Demographic Cycle Weights Negatively on China’s Growth

3 mins. to read

Growth rates of between 8% and 9% have been commonplace in China for the last 30 or even 40 years. Leaving to one side the question of data reliability, between 1970 and 2011, China officially grew at a pace of 9.3% per year – an astounding figure, and one which is a distant dream for Europe’s mature economies…

Based on average growth rates, the typical European economy takes 30 years to double its GDP while in China, only 8 years are required to achieve the same feat. However, although we might envy Chinese fundamentals, we also know from experience that such phenomenal growth rates cannot last forever. As with all nations, China will inevitably experience demographic changes that will dramatically alter its growth profile.

On Demographic Cycles

It is commonly accepted that a growing nation (or region) experiences five demographic stages over time. Starting with a “High Stationary” stage (characterised by high birth and death rates) the population profile of a country then goes through two stages of an expanding population until stagnating again and finally entering the stage of decline. These five stages are summarised below;

1) First Stage (High Stationary) – At this stage both the birth and death rates are high and consequently the population remains stationary.

2) Second Stage (Early Expanding) – The population starts expanding as there is a decline in the death rate while the birth rate remains unchanged. Developing countries in Asia and Africa are widely regarded as being in this stage.

3) Third Stage (Late Expanding) – The death rate declines further and the birth rate begins to fall. However, the number of births still exceeds the number of deaths and the population continues expanding. India is in this stage.

4) Fourth Stage (Low Stationary) – As the birth rate continues to decline, both the birth and death rates are low in this stage and the population becomes stationary. Many European countries are in this stage.

5) Fifth Stage (Declining) – At this stage the birth rate is lower than the death rate and the population begins to decline. Germany & Japan have already entered this stage.

Impact in China

When a population is growing, the ratio of younger to older people is also growing. At the first stage, outlined above, the ratio of non-working to working people may not decline. However, by the third stage, this ratio is generally towards its lowest levels. This  has a significant positive impact on GDP growth.

Unfortunately, nothing lasts forever. As the demographic cycle goes through the fourth and fifth stages, the ratio of non-working to working people grows and a country is no longer able to post double-digit growth rates. This can currently be witnessed in certain Asian and African countries, but it is in China that the change is most pronounced.

It is widely recognised that China went through an especially  quick demographic change. Its population exploded just a few decades ago and the government had to introduce birth controls. After this, the country quickly moved to a more mature stage in its growth cycle, with both the death and birth rates declining. Now China is entering the latter phases, described above, that are characterized by a growing number of non-working people. Obviously such conditions aren’t exactly conducive to a 7-8% annual GDP target!

Several studies show how dependent on demographics many Asian countries have been. High GDP growth rates often coincide with low non-working to working people ratios. Just look at Japan. Demographics played a positive role until the ‘90s but as age dependency started rising, the country entered a frustrating period of low, or even no growth. Demographics certainly weren’t the only factor in the case of Japan, as productivity and capital accumulation are other key drivers of growth. Japan has struggled with both of these. However the worsening demographic profile served to accentuate the other economic problems, which have plagued that country for the last two decades.

China could well be about to experience something similar, as it also starts to come under pressure from the issues associated with productivity and capital accumulation in mature economies. After more than 40 years growing between 8% and 9%, it will be increasingly difficult for China to achieve substantial productivity gains, as established working practices become more entrenched. Regarding capital accumulation, the country can also no longer depend on government spending to grow at the rate it has (estimated to be as much as 50%pa).

Even though China is in a hurry to grow there will be an increasing irony about this desire. The faster it grows the quicker it will stagnate, unless the “Chinese Miracle” will extend to diffusing the demographic time bomb all other nations have struggled with!

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