Contemporary Issue in the Chinese Economy - Essay Example

Contemporary Issue in the Chinese Economy ONE CHILD POLICY AND AGE DEMOGRAPHICS Based on the results of the 6th national census carried out in 2010, the Chinese population’s average growth rate between 2000 and 2010 was 0.57%. In the same year, the population of people aged 60 and above reached hit the 178 million mark, representing 13.26% of the whole population and up to 5.64% starting 1982. The population in the 0-14 age group, however, represented 16.6%, a 16.99% decline compared with 1982 (Almond & Li, 2013:43). Reports forecast that the population of people aged 65 and above will represent between 15 and 20% in 2027 and 2035 accordingly. With a growth in the number of the aging people and decline in that of the working-age population, China’s dependency ratio of population will keep increasing and reach the 0.5 mark or above in 2033 (China Development Research Foundation, 2014:8). This is a worrying statistic considering that it was 0.38 just 4 years ago. Based on forecasts by the United Nations, the dependency ratio of China’s population will reach an extremely high level of 0.8 by 2070, meaning that 4 working-age people will be compelled to support at least two aged adults and one child by that time (China Development Research Foundation, 2014:9). This change in the population structure makes the challenge of an aging population a significant one for the country to confront so that it can guarantee social and economic development in the future (Barber, 2011:37). The past experiences of Japan show that even in a nation with a high income level, advanced technology, highly-skilled workforce and developed infrastructure, an ageing population is still likely to cause an economic downturn and even stagnation. In 2011, Chinese aged 65 and above represented 9.1% of the total population, a scenario very identical to what Japan faced in 1990. However, China is to some degree confronted with a more serious problem than Japan because it is currently still far from qualifying as a developed country (China Development Research Foundation, 2014:9). The negative effect on economic growth caused by the aging population can be summarized this way: First, the country will lose the benefits of backwardness prematurely in its pursuit of developed countries. Secondly, the country will lose its edge when competing with developing nations that still have a demographic share (China Development Research Foundation, 2014:10). Finally, China is yet to enjoy the innovative rewards of a developed country. Consequently, its original competitive benefits are dwindling, which in turn will surely magnify the need for a reform of China’s economic growth system (Benson, 2013:24). Currently, China is not yet adequately prepared or well-equipped to manage the future aging population society. First, the country’s bureaucratic organization is lagging behind. The social policies and public service structure at this time cannot match the requirements of an aging society, including the old-age medical care, personal income tax regime, retirement system and insurance system (China Development Research Foundation, 2014:11). Consequently, the financial readiness is inadequate. On the one hand, the cost of old-age insurance merely accounts for a small portion of the entire public expenditure, and the insurance rate of the old-age insurance regime is still quite low (Almond & Li, 2013:34). In 2011, for instance, Chinese firms’ pension replacement rate was just 42.9%, while the pension itself amounted to 55 Yuan – roughly US $9 – per month in some rural regions (China Development Research Foundation, 2014:11). On the other hand, the current old-age security system has a hidden debt. Almost 50% of China’s provincial governments must undergo pension deficit cuts, and the mean rate of return on pension investment is currently below 2%, lower than the inflation rate during the same period. As the aging population is growing rapidly, the costs of old-age insurance will rise considerably, which in turn will exert more pressure on China’s current old-age security system (Almond & Li, 2013:51). China’s public service infrastructure is still poor. Currently, its urban planning and infrastructure development is not ready to meet the demands of the rapidly growing aging population (Dodson, 2011:68). The public service infrastructure does not consider the elderly. In some rural areas, the elderly face more obstacles in their daily lives, because of the huge outflow of the youth and a serious lack in service systems. To grapple with, the negative effect caused by an evolving population structure, the CDRF (China Development and Research Foundation) released a report recommending a relaxation of the country’s one-child policy (Dodson, 2011:45). According to the report, the one-child policy should end immediately in regions where the government has implemented controls before (China Development and Research Foundation, 2014:15). Subsequently, the two-child policy should be implemented throughout the country. Based on age structure, gender, total population, fertility rates data gathered by the national census of 2010, the report assesses various approaches to loosening the country’s one-child system (Galalae, 2014:21). Findings show that terminating the policy in various regions simultaneously will spark a huge population explosion which will prove to be useless to the current social security stability, in addition to employment and education scenarios. However, loosening the policy gradually and area by area might satisfy the demands of policy change as well as prevent an explosive population growth fluctuation in a short period. However, new census data support arguments made in recent years that China is suffering from a population problem of a unique kind: the birth rate is too low (Goh, 2011:18). The most recent data released in 2011 and borrowing from the national census in 2010, show that mainland China has a population of 1.34 billion. They also show a sharp fall in the mean annual population growth rate, which fell to 0.57% between 2000 and 2010; 50% of the figure of 1.07% recorded in the last decade (Galalae, 2014:27). The data shows that the cumulative fertility rate, which is the number of children a fertile woman can expect to have, averagely, in her lifetime, could now be only 1.4, much lower than the 2.1 replacement rate, which ultimately leads to the stabilisation of the population. Slower growth is supported by a rapid aging of the population. People over 60 now account for 13.3 percent of the total, an increase from the 