China’s Demographic Crunch

By Minya Scase from The South Australian Globalist

Woman on street in Xiaoyi, China. Photo courtesy of Gao on Flickr

Following the opening and liberalisation of the economy under Deng Xiaoping, China has grown impressively at a rate of around eight per cent per year, with GDP per capita also increasing precipitously. In his recent article Foreign Policy, Robert Fogel has predicted the Chinese economy to be worth US$123 trillion in 2040. China’s weathering of the recent financial crisis, retaining high levels of growth, is seen as further evidence of China’s economic strength.

There is no doubt that the growth of the Chinese economy has been strong, and has lifted millions out of poverty. However, in looking to the next 25 years, China must overcome a significant demographic obstacle to ensure the continuing strength of its economic growth. Whilst there has been much acknowledgment of demographic issues arising from ageing populations in Western Europe, Japan and Australia, similar demographic issues must be considered in the Chinese case when making predictions of economic ascendancy.

The one child policy, implemented in the post-Mao era, had definite soundness in recognising the potential burdens of overpopulation, which places undue pressure on resources and the employment sector. This in turn contributes to social unrest. However, despite the sound nature of such policies of restricting the population, it is a demographic hurdle of a different nature that China is currently facing.

The main issue with China’s demographics is the excessive ratio of those of the pre-one child policy era to those born after it, and the problem of supporting these older people. Previously, the duty of caring for elderly parents could be shared among their numerous offspring. Now, a single couple has the burden of caring for two sets of elderly parents, which puts enormous time and financial strain on younger generations, especially if they have a child as well. The lack of state provided welfare leaves families with few options when caring for elderly family members. Western European countries may face issues of public spending ballooning with ageing populations, but there is at least the presence of state assistance which is changing the nature of the burden on younger generations.

Such a predicament has explicit implications for China’s economy. Economic growth to date has lead to the establishment of an urban middle class. Much growth has been provided by industrialisation, but it is the middle class which provides continued economic growth in a post-industrial society. Over the next 25 years, such pressure arising from elder care will have definite negative implications for the effectiveness of the middle class in aiding the growth of the Chinese economy.The recent economic crisis alerted the Chinese government to issues stemming from having an export-oriented economy. Chinese economic growth is reliant on US (and European) economic strength, thus economic crises originating in the US can hurt the Chinese economy. Such reliance on foreign markets has led China to look more inwards, strengthening domestic markets for growth.

However, with the increasing financial burden of elder care, and a lack of state welfare provision, there is a two-fold source of problems for developing a home market. Firstly, family resources are consumed in providing for elderly family members, and secondly, there is a very high savings rate for economically active members of younger generations. This high rate of savings is good for investment, but detrimental to short term domestic spending.

The Chinese government has two options. It can either leave the situation as it is, or provide welfare services. The latter option is problematic. There has been, and still is, much state involvement in China’s economic growth, which would have to be scaled back to provide the funds for welfare, and the level of welfare investment would be massive, given China’s population of over 1.6 billion. Whilst the encouragement of private enterprise and privatisation of state owned firms could lessen the cost of state involvement in the economy, among other beneficial outcomes, this would probably not compensate for the costs of welfare, and the economic restructuring, including taxation, that would go with it. Neither option is an easy one.

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