Discontents of demography
Updated: 2013-02-16 08:12
By Xin Zhiming (China Daily)
China should refrain from excessive stimulus policies to offset the impact of decrease in working-age population
China has been racking its brains on how to combat the economic slowdown, but it should pay more attention to the alarm sounded by the drop in its working-age population.
The drop in the working-age population, a major long-term underpinning force of a country's economy, will determine China's growth prospects in the coming decades. China's bullish economic growth over the past 30-odd years has been mainly attributed to such factors as systematic improvement and attraction of foreign investment, but the abundant supply of low-cost labor has played a crucial role in driving the boom.
According to the National Bureau of Statistics, China's working-age population, defined as those aged between 15 and 59 years, fell by 3.45 million last year, the first decline at least in the past three decades.
Demographic experts agree that the trend will continue for some years, thanks mostly to China's family planning policy, which was implemented in the late 1970s. From 2012 to 2020, China's working-age population could decrease by more than 29 million, posing a threat to economic expansion, says Cai Fang, head of the Institute of Population and Labor Economics, affiliated to the Chinese Academy of Social Sciences.
As the number of young workers drops and the aging population continues to increase, fewer people will be available for employment. As a result, the cost of labor will increase. Moreover, the rising expenditure on healthcare because of an increase in the aging population will reduce the amount of capital available for investment, and thus drag down overall economic growth.
Since the working-age population has started declining, some experts call for the loosening of the family planning policy, while policymakers have to find feasible ways to iron out the possible economic fluctuations the decline would cause.
Demographic policy change aside, the government can also use a number of systematic restructuring means to reduce the impact of the decreasing working-age population on economic growth. For example, experts have suggested the hukou (house registration) system be reformed to enable more migrant workers to settle down or at least stay longer in cities and thus contribute more to local economic growth. At present, migrant workers in their 40s return home in the countryside. But if policies become friendlier toward them, experts say, they could work in cities until they are 50 or even older.
Policies encouraging technological upgrade and innovation are also crucial for fuelling growth in China. So far, the country's growth has been driven mainly by labor, material and capital inputs. But if it wants to maintain a stable economic growth rate, it must seek new ammunition on the technological front.
The government also has to improve overall national productivity by encouraging fair competition among enterprises. It should deepen market-oriented reform so that monopolies can be broken and enterprises can compete on an equal footing in all fields. Once such an economic regime is established, enterprises with higher productivity will stand out, pushing up the country's overall productivity and offsetting the impact of the drop in the working-age population.
More importantly, however, China must reshape its economic growth philosophy so that it can tolerate lower growth rates because of its changed demographics. Economists estimate that because of the declining working-age population, China's reasonable growth rate, or growth rate that is in line with its basic economic conditions, slumped from about 10 percent in the 2006-10 period to about 7 percent between 2011 and 2015. And it is expected to drop further to about 6 percent in the 2016-20 period.
Therefore, the government should avoid using large-scale loose monetary and fiscal policies to push up the growth rate to its potential limit. While such policies may temporarily benefit economic expansion, economists warn that they could create financial bubbles that would ultimately damage economic health.
Japan's case is often cited when it comes to failure in balancing the economic growth rate and stimulus policies. When the ratio of Japan's working-age population to the total population hit the trough after the 1970s, its growth started slowing down causing panic both in the government and among the public. The ensuing stimulus measures, characterized by loose monetary policy, pro-active fiscal policy and industrial and regional support policies, instead of pulling the economy out of recession created the new problem of bubble economy.
Given the appalling consequences of such policy mistakes, China should draw a lesson from its neighbor and refrain from adopting excessive stimulus policies to reverse the economic downturn.
The author is a journalist with China Daily. E-mail: email@example.com