10.3 percent recorded in 2000. Within the same period, the number of those aged below 14 fell from 23 to 17 percent (Greenhalgh, 2010:17). A prolongation of these patterns will add even greater responsibilities on the working youth who must take care of their elderly family members and relatives, as well as on state-sponsored pension and medical care systems. China’s huge demographic share – a growing percentage of working-age adults – is virtually over. Besides messing up China’s age distribution, the one-child system has potentially magnified its gender inequality (Greenhalgh, 2010:56). More boys are born in China than girls. However, the country is not distinct in this; other nations like India have faced similar challenges without effective population controls. Despite this, Chinese officials do refute that the one-child system has had an impact. China’s high cultural affinity for male offspring has pushed many families to take whatever measures necessary to ensure that their only child, they have, is a son. At the advent of the one-child policy, this sometimes implied female infanticide (Greenhalgh, 2010:57). As reproductive technology spread – especially ultrasound – sex-discriminative abortions became popular. The results of the 2010 census show that China is making little progress in addressing this worrying trend. Among newborns, in 2010, there were over 118 males for 100 females (Guthrie, 2012:36) This represents a minor growth over the 2000 mark, and shows that, in around a quarter of a century there will not be enough wives for about a fifth of today’s infant boys – with the potentially huge destabilizing effects that could have. The census findings are likely to fan discourse in China between the powerful population-control institutions and an increasingly outspoken group of academic demographers campaigning for a loosening of the one-child system. Their differences involve not just the system’s future, but also – as is typical in China – its past. According to Wang Feng, the head of the Brookings-Tsinghua Centre for Public Policy – China’s demographic trend had already shifted drastically by the stat of the one-child system in 1980 (Holtz, 2013:24). The overall fertility rate was 5.8 in 1950 and had fallen steeply to 2.3 thirty years later, slightly above replacement level (Holtz, 2013:27). Other nations attained identical declines in fertility at the same time. The vital influences, according to Wang, are the rewards of development, including improved healthcare and steep declines in high infant-mortality rates which caused high higher birth rates to ensure that at least some offspring survived to maturity (House of Representatives Committee on Foreign Affairs, 2014:34). In terms of consequences, coercive measures had little impact on reducing fertility, which would have occurred regardless (House of Representatives Committee on Foreign Affairs, 2014:38). Nations that simply made contraceptives more available – Indonesia and Thailand, for example – did as much as China (with its draconian approaches) to lower fertility. Taiwan, which the Beijing government views as part of China, posted declines in fertility rates equal to those achieved in China, without adopting population controls. AGE STRUCTURE AND THE ECONOMY China’s 2010 national census revealed some important findings that point to significant structural changes in population patterns with effects on the economy (Jacobsen, 2013:26). These include: The number of permanent inhabitants in developed coastal provinces increased, while it reduced for people in underdeveloped remote provinces; education levels increased while literacy rates kept increasing; China’s annual population growth rate has surprisingly slowed in the last 10 years compared to the last decade; the number of both aged and working age segments of the populations rose, while the number of children below 14 years reduced, implying a general aging of the population; and the urbanization process is more rapid than forecasted, with half of the total population residing in urban areas (Jacobsen, 2013:29). The findings make it imperative to research the possible implications of this shifting population makeup on inflation, the growth of financial markets, economic growth and property prices. A decline in the workforce will impact the likely growth rate which depends on the consistent supply of capital, productivity, and workers. In the past thirty years, China’s economic growth has averaged around 10% annually, largely due to the abovementioned three factors: increasing efficiency of production; capital resources based on high local savings rates; and rapid increase in labor supply (Magnus, 2012:31). As is the case in many countries, particularly Japan with its rapidly aging population, the decline in labor supply influences economic growth. However, the reprieve could be that China is somehow different, magnifying the risk in the forecasting of future economic growth patterns (Magnus, 2012:32). For instance, the increasingly rapid urbanization levels are good for economic development. It implies that rural labor is shifting from the poor productivity of agricultural regions to the higher productivity of contemporary manufacturing and service industry regions (Holtz, 2013:36). The census data revealing China’s urban population accounted for 49.68 percent of the total population (or 666 million) shows that the country still has a long road to travel before it can attain the standards of both developed and emerging market nations (Newman, 2013:58). In addition, the income difference between urban and rural laborers keeps growing. The data shows that there is significant potential for improvement and, therefore, more urbanization (Pan, 2014:23). However, conversely in juxtaposition with potential, the rate of urbanization will reduce in the coming years, therefore reducing its effect on economic growth. The impact of labor shortage in recent times is a good sign, as is the increase in labor quality owing to better education (Newman, 2011:48). The census revealed that illiteracy rates decline from 6.72 to 4.08 percent between 2000 and 2010, and the number of Chinese with university-level education rose from 3611 to 8930 per 100,000 in the same period (China Development and Research Foundation, 2014:74). The better pool of quality (better-educated workers) insinuates that with steady labor supply there should be a growth in productivity (Pan, 2014:47). It also insinuates a reform of the economic model from the labor-intensive, stable growth trend of the last thirty years or so. However, during the reform period, the