Celebrity Column: China’s Economy Faces Labor Shortage and Aging

China is facing an aging population. China’s economy has grown tremendously since Deng Xiaoping abandoned the Mao-era economic model. The generation that drove the development is now retiring, and the young workforce that can replace them is young and yellow.

The demographic problem poses a huge challenge to the Chinese economy. This problem is of the government’s own making. After all, it was Deng Xiaoping who enacted the one-child policy to limit the number of people. However, the cause of the problem is obviously not as important as the absence of the problem itself. The shortage of young workers often causes a slowdown in economic growth and development and robs the Chinese economy of its dynamism.

While the Chinese Communist government is aware of this drawback, it is curious that it has been overlooked in the many insightful and detailed critical analyses of the development of U.S.-China relations in the West. This is not to say that those authors are glossing over the facts, but most of them have only diplomatic, military and political experience, but lack economic background, often based on the assumption that China’s economy is unaffected, maintains its original momentum, and continues to be an unstoppable economic giant against the world.

If the Communist Party’s Belt and Road Initiative succeeds, these assumptions are still relevant. However, speculating on the possibilities requires that, regardless of the aspect of the analysis, one needs to consider the dramatic changes that are about to take place in China, its dampening effect on this otherwise huge economic entity, and the indirect effects on China’s economic, political, diplomatic and military capabilities in the coming years.

Workers walk through the Gwadar Port in Pakistan. This is a multi-billion dollar infrastructure project invested in by the Chinese Communist Party’s “One Belt, One Road” program. The photo is undated.

China’s demographic pressures are very different today than they were during its rapid economic development. When Deng Xiaoping abandoned Mao’s failed economic model (and enacted the one-child policy) in 1979, China had abundant labor resources.

At that time, the working-age population (15 to 64 years old) accounted for about 90% of the adult population. For every 1 person who retired there were 9 people who could take over the job, so the needs of industrialization and development were easily met. In contrast, the ratio of retirees to employed people in the United States at that time was less than 1 to 5.

But the one-child policy undermined this advantage. According to UN demographers, China’s birth rate was lower than its death rate, with each woman having an average of only 1.6 children in her lifetime.

By the mid-1990s, the rate of young people entering the labor force began to slow, and by this century it was even lower than the number of people retiring. In fact, China’s labor force is shrinking, both in absolute numbers and relative to the number of retirements.

Despite Beijing’s recent easing of its one-child policy, it will take 15 to 20 years for new births to have an impact on the labor force, and preliminary data suggest that fertility rates are not rising as a result.

As a result, UN demographers estimate that by 2040, China’s working population will be 10% lower in absolute terms than it is today, while the number of retirements will increase by about 50%, so that the ratio of retirements to the labor force is less than 1 to 3.

This is very similar to the situation in Japan. 3 workers must work to support themselves, their families, and 1/3 of the retired population. China will have little productive surplus to invest in the future, let alone the ambitious projects that have received so much attention in the past. China’s economy will lose much of its dynamism and flexibility.

Unlike aging Western economies, the CCP cannot count on immigration to mitigate this effect. Few people are keen to have to come to China, and even if there were such people, with China’s existing huge population base, the flow of people would have to be unprecedentedly high enough to have an effect. In any case, that’s not going to happen.

Chinese migrant workers arrive at Shanghai station to take the train back home for the New Year on Feb. 8, 2007.

Of course, labor does not mean everything. As technology advances, especially artificial intelligence (AI), and the productivity gains it brings, China can make more efficient use of its existing human resources and will certainly be able to make great strides in these areas, but an aging population will also limit the economy’s ability to innovate.

Based on Nobel Prize winning patent data and statistics, demographers have determined that most of society’s inventions are made by the 30 to 40 year old age group. Cross-country studies show that this fact applies to all cultures and economic systems. Within the next 20 years, the proportion of this age group in China’s workforce will shrink from the current 43% to 37%. This relative loss is likely to be less damaging to the CCP’s unified planned economy than to the more open economy of the West, which relies heavily on innovative competition, but it has not had the slightest positive effect on China’s economic development.

On the financial side, an elderly population in need of care will impose other constraints on China’s economic prospects. By 2040, with 25% of the adult population over the age of 64, China will become what demographers call a “super-aged” country, even worse than Japan is today.

So far, less than 65 percent of Chinese workers have at least a pension plan, and the burden of this large retired population will be borne by the central or provincial and local governments, which is all the same thing in China. These huge financial needs will absorb a huge amount of government resources. The International Monetary Fund (IMF) estimates that the amount of pensions the government needs to fund is now already 100 percent of gross domestic product (GDP). Unless Beijing’s policymakers act quickly, the burden will only grow, yet they seem to have no intention of doing so.

In this context, the Communist government is likely to see the Belt and Road Initiative as a way to mitigate the demographic impact. If the CCP accumulates ownership and control of foreign facilities through Belt and Road before demographic pressures intensify, it could compensate for the loss of domestic economic capacity.

Currently, the CCP primarily uses its own workforce to build and manage Belt and Road projects, but could later use local labor, as the British Empire did, with only its own citizens in management positions. Perhaps under such an arrangement, the CCP could enlist a group of locals who would be loyal to the CCP regardless of their own country or government, just as they were during the British colonial period.

The point here is not to say that this great Chinese nation is going to disappear or that its economy will stagnate. I do say, however, that contrary to much of the discussion and analysis of U.S.-China relations in today’s media, China’s economic growth will slow significantly, and the pace of development and innovation will slow.

Beijing will no longer be able to attract observers with ambitious investment plans as it once did. This general environment will also affect Beijing’s military ambitions and space strategy, which are of course fairly small expenditures in financial terms compared to basic development or future pension needs.

The Chinese Communist Party is gradually moving toward Japan in some key ways, except that Japan’s economy was already well developed before its population aged, while Chinese society is declining before it gets rich.

The original article China Has a Problem With New Working Hands and Minds was published in The Epoch Times

Author Bio.

Milton Ezrati Milton Ezrati is a contributing editor to The National Interest, a professor emeritus at the Center for Human Capital Studies at the University at Buffalo (State University of New York), and chief economist at Vested, a New York-based communications firm. economist at Vested, a New York-based communications firm. His latest book is Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live).