in this area will buffer against any effects of a numerically declining work force.

    This also inversely explains why contrary to the uncritical punditry in the middle brow press, India’s soon to come youth population bulge is going to have quite unpredictable results. People, and by people I mean slack jawed idiots who think the wall street journal is the final word on economics, make too many uncritical assumptions. A more youthful population will be more productive, this may be true, but again only if many things are equal. A youthful population doesn’t provide an end result, it provides an “opportunity”(Another pet peeve, people have difficulty between distinguishing equality of opportunity and equality of outcome, again a whole ‘nother story) of possibly more rapid growth, but it also brings it’s own penalties. India’s population surge is primarily occurring in the most underdeveloped regions of India. India’s urban population birth rate is fairly low, similar to Chinese urban birth rates. The difference primarily lies in the rural areas where Chinese birth rates are still relatively low, but India’s birth rates are sky high. This geographic trends in demographic growth are going to be particularly pronounced in the north, home to India’s most populous and impoverished states. The problem is compounded by India’s lack of infrastructure growth and poor educational record.

    Despite the Indian engineers you may know personally, India’s education system is deeply flawed and requires urgent reform. India’s educational policy during the Nehruvian era, due to the finite amount of resources available, was essentially one of robbing from Peter to educate Paul. In India’s particular case, it meant robbing from 100 Peters for 1 Paul. India’s secondary education system has come at the expense of primary education due to limitation of resources. It costs much more to educate a single college student in a public university than it does to teach a class of children how to read. To this day, India is still paying for this mistake. Even the much heralded IIT’s are a pittance, graduating only approximately 6000 students per year combined. India’s best and brightest to be sure, but it’s essentially the same number of students as a single large U.S. state university.

    You know, I just realized how late it was and how sleepy I am. Also I’m wandering off on a tangent that would fill pages. I’ll finish by economic polemic later if anyone still cares.

  13. Brian says:

    One factor I don’t think people here are considering is this population aging in the context of China’s unbalanced development and social inequality. There is still a large proportion of Chinese who are not involved in the mainstream national economy or the global economy. These peasants from the countryside and their children represent an untapped labor pool that will be able to fill in this supposed gap, or at least mitigate its effects.

  14. Michael says:

    Yes and no, Brian: what’s the birth rate among those peasants? Last I heard, the Chinese government relaxed their 1 child policy a bit for them, but not by very much. By the time the urban employers need them, there may not be that many rural farmers left to help. A similar problem would potentially hinder efforts to bring in labor from Tibet, Xinjiang or Inner Mongolia (not to mention the political challenges).

    Remember, also, Jing’s comment about peasants in India. At some point, they’re going to need hot talents as well as warm bodies; are the schools in China’s rural areas producing those talents?

  15. sun bin says:

    ‘will China really have a competitive advantage if its shrinking workforce is never able to support a social security/public pension system?’

    the question is exactly as curzon phrased.

    the ‘competitive advantage’ china has today is basically a cheap, and hardworking labor force. that is due to disappear soon.
    although jing is right in that in chinese society one just has to live on saving (which explains the high saving rate today), the problem, is not about social unrest or problem, it is about overall productivity at the macro-level. or simply, GDP/cap.

    it is about time the Chinese govt eases on its inhumane one child policy, 10 years ago. it is still not too late i does that now. (instead of immigration)

  16. Kurt9 says:

    Curzon,

    If people live longer (ala SENS), the retirement age will have to go up. If aging is truly defeated (SENS style or the like), people will have a series of mini-careers (10-20 years each) followed by retirement when they become financially independent.

    Michael,

    This is a not a problem. People will start having kids when they feel good and ready. If not, SENS and other anti-aging biomedical technologies will render the whole issue moot by the second half of this century anyways. A post-mortal society will need either restrictions on birth rate or large-scale space migration (like the O’neill scenario of the 1970′s), which will be an option by mid-century.

    The conservative “depopulation” pundits, much like the “population bomb” pundits before them, fail to consider technological progress, particular in biotech and nanotech. Japanese industry is investing heavily in robotics, biotech, nanotech, and AI. It is no accident that the recent stem-cell reversion breakthrough has come out of Japan. You will see much more like that coming from Japan in the near future.

  17. Michael says:

    Maybe, but scientists have been predicting a fountain of youth for a long time now. Until it actually arrives, it makes sense to take continued mortality and senescence into account.