labor market can face imbalances caused by misalignment of skills to available or necessary responsibilities (Pan, 2014:39). In summary, the decline in the number of working-age Chinese – which will decline further in the next 3 or 4 years – will lead to a remarkable decline in the country’s economic growth in the next decade. Redundant rural workforce produced by urbanization and the increase in labor quality will, partly, counter the impacts of the reduced cumulative working age population. Based on government and private agencies’ forecasts of China’s economy, and considering labor patterns, productivity and capital, likely annual growth over the Twelfth Five-Year Plan should be between 8 and 9 percent, reducing sharply vis-à-vis the 10% recorded in the past decade, and likely to reduce during the Thirteenth Five-Year Plan (Pan, 2014:41). Although rapid aging has created several economic challenges for China, these challenges are not unsolvable, for various reasons. Using mechanistic logic, we could reason that although aging has been happening rapidly, it cannot be classified as a spontaneous shock, so the economy has room to maneuver (China Development Research Foundation, 2014:43). The intensifying problem of elderly dependency will keep getting countered by low dependency among the youth. Also to the degree that labor shortages can tend to occur, they could be prevented by reducing pseudo-employment – marginally employed people will have opportunities to increase their productivity (Perry, 2010:64). There could also be behavioral changes like rise in education levels and labor supply, together with stronger household coping policies in lieu of newly identified elderly needs. Population aging may also spark institutional measures that affect immigration, pensions, and retirement. To the (large) degree that China’s economy is sensitive to fluctuations in supply of and demand for labor, it is logical to expect that any likely labor shortage will trigger an increase in wages and, consequently, more labor force involvement; with outcome that the economy will become increasingly capable of producing required products and services, including for the aged (Powell & Martin, 2012:54). Similarly, it could be expected that fluctuations in labor supply and demand will influence the assortment of goods and services produced, in a manner that will tend to meet the obvious needs of the population, even when those needs evolve due to the population aging (China Development Research Foundation, 2014:69). Finally, China could gain something by looking at the earlier aging experience of Korea and Japan. As the population ages, it will certainly be imperative to commit more resources to the health and care of the elderly. Moreover, as China progresses in its epidemiological evolution toward an even higher prevalence of noncommunicable illnesses, it will gain by implementing programs intended to reduce behaviors that cause serious chronic conditions (China Development Research Foundation, 2014:35). Pension insurance is another area in which government intervention may benefit the elderly. Remote areas especially lack this vital component of social protection (Wang & Tybout, 2014:35). China will have many options on how to build a financially relevant pension model, and it will gain from examining the experiences of other nations. Currently, and in the foreseeable future, like most of its neighbors, China enjoys a very stable framework of family accountability via which the elderly can rely on huge support. Population policies are also vital. A relaxation of the one-child policy would facilitate a gradual increase in the average size of the working-age population. Further, such relaxation could be effective in enabling the reverse of the very high disproportionate ratio of men to women in the Chinese population – a scenario that depends on targeted prenatal abortions and the maltreatment or worse of girls, and that blocks millions of Chinese men from marrying and robs them of the support of wives or adult children or grandchildren when they are elderly (Wang & Tybout, 2014:29). Current government interventions, to drive economic growth in the non-coastal regions, could also be vital in preventing economic challenges resulting from population aging (Wasserstrom, 2013:47). If the working population of the rural provinces is harnessed to increase its productivity, the Chinese economy will gain holistically, and regional economies will be better placed to offer care services and care to the elderly. It is expected that China’s economic growth will gradually decline in the future, in comparison with the rapid pace of economic growth from 1978 to date. However, population aging will not be solitary, or even the main, cause (Wasserstrom, 2013:49). One of the biggest reasons for this forecast is that almost all countries as they grow, undergo a major decline in economic growth. All factors constant, rapid growth is often fastest at lower income levels. China has achieved major progress, and its economic development is likely to stabilize as it moves toward a higher income level (Zhu & Whalley, 2013:23). In summary, it is unlikely that population aging will lead to major economic challenges for China, but it should be addressed imperatively. The country’s productive economy is dominated by skilled workers and by those looking to join the workforce. There is little likelihood of a lack of labor leading to a major slowing of GDP or GDP per capita growth (China Development Research Foundation, 2014:42). To the level that older employees are retiring, there are (more than) adequate working-age people to replace them and to support the regular needs of the country’s elderly population. Nonetheless, policy changes (in health, internal migration, pensions, and labor policy) could significantly bolster the security of China’s economic future. Population could influence output in two ways. In the first instance, population aging means that a larger percentage of the population is above the retirement age of most people (Zhu & Whalley, 2013:25). Without the implementation of compensatory initiatives, there will be a smaller percentage of the population involved in productive activities, and overall output per capita will reduce. In the second instance, the savings rate fluctuates depending on age (China Development Research Foundation, 2014:23). Working-age people are the biggest savers, both due to the fact that they can do so, by harnessing their income, and because they have a motivation to save in expectation of retirement. The aged, if they are out of work, often have