China’s population fell last year for the first time since the disasterrelated mass deaths Big leap forward in Mao Zedong in the 1960s. Or maybe it would be more accurate to say that the China announced that its population has declined. Many observers are skeptical about the Chinese data. I’ve been to conferences when China released new data on economic growth, for example, and a lot of people answered no by asking, “Why was the growth 7.3%?” but “Why did the Chinese government decide it was 7.3% %?”
In any case, it is clear that China’s population has peaked or is about to peak; the best bet is probably that the population has been declining for several years. But why consider that a problem? Finally, many people in the 1960s and 1970s feared that the world was facing an overpopulation crisis, with China being one of the biggest sources of that pressure. And the Chinese government itself has tried to limit population growth with its famous onechild policy.
So why is the population decline not good news, an indication that China and the world at large will have fewer people demanding resources from a finite planet?
The answer is that population decline creates two major problems for economic governance. These problems are not insoluble, depending on intellectual clarity and political will. But will China be up to the challenge? This is anything but clear.
The first problem is that a shrinking population is an aging population and in every society I know, we depend on the younger to support the older. Us US, the three major welfare programs are Social Security, Medicare, and Medicaid; the first two cater specifically to older people, and even the third spends the most money on older and disabled Americans.
In any case, funding for these programs ultimately depends on taxes paid by workingage adults, and concerns about America’s longterm fiscal future stem in large part from a growing proportion of older people — that is, a growing proportion of older people in relation to those of working age.
China’s social safety net is underdeveloped compared to the United States, but older Chinese rely on government assistance particularly the state pension. And China’s oldage dependency ratio is skyrocketing. That means China must either inflict great economic pain on its elderly or drastically increase taxes on younger citizens. Or do both.
The other problem is more subtle, but also serious. To maintain full employment, a society must keep aggregate spending high enough to keep up with the productive capacity of the economy.
You might think that a dwindling population reducing capacity would make this task easier. But a shrinking population particularly a shrinking workingage population tends to reduce some important types of spending, particularly capital spending. Because if the number of workers falls, fewer factories, office buildings, and so on have to be built; If the number of families decreases, not much new construction needs to be done.
The result is that a society with a declining workingage population, other things being equal, is prone to persistent economic weakness. THE Japan Makes the point: the workingage population peaked in the mid1990s, and the country has struggled with deflation ever since, despite decades of extremely low interest rates.
More recently, other rich countries whose demographics were beginning to resemble Japan’s have faced similar problems, although those problems have been pushed aside temporarily, I would say by the inflationary explosion prompted by policy responses to the Covid19.
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To be fair to the Japanese, they’ve probably handled the problem of declining population fairly well, partially avoiding mass unemployment by supporting their economy with deficit spending. This has resulted in high levels of government debt, but there is no sign that investors are losing confidence in Japan’s solvency.
But can China whose workingage population has been falling since 2015 handle things just as well? There are reasons to be skeptical.
Because China has long been a completely unbalanced economy. For reasons I admit I don’t fully understand, policymakers have been reluctant to pass on to households all the benefits of past economic growth, and this has resulted in relatively weak consumer demand.
Passengers walk through a train station in Beijing; China’s population has declined for the first time in 61 years. Photo: Mark Schiefelbein/AP
Instead, China has propped up its economy with extremely high investment rates, much higher than Japan’s in the late 1980s at the height of its infamous bubble. It’s usually good to invest in the future, but when an investment’s extreme high population size collides with a declining population, too much of this investment results in diminishing returns loss.
Indeed, China’s economy currently seems dependent on a bloated real estate sector, which certainly looks like an impending financial crisis.
It would be foolish to assume that China cannot manage its demographic problems. After all, if we look at the bigger picture, China has had an incredible track record, going from a poor developing nation to an economic superpower in just a few decades.
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On the other hand, I’m old enough to remember when every other business book seemed to have a samurai warrior on the cover promising to teach the management secrets that made Japan the world’s economic leader.
The problem is that for both economies and mutual funds, past performance is no guarantee of future results. We don’t know how much China’s demographic challenges will shake it, but there are many reasons to be concerned. I have heard pessimists describe the situation in China as similar to postboom Japan, lacking the same high level of social cohesion that has allowed government and society to cushion the fall.
Oh, and China is a superpower with an authoritarian and seemingly unpredictable leader. I don’t think it’s alarmist to worry about how you’re going to react if your economy does badly.