Demography China’s Achilles heel

DemographyChina’sAchillesheelAcomparisonwithAmericarevealsadeepflawinChina’smodelofgrowthApr21st2012|fromtheprinteditionLIKEtheheroof“TheIliad”,Chinacanseeminvincible.In2010itovertookAmericaintermsofmanufacturedoutput,energyuseandcarsales.Itsmilitaryspendinghasbeengrowinginnominaltermsbyanaverageof16%eachyearforthepast20years.AccordingtotheIMF,ChinawillovertakeAmericaastheworld’slargesteconomy(atpurchasing-powerparity)in2017.ButwhenThetis,Achilles’smother,dippedherbabyintheriverStyxtogivehimthegiftofinvulnerability,shehadtoholdhimsomewhere.Alongsidetheothermanyproblemsitfaces,Chinatoohasitsdeadlypointofunseenweakness:demography.Overthepast30years,China’stotalfertilityrate—thenumberofchildrenawomancanexpecttohaveduringherlifetime—hasfallenfrom2.6,wellabovetherateneededtoholdapopulationsteady,to1.56,wellbelowthatrate(seetable).Becauseverylowfertilitycanbecomeself-reinforcing,withchildrenofone-childfamilieswantingonlyonechildthemselves,Chinanowprobablyfacesalongperiodofultra-lowfertility,regardlessofwhathappenstoitsone-childpolicy.Thegovernmenthasmadesmalladjustmentstothepolicy(notablybyallowinganonlychildwhoismarriedtoanotheronlychildtohavemorethanonechild)andmayadaptitfurther.Butfornowitisfirmlyinplace,andverylowfertilityratesstillprevail,especiallyintherichestpartsofthecountry.Shanghaireportedfertilityofjust0.6in2010—probablythelowestlevelanywhereintheworld.AccordingtotheUN’spopulationdivision,thenationwidefertilityratewillcontinuetodecline,reaching1.51in2015-20.Incontrast,America’sfertilityrateis2.08andrising.Thedifferencebetween1.56and2.08doesnotsoundlarge.Butoverthelongtermithasahugeimpactonsociety.Betweennowand2050China’spopulationwillfallslightly,from1.34billionin2010tojustunder1.3billionin2050.Thisassumesthatfertilitystartstorecover.Ifitstayslow,thepopulationwilldipbelow1billionby2060.Incontrast,America’spopulationissettoriseby30%inthenext40years.Chinawillhititspeakpopulationin2026.NooneknowswhenAmericawillhititspopulationpeak.Thedifferencesbetweenthetwocountriesareevenmorestrikingifyoulookattheiraverageages.In1980China’smedian(theageatwhichhalfthepopulationisyounger,halfolder)was22.Thatischaracteristicofayoungdevelopingcountry.Itisnow34.5,morelikearichcountryandnotverydifferentfromAmerica’s,whichis37.ButChinaisageingatanunprecedentedpace.Becausefewerchildrenarebeingbornaslargergenerationsofadultsaregettingolder,itsmedianagewillriseto49by2050,nearlynineyearsmorethanAmericaatthatpoint.Somecitieswillbeolderstill.TheShanghaiPopulationandFamilyPlanningCommitteesaysthatmorethanathirdofthecity’spopulationwillbeover60by2020.Thistrendwillhaveprofoundfinancialandsocialconsequences.Mostobviously,itmeansChinawillhaveabulgeofpensionersbeforeithasdevelopedthemeansoflookingafterthem.Unliketherestofthedevelopedworld,Chinawillgrowoldbeforeitgetsrich.Currently,8.2%ofChina’stotalpopulationisover65.TheequivalentfigureinAmericais13%.By2050,China’ssharewillbe26%,higherthaninAmerica.InthetraditionalChinesefamily,children,especiallysons,lookaftertheirparents(thoughthisisnowchanging—seestoryonnextpage).ButrapidageingalsomeansChinafaceswhatiscalledthe“4-2-1phenomenon”:eachonlychildisresponsiblefortwoparentsandfourgrandparents.Evenwithhighsavingsrates,itseemsunlikelythattheyoungergenerationwillbeableorwillingtoaffordsuchaburden.SomostelderlyChinesewillbeobligedtorelyheavilyonsocial-securitypensions.Chinasetupanationalpensionsfundin2000,butonlyabout365mpeoplehaveaformalpension.Andthesystemisincrisis.Thecountry’sunfundedpensionliabilityisroughly150%ofGDP.Almosthalfthe(separate)pensionfundsrunbyprovincesareinthered,andlocalgovernmentshavesometimesrenegedonpayments.Butthatisonlypartofawiderproblem.Between2010and2050China’sworkforcewillshrinkasashareofthepopulationby11percentagepoints,from72%to61%—ahugecontraction,evenallowingforthefactthattheworkforceshareisexceptionallylargenow.ThatmeansChina’sold-agedependencyratio(whichcomparesthenumberofpeopleover65withthoseaged15to64)willsoar.Atthemomenttheratiois11—roughlyhalfAmerica’slevelof20.Butby2050,China’sold-ageratiowillhaverisenfourfoldto42,surpassingAmerica’s.Evenmorestrikingly,by2050,thenumberofpeoplecomingtowardstheendoftheirworkinglives(ie,thoseintheir50s)willhaverisenbymorethan10%.Thenumberofthosejustsettingout(thoseintheirearly20s,whoareusuallythebesteducatedandmostproductivemembersofsociety)willhavehalved.HelpwantedTheshiftspellstheendofChinaastheworld’sfactory.Theapparentlyendlessstreamofcheaplabourisstartingtorundry.Despitepoolsofunderemployedcountry-dwellers,Chinaalreadyfacesshortagesofmanualworkers.Astheworkforcestartstoshrinkafter2013,theseproblemswillworsen.SarahHarperoftheOxfordInstituteofPopulationAgeingpointsoutthatChinahasmappedouttheagestructureofitsjobs,andknowsforeachoccupationwhentheskillsshortagewillhit.Itislikelytotrytooffsettheimpactbylookingforworkersabroad.Manpower,abusiness-recruitmentfirm,saysthatby2030Chinawillbeimportingworkersfromoutside,ratherthanexportingthem.Large-scaleimmigrationposesproblemsofitsown.Americaisoneoftherareexamplesofacountrythathasmanagedtousemassimmigrationtobuildaskilledlabourforce.ButAmericaisanopen,multi-ethnicsocietywithalonghistoryofimmigrationandstronglegalandpoliticalinstitutions.Chinahasnoneofthesefeatures.Intheabsenceofpredictableinstitutions,allareasofChinesesocietyhavereliedonguanxi,thewebofconnectionsthatoftenhasextendedfamilyrelationsatthecentre.Butwhathappenswhentherearefewerextendedfamilies?Oneresultcouldbeamovetowardsamorepredictablelegalsystemand(possibly)amoreopenpoliticalculture.And,asshiftsinChina’seconomyleadtolowergrowth,Chineseleaderswillhavetomakedifficultspendingchoices;theywillhavetodecidewhethertobuy“gunsorwalkingsticks”.Chinaisnotuniqueinfacingtheseproblems.Allrichcountrieshaverisingpensioncosts.AndChinahassomeadvantagesindealingwiththem,notablylowtaxrates(givingroomforfutureincreases)andlowpublicexpectationsofwelfare.Still,Chinaisalsounusualintworespects.Itismuchpoorerthanotherageingcountries,anditsdemographictransitionhasbeenmuchmoreabrupt.ItseemshighlyunlikelythatChinawillbeabletogrowitswayeconomicallyoutofitspopulationproblems.Instead,thoseproblemswillweighdownitsgrowthrate—tosaynothingoftheimmensesocialchallengestheywillbring.China’sAchillesheelwillnotbefatal.Butitwillhobblethehero.fromtheprintedition|China