The Chinese Growth Trap That Could Cripple Beijing’s Economy
China plans to do what has never been done before: achieve sustained economic growth with a falling population.
The Chinese labor force peaked in 2017 with 787 million people. Demography tells that the fall will continue. There is some leverage to increase the number of people working. The participation rate for women can be improved somewhat. Now it is about 43 percent compared to 75 percent for men. Lessons from other countries clearly indicate that it is easier said than done though. Chinese women have moved towards prioritizing their careers above raising a family. The one-child policy (1979 to 2016) has resulted in a lopsided sex ratio. For the age group under twenty-four years, there are more than 110 boys for 100 girls. Politically, the Communist Party of China (CPC) has just softened up the rules for having children and may see a drive to get more women on the labor market as subverting this turnaround in policy.
Over recent decades several countries have tried to get out of the demographic trap by enhancing productivity defined as higher output per production factor: How much more production can the system squeeze out of one work hour. OECD statistics reveal how difficult it is. Despite strenuous efforts, average annual productivity growth in Japan since 2005 is below 1 percent. Italy, likewise a country with a falling population, has done even worse with annual productivity growth below 0.5 percent. The Euro area is at 0.8 percent. Britain at 0.6 percent. The United States is doing better with 1.25 percent.
China has unquestionably studied the Japanese ordeal to find out which policies work and which don’t. Unfortunately, Japan’s economy has been stationary for about three decades, so there is not much help coming from that side.
More technology enhances productivity, mostly and immediately for young workers joining the labor market. They have the skills to use it. But the snag is that the size of a cohort is small compared to the total labor force. It takes time before a tangible share of the workforce possesses new skills. Workers must be enrolled in training and education to ensure that handling and operation processes make full use of performance embedded in new technology. The skills of workers must be enhanced continuously.
Such policies have been implemented by some European countries, mostly welfare societies or, even better, those having managed to combine a welfare state with a competitive economy. But it costs a lot of money, which raises the question of how to fund them. An increasing share of Chinese businesses are at least partly private and they may balk at being asked to share the financial burden. State-owned enterprises account for 25 percent of the economy and are mainly found in high-tech sectors precisely among the group of enterprises expected to go first into upgrading of skills. But we do not know how they will react, how much leverage they have vis-à-vis the state and how they are managed. The workers themselves need to be assured that training will not lead to unemployment or lower wages. The workforce and trade unions need to be partners convinced that it benefits them and is not a racket for augmenting profits.
Chinese civilization is rich in invention. Paper, the movable type printing, gunpowder, compass, the mechanical clock, iron smelting to mention some of the most important ones can be traced back to China. But the frightening observation for the leadership is that none of them transformed society in the same way as steam power led to the industrial revolution in Europe. The mountain to climb in the next decades is to integrate inventions in society and accept concomitant profound changes, which may cut across traditional thinking and the current political philosophy laid down by CPC.
The Western point of view is that an innovative society is inextricably linked to a societal model in the mold of democracy, but the evidence to support such a thesis is scant. It is more likely that other sociological, economic or psychological factors facilitate or block turning inventions into production for consumption. One of them might be the dissemination of new knowledge through society. Another one is decisionmaking in the research and development sector. A third one, and maybe the most important one, centers around how the economic system selects funding of inventions and investment projects. But none of those are embedded in democracy.
The United States has been implementing solutions by directly and indirectly limiting Chinese purchase of technology abroad and closing markets for export of its high-technology products. Increasing returns to scale allowing funds to be plowed back to research and development cannot thrive without large markets. So, the United States is trying to box in China. Huawei is another case in point.
Such a policy may turn out to be ill-conceived and shortsighted. It may make China more determined to triumph. As for now, China is focused on Emerging Markets and Developing Economies exemplified by the start in 2015 of the Digital Silk Road. In view of future population and economic growth, this is where the large and dynamic markets are to be found. China has adopted an offensive and proactive policy designed to solve its own problems with the United States locking itself into a defensive and reactive role.
The United States may find it difficult to force allies to toe the line. A strategy similar to the U.S. plan was used more than two hundred years ago when Napoleon Bonaparte introduced the continental blockade closing European harbors for British products. It failed. Mainly because Napoleon’s satellites and allies came around reluctantly, participated under pressure and implemented it half-heartedly. To make it effective and force Britain to its knees, Napoleon alienated his allies, some of whom had secretly negotiated with Britain. Russian dissidence undermined the blockade and became one of the reasons for his attack in 1812. This military undertaking was instrumental in his downfall.
One wonders whether something similar is in store for the United States. Various Asian and European allies are wary of China’s policies and behavior. They might be willing to protect their own technical knowledge and stop China from becoming a too dominant factor in communication and a few other sectors, but they may not be ready to go as far as the United States. If the Americans behave clumsily, and there are examples of that in the past, then the candor of the allies may become less enthusiastic.
The decisive factors determining whether China will do the trick is not U.S. countermeasures, but:
- Can innovation and entrepreneurship coalesce into a growth machine—an accomplishment never achieved in its four-thousand-year-old history. Is the infrastructure to expedite this grueling task massive, stupendous and encroach on almost all sinews of society?
- Can China find the holy grail of sustained growth with a falling population, which is something that has never been done before by any country?
- Can the country remain united under the leadership of the CPC?
No one knows the outcome of this colossal economic and social engineering, but the world should hold its breath and wish for success. If not, then a China caught in a low growth trap with a population used to higher living standards year after year could well herald a global economic depression on an unprecedented scale. In fact, China could become a recalcitrant partner in the global system blaming the West for its misery, which is not exactly conducive to a peaceful world.
Joergen Oerstroem Moeller is the author of Asia’s Transformation: From Economic Globalization to Regionalization, ISEAS, Singapore 2019 and The Veil of Circumstance: Technology, Values, Dehumanization and the Future of Economics and Politics, ISEAS, Singapore, 2016.