This December will mark the 30th anniversary of the Chinese
Communist Party's decision to initiate market-oriented economic
reform. At the time, China was an insignificant part of the world
economy. Now, scarcely a week goes by without a new projection of
China bulls start with the growth of the past three decades, pat
it down somewhat, then extend the lines forward on a graph to reach
wondrous conclusions. But will the expansion be sustained for
another 30 years?
The answer lies ultimately in the future of market reform, which
does not look promising of late. But the choice to reform further
will not occur in a vacuum. There are core variables that frame it.
Case in point: population demographics. For the last 30 years,
demographics in the People's Republic of China (PRC) have been a
very strong ally of economic growth. That support, however, will
soon weaken, starting a transition period toward weaker growth.
With the wrong policies, the much-heralded era of Chinese
economic leadership could stop almost before it starts.
People and Growth
It seems unnecessary to chronicle the contribution of labor to
growth. For the first 20 years of reform, the PRC was capital-poor,
and labor did the heavy lifting. Even now, the attractiveness to
foreign investors, for instance, stems primarily from features of
the labor market.
This component of China's success is built upon a well-known
population boom. As the worst of the Cultural Revolution began to
ebb around 1970, net births accelerated sharply, eventually fueling
reform-era expansion. The party responded to population pressure in
1979 with the infamous one-child policy. This policy has had a
dramatic impact on urban families, and the demographic changes it
begat may eventually have a dramatic impact on the entire
End of an Era
For nearly two decades, new workers have poured into the labor
force in such numbers that the party has been compelled to keep
growth high to accommodate them. Annual entrants to the urban labor
force are typically put at 10 million. In a startling change, the
central government's Chinese Academy of Social Sciences (CASS) sees
labor surpluses beginning to dissipate as soon as next year. The
first effect of the demographic transition is therefore beneficial:
fewer annual entrants to the labor force and a less pressing need
to grow for the sake of jobs.
There is a catch. As the demographic transition takes hold
during the next decade, pressure will rise to find greater
efficiency in the use of labor. Market reform is the obvious
option; without it, China will find it more difficult to sustain
its high rates of growth.
Rural Pension Peril
A failure to genuinely reform in this environment could also be
a major fiscal problem. There were more than 150 million people
over the age of 60 at the end of 2006, compared to fewer than 50
million in the U.S. The proportion in the PRC is still much
smaller, of course, but it is absolute numbers that matter with
regard to pension payments.
In an 800-million-strong rural population, there were only 55
million contributing to the national pension scheme at the end of
2006, and the number was shrinking.
Fewer than 5 million people are receiving payments averaging
less than 40 percent of the unpleasantly low per capita rural cash
income. Yet, between 1991 and 2006, the central government did not
contribute a dime to rural pensions.
Affluence is spreading in urban areas in no small part due to
the surplus of rural labor. Rural areas are still poor and will
soon begin to see labor balance. Without a historically
unprecedented effort to channel resources back from urban to rural
areas, changing demography means affluence will not spread to the
majority of the population. If the rural pension program remains
effectively non-existent, there could be outright stagnation in
rural household income as a smaller number of workers earn more but
are forced to support a larger number of retirees. The China
miracle might stop at the city limits.
The CASS transition is only the beginning. Official data imply
that no fewer than 135 million people were between the ages of 30
and 35 in 2005. As these citizens age, the reserve labor
pool will become inadequate. Among other things, export
competitiveness will erode, weakening a cornerstone of expansion
and testing the party's capacity for innovative policy.
Unless the retirement age shifts, the group of 135 million will
begin to leave the labor force soon after 2020-the beginning of the
end for the brief period of labor balance-and start to push China
into an actual labor deficit. The State Committee on Aging then
sees the growth contribution of the pure quantity of labor actually
turning negative after 2030.
At that point, China can be confidently projected to be middle
income and, in urban areas, perhaps even tending toward rich. The
impact of labor deficit in wealthy economies is clearly seen in a
sometime model for China: Japan. After four decades of a young
population and rapid growth founded on exports, Japan was also
projected by many to challenge the U.S. for global economic
preeminence. Instead, Japan is now approaching 20 years of starkly
inferior performance, coincident with an aging population and much
lower birth rates than those seen at the outset of that earlier
"miracle." There are similar stories to be told ranging from Korea
to the Russian Federation to original members of the EU.
Not So Fast
Population is at the heart of long-term economic expansion.
China is soon to leave what has been an extended demographic
pattern supporting economic growth and enter a very different
pattern entailing difficult policy choices. It remains likely that
at some point China will pass the United States in broad economic
measures, such as total GDP, but 2009-2039 will not necessarily
just extend the trends from 1979-2009.
Derek Scissors, Ph.D., is Research Fellow in the Asian
Studies Center at The Heritage Foundation.
Chinese Media Watch, "Labor shortage to emerge 2009," May 11, 2007,
(August 19, 2008). While an important marker, this will not have an
immediate impact. Rural unemployment is not officially measured but
estimates go as high as 25 percent, for a huge pool of reserve
labor. Charles Wolf, Jr., et al., Fault Lines in China's
Economic Terrain (Santa Monica, Calif.: RAND, 2003), chapter
2, at /static/reportimages/7F77D9B2ECF2659F08FCB9E804120DD4.pdf
(August 19, 2008). When rural workers cannot fill urban jobs, there
is another labor pool, as the average urban retirement age is
barely 51. "China won't change retirement age," People's
Daily, December 16, 2005, at http://english.people.com.cn/200512/16/
eng20051216_228469.html (August 19, 2008). With health
and life expectancy improving, early urban retirees are much more
Author's calculations based on data from National Population and
Family Planning Commission of China, "Total population, Crude Birth
Rate, Crude Death Rate, Natural Increase Rate and Total Fertility
Rate (1949-2002)," at http://www.npfpc.gov.cn/en/endata_1.htm
(August 20, 2008).