In China, with a massive population of 1.34 billion, the declining birthrate and aging population cast an ominous shadow over society.
The pool of workers is beginning to shrink due to the one-child policy. At the same time, wages continue to rise in the "world's factory," a juggernaut that relies on a cheap labor force.
What price will China pay if the population grows old before it gets rich? Will social instability result? What effect will the changing face of an aging China have on the global economy?
The Asahi Shimbun sought answers to these and other questions from Cai Fang, a leading expert on the population problem who sounded the alarm to the Hu Jintao administration.
Excerpts from the interview follow:
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Question: The United Nations predicts that China's population will peak at nearly 1.4 billion around 2030. Last year, the share of the working age population, those between 15 and 64, fell for the first time in nine years, to 74.4 percent. What is happening?
Cai: China's working generation won't expand anymore. Even the total number of people in the core group aged 15 to 59 will start to gradually decline, starting next year. This age bracket will somehow manage to remain at 900 million people until around 2020, but after that the decrease will accelerate.
Q: Is this the direct result of the one-child policy introduced in the late 1970s to contain population growth?
A: Until now, the number of children had been declining at a faster pace than that of the aging population--resulting in an increase in the number of the elderly. That explains the drop in the combined proportion of children and seniors requiring support. This population structure made it easy to earn an income. From now on the pace of aging will accelerate, along with the declining birthrate. The time when China could hitch a ride on the "demographic dividend" advantageous to economic growth is coming to an end.
China's gross domestic product on a per-capita basis surpassed $5,000 only last year. That is around one-ninth of Japan's GDP. Before China gets rich, the heavy burden of an aging population will be thrust on its society. This is a daunting challenge.
Q: What happened to the excess labor that farming villages were supposed to have?
A: Before economic reforms were introduced around 30 years ago, 80 percent of the population, or 800 million people, lived in villages. They were drawn to the cities and provided cheap labor. It seemed like there was an unlimited supply. Meanwhile, it was easy for companies to fire them if business dropped off. Officially, these migrant workers are listed as farmers so they aren't counted in unemployment figures. They acted as a valve to adjust employment.
Industrialization has progressed so rapidly that the excess rural labor has become insufficient to meet the continued growth in labor demand. Labor shortages first began to show up in Guangdong province, which has many migrant workers, around 2004. Looking at the situation in the countryside, we saw that there was still a surplus of 100 million workers there, but many were aged 40 or older. We had already reached the point where the supply of young people that factories want was no longer abundant.
Q: Even as the economy slows, minimum wages continue to rise. Many cities, including those in inland areas, saw annual increases of 20 percent in 2010 and 2011.
A: The rural population has dropped to 650 million, about half the total population. Companies can't get workers if they don't raise wages. And I'm not just talking about minimum wages set by local governments. Blue collar pay as a whole for factory work and such is on the rise.
Q: Industrialization has completely tapped the excess labor in the countryside and the time when companies could hire as many workers as they wanted without raising wages has ended. In other words, China has passed a "Lewisian turning point."
A: 2004 was that turning point. I think wages will continue to rise for another decade or longer. The low-margin, high-turnover factories that can't cope are beginning to move from the coast to the interior.
Q: You were summoned to the politburo's group seminar this past February that gathered the Chinese Communist Party's leadership, headed by Hu Jintao.
A: It was my third time. In 2003, when I gave my first presentation there, there was growing interest in somehow creating more jobs as a response to the restructuring of state-owned enterprises. Now there's a shortage of blue collar workers. At the same time, it's hard for university students and middle-age and elderly urbanites to find work. The employment mismatch is becoming more and more complex.
Q: Is it possible that the one-child policy will be amended to increase the working population?
A: Because of the so-called one-child policy, China's birthrate, death rate and population growth have all fallen in a short span of time to as low levels as those of a developed country. It will be difficult, both politically and socially, to make a sharp about-turn because the government had explained that controlling the size of the population was vital to ensuring a stable supply of resources and food as well as to raise living standards. Even if the government does change its policies, I think this will happen slowly.
Even now, farmers and ethnic minorities are, in principle, allowed to have no more than two children per family. In another exception, a couple is allowed to have up to two children if both of them have no brothers nor sisters. I've heard that the government is considering allowing two children even when only one parent is an only child. But even if that serves to partially amend the one-child policy, the population won't grow significantly.
A: China faces the same situation as Japan, South Korea, Singapore, Hong Kong and Taiwan. Highly educated women often delay marriage. That means they give birth later in life. Smaller numbers of men and women say they want many children out of concern about the cost of education and adverse effects on their work life.
Q: China can no longer expect any increase in the number of workers and depend on cheap labor to remain competitive. A growing number of old people will add to social security costs. Can the economy continue to expand under such a situation?
A: First off, the household registration system urgently needs to be revised. China categorizes households as either urban or rural. Rural residents working in the cities cannot receive the same social welfare benefits as registered urban residents. By this I mean education, health care and pensions. Things are improving little by little, but the gaps should be filled so that more people are available to work.
There is a misalignment between what schools teach and what companies want, and that makes it hard for 6 million university graduates a year to find work. We need to change the way students are taught and create more jobs that utilize graduates' knowledge. The conventional approach of stipulating economic growth by exploiting cheap labor to profit from exports and throwing vast sums of money into public works projects has to change. When you think how to change the approach, Japan offers a lesson.
Q: What do you mean?
A: Japan's demographic dividend disappeared in around 1990 and the asset-inflated economy collapsed before long. Japan sank money into inefficient public works projects and uncompetitive industries to try to return to the track for high growth. But the result was a "lost two decades." When the composition of China's population becomes disadvantageous, then the growth rate will naturally decline. If we try to return to 10-percent growth by saving "zombie" companies that should be weeded out and starting up public works projects in expectation for creating demand, then we could temporarily achieve high growth, but it wouldn't last very long.
Q: Can the Chinese economy avoid becoming "Japanized"?
A: Exporters in Guangdong province and elsewhere are going broke due to the effects of the crisis in Europe, but there's still a labor shortage. This is a chance to weed out companies that should be eliminated. China should invest in technological innovation and education to bolster production efficiency and devote funds to social welfare, such as unemployment insurance and pension systems. It should be easy to implement those systems now when government revenues are increasing.
If the government takes excessive fiscal stimulus and monetary easing measures, then that will just inflate the real estate bubble. That's why the central government lowered this year's target growth rate to 7.5 percent. It was also a message to local governments: "Don't expect unreasonably high growth." Achieving higher growth will make it easier for local governments to have more money to distribute to local people.
Q: However, other countries are concerned that if growth slows in China, the global economy will suffer.
A: Don't you think it would be better for the global economy (as well as China) if, instead of inflating concern about the economic bubble by seeking to achieve an unreasonably high growth of 10 percent, China slows its growth bit by bit according to its changing demographic composition so its economy can continue to grow for a longer period of time? The real worry about the Chinese economy is not the growth rate in the near future; it's how to keep the economy growing and lay the foundation for a very fair society as it ages before becoming wealthy. It's a battle against time.
Q: When China was an aggressive exporter utilizing cheap labor, the term "deflation out of China" was coined. Next will it be the "inflation out of China"?
A: In the foreseeable future, commodity prices will continue to rise by 3 to 4 percent a year in China. The prices of cheap Chinese-made clothes and shoes may rise and production will be shifted to developing countries in Africa and elsewhere, offering growth opportunities to those nations. I expect the industrial sector's map of international division of labor is going to be significantly redrawn.
And the change is not all bad for China if we take this as a chance to enhance productivity and round out social welfare systems. More than anything, China's problem now is that people keenly feel the gap between the rich and the poor is widening even though the wage gap between cities and the countryside is narrowing. That's because of a hidden disparity in non-wage incomes and benefits, including social welfare.
A good number of people earn incomes that are not subject to taxation, taking advantage of their special privileges to profit from land deals. Everybody knows it. Fair distribution of wealth will be vital to maintain social stability when the growth rate falls. China also needs reforms to make the truly rich pay more taxes.
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Cai Fang is director of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences since 1998. He continues to call on China to prepare for an aging society. His published works include "Has China passed the Lewisian turning point?" He was born in 1956.
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