News Analysis
In order to save itself from the aging crisis, China needs to increase the number of young workers or increase the education and productivity of its current workers. Either policy would be very costly and could take decades to pay off.
In 2016, faced with an aging population and a dwindling workforce, the Chinese Communist Party (CCP) repealed the one-child policy. The expected birth explosion, however, never materialized.
The cost of raising and educating a child in China was just too high to encourage young couples to have more than one child. In Shanghai, a pre-owned, two-bedroom apartment can cost more than $1.5 million, while the average monthly salary is just $1,700 and the minimum wage is $374. With the cost of living to housing ratio, most married couples cannot survive, without support from parents and grandparents, completely ruling out having two or more children.
In 2020, only 12 million babies were born in China, the lowest birth rate since 1978. In response, the CCP announced that it would allow couples to have three children. This policy is expected to be as ineffective in curbing the aging crisis as the previous two-child limit.
Much of China’s stellar growth came as a result of shifting workers from the countryside to the cities. Rapid urbanizations drove the GDP numbers, as each citizen who left the farm, to work in a factory, doubled their contribution to GDP. Now, however, 64 percent of the population is already urbanized. There will be no more tremendous jumps in GDP based on rural-to-urban migration.
A look at Japan may explain why China is failing to solve its aging problem.
Japan and China had a similar experience as they moved up the economic ladder. They both had rapid economic development, ballooning debt, and a skyrocketing real estate sector. When their economies significantly slowed down, both countries realized they were facing an aging crisis. The Japanese government took several steps to mitigate the crisis. So far, the CCP does not seem to have a plan.
When Japan saw its population aging, the government began offering free healthcare and education. The CCP has not rolled out similar programs. Another policy Japan adopted was to establish a national pension program, which all workers must pay into.
The Gini coefficient is a measure of wealth disparity within a country. The higher the number, the greater the disparity. China’s Gini coefficient is 46.5, while Japan’s is only 29.9. An estimated 600 million Chinese, or about 40 percent of the population, earn around 1,000 yuan (about $156) per month. China’s per capita GDP, however, is roughly $10,500 per year, or $875 per month. This suggests that one half of the population is earning dramatically more than the other.
Japanese cities and small towns have offered incentives to families who were willing to have a third child, ranging from cash payments to free spots in kindergarten, free cars, and sometimes houses. It is unlikely that Beijing, after only recently repealing its one-child policy, would be willing to take similar measures. As a result, last year, Japan’s fertility rate was slightly higher than China’s with 1.369 births per woman, while China’s was only 1.3.
Japan’s current retirement age is 65, but the government is planning to raise it to 70. For decades, the retirement age in China has been 55 for women and 60 for men. It is unclear if the CCP will raise it.
Japan’s workforce lost as many as a million people in a single year, during the peak of its population decline. No country has ever had as extreme a reduction in workforce for any reason, other than war. A significant difference between China and Japan, however, is that while Japan has the lowest overall GDP growth among the G-7 countries, its GDP per worker has increased at the highest rate. This means that Japan is able to sustain more GDP growth with fewer workers.
GDP per hour worked is a measure of worker productivity across countries. In Japan, each hour worked contributes $41.90 to GDP. In China, each hour worked contributes roughly $15 to GDP. Not only are Chinese workers less efficient than Japanese, but labor productivity in China is declining. China Labor Productivity declined sharply from 2010 to 2011 and remained relatively flat until 2018. Since then, it has been trending downwards.
One way of increasing worker productivity is through education. Better educated workers can do work that is higher up the value chain, contributing more to GDP. Through increased education, Japan, Korea, Singapore, Taiwan, and Hong Kong were able to move up the value chain, becoming wealthy and then maintaining their wealth, in spite of a shrinking workforce. China, however, is starting at a much lower point than those countries, particularly Japan. The average years of education of an adult in China is 7.8, while in Japan it is 12.8.
The United Nations’ Human Development Index (HDI) is used to measure the people and their capabilities in different countries, in non-economic terms, examining such factors as a long and healthy life, general knowledge, and standard of living. Having a high HDI is highly correlated with a country being wealthy and having high worker productivity. In 2020, Japan’s HDI was .919, while China only scored .761.
The Economic Demographic Matrix classifies countries, according to age and wealth demographics. Japan is classified as rich-old, and China is classified as poor-old. Both countries are aging, but the per capita GDP in Japan is just over $40,802 per year, while in China it is only $10,243.
China’s aging crisis will make it very difficult for the country to pull out of its downward economic trend. Most of the measures that Japan used, to cope with its aging population and still maintain GDP, are costly and take time. Compared to when Japan hit its economic peak in 1989, the vast majority of China’s population is significantly poorer and less educated. With only 70 years of experience running a country, and only about 40 years of experience with a market economy, it will be interesting to see if the CCP can come up with a solution that other, more developed countries, like Japan, did not.
Read part 1 here.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.