Three reasons China’s shrinking population won’t slow the economy
- Population growth is almost irrelevant to economic growth for a developing country
- Besides, China has millions of rural workers, who can partially offset any potential labour shortage. It also has the option of raising the retirement age
China does indeed face a unique demographic problem: the country is getting old before it is rich. To put the issue in proper perspective, China’s per capita GDP is about 17 per cent of that in the United States but China’s population growth has slowed to levels that are lower than that of the US.
Does this demographic problem necessarily cause growth stagnation? Not at all.
First, population growth is almost irrelevant to economic growth for a developing country. A typical example is Sub-Saharan Africa, where there has been plenty of population growth, but little output expansion prior to 2000.
In a similar vein, for a large number of rapidly industrialising economies such as South Korea and Taiwan in the 1970s and 1980s, and China since the 1990s, economic growth has been sustained at a very high rate, even though population growth has plummeted.
In these examples, productivity – not population growth – has been the dominant driving force behind economic growth.
What are the prospects for China’s labour productivity going forward? Most newly industrialised Asian economies were able to sustain 5-6 per cent labour productivity gain per year after their income levels reached US$10,000 and there is no reason China cannot achieve a similar result.
Of course, if China’s income levels continue to rise, its growth rate will inevitably fall over time.
Second, although China has come a long way in industrialising its economy, the urbanisation process is not complete. The percentage of the labour force engaging in agricultural production remains at 24 per cent, which translates into more than 170 million rural workers. In South Korea, rural labour accounts for 5 per cent of the overall labour force, and it is 1 per cent in the US.
Therefore, the migration of Chinese rural labourers into modern sectors will at least partially offset any potential labour shortage caused by stagnating population growth in the foreseeable future.
It is interesting to point out that, although China’s overall population growth has fallen to 0.3 per cent per annum, urban population growth continues at around 2.2 per cent per year, due to urbanisation.
China should be able to increase its labour force by 10 per cent if the retirement age is lifted to 65 for both male and female workers. For the time being, Beijing has not changed the retirement policy because the dominant issue in the labour market is not a labour shortage but creating enough jobs for new entrants.
Productivity growth holds the key to China’s long-term growth trajectory. Both technological advances and deep economic reforms can increase China’s growth potential. By the same token, a lack of economic reforms or even back-pedalling on previous reform measures could undercut the economy’s steady state growth rate.
Chen Zhao is founding partner and chief strategist of Alpine Macro