Beijing is now well aware that decades of its one-child policy have at last begun to starve China’s economy for workers and growth potential. The first sign of recognition appeared in 2016, when the government finally rescinded that by then almost 40-year-old stricture on family size. Though the public hardly responded and birth rates remain below replacement, the country has so far avoided outright population decline only because longevity allowed the elderly retired population to expand. China still faces a paucity of youthful labor entering its workforce, a condition that will only become more acute, slowing the economy’s pace of growth, and rendering it less flexible.
China already faces a dire demographic profile. According to the 2020 count, some 13.5 percent of the country’s population exceeds 65 years of age. That figure is up from 9 percent in 2010 and a record. Some 18 percent of the population is under the age of 15, up marginally from 16.6 percent in 2010 but still historically low. Those of working age—the group between 15 and 60 years old—has fallen some 7 percent during the last ten years to just under 63 percent of the population. China now has barely over 4.5 people ready to work for every retiree. Those people must support themselves, their personal dependents and produce more than one fifth of what a retiree needs. The situation leaves the economy with limited surplus labor for investment and is a far cry from the nine people of working age for each dependent retiree China had when it began its great development 40 years ago. Even in the unlikely event that the birth rate picks up, it will take 15 to 20 years to affect the workforce. The United Nations predicts that China by 2040 will have barely three of working age for each dependent retiree, a dire need for working hands and minds.
No doubt today’s authorities in Beijing regret that Deng Xiaoping ever implemented his one-child policy or that their predecessors in authority kept it in place for as long as they did. China likes to brag that it has more patience than the West and a longer view, but in this case, it was all so shortsighted. Demographers raised warnings about the policy even from the beginning. Now the authorities, beset by this needless mistake, are casting about for ways to mitigate the effects. They have mooted four answers: 1) raising the average retirement age; 2) shifting the emphasis of production to more high-value products so that fewer workers can produce more wealth; 3) emphasizing robotics and artificial intelligence (AI) so that manufacturing can continue to grow even with a limited workforce; and 4) place production facilities outside of China, what the Americans call “offshoring.” Even taken together these answers can only mitigate, not reverse the adverse economic effects of China’s demographics.
Efforts to keep more Chinese working later in life has the potential to help. China has room. Presently, the retirement age in China is 60 for men and 50 to 55 for women. That is considerably below the OECD average of 64 for men and 63 for women. Moving up to the OECD standard would offer China a source of admittedly elderly labor to supplement the shortage of younger workers. But even this has limits. The retired might not want to return to work, and even Beijing would not risk the social discord that force would evoke. Nor for similar reasons would even Beijing’s autocratic government try to induce a return to work with a sudden shutdown of pension payments. The only practicable option then would seek a gradual change, say by raising retirement age for people five or more years away from eligibility. That approach could work for the longer run, but it would delay for years any relief from demographic pressures.
Two other avenues talked about to mitigate the ill effects of demographics—shifting to higher-value-added output and using robotics in the production process—might have an even longer lead time. After having built its early growth on relatively cheap, unskilled labor producing low-value-added items for export, China has already begun its transition to more mechanized production techniques and higher-value output. But the move has gone slower than originally planned. To fully implement these alternatives, China will need a better trained and better educated workforce than it has. To be sure, much is made about the numbers of engineers graduated every year from Chinese universities, but this effort toward a widespread upgrade in production techniques, as well as the output of higher-value-added products need more than elite education. It will require a broad-based upgrade in education and training for the workforce generally. No doubt the Chinese people could rise to the need, but it will take time. Today the median level of education in the Chinese workforce stands at only eight years and is highly skewed to just a few regions, mostly Beijing and Shanghai. Even if China suddenly dedicated much greater resources than presently to the broad-based development human capital, which it does not seem to be doing, the working population could not support a significant change in product or process for years.
A clue to the difficulty of this shift in processes and products appears in the speed of productivity growth. Even with all the upgrades Beijing has announced and all the money poured into robotics in recent years, productivity growth in China has risen neither as fast as was predicted nor certainly enough to compensate for the developing lack of labor. According to research done on global productivity by the University of Groningen in the Netherlands and the University of California, Davis, the inflation adjusted productivity of labor and all factors of production, after soaring in China at a remarkable 2.0 a year between 1980 and 2005, has since expanded at only a 0.7 percent annual rate and at just the time when China has worked hardest to implement robotics and AI.
Most interesting is Beijing’s plan to offset some of the demographic disadvantage by offshoring production. Europe, the United States, and Japan have long engaged in offshoring, mostly to find cheap labor. Indeed, China has served as a destination. No doubt the 2019 “trade war” with the United States has accelerated the process of Chinese offshoring, as Chinese producers avoided U.S. tariffs by locating production in subsidiaries elsewhere, in Vietnam, for example, or Indonesia.
Now as Beijing seeks to extend the process for demographic reasons, it will face a problem particular to China’s approach to economic organization. Firms in every country chafe at the loss of control when they place facilities abroad. China’s top-down, command approach to economics will have a particularly difficult time accepting that loss of control, most especially when it involves the state-owned enterprises (SOEs) that so dominate much of China’s industry and that will have to become involved if the offshoring is to have any impact. Perhaps the Belt and Road Initiative (BRI) reflects Beijing’s effort to square this circle by using loans to retain more control abroad than would otherwise be the case.
These four responses to China’s demographic challenge might help mitigate the economic constraints otherwise implicit in the demographic situation, but as should be apparent, they cannot offset all the ill effects. Each mitigating effort would take a long time to implement, time that China does not have. Advancing the retirement age could help a lot but for social peace it must happen gradually. The steps to modernize Chinese production and upgrade the value added of its output will require fundamental educational adjustments that Beijing seems not even to have started. The BRI has only just begun and it is already meeting some resistance from the nations where Beijing had hoped to gain access. These answers may keep China’s economy on a growth path when the demographic imperatives would otherwise dictate decline or stagnation, but they are insufficient to sustain the kind of growth and flexibility to which China has grown accustomed and the world now reflexively expects. It is ironic that the entire problem is the product of the authoritative command economic system to which Beijing still clings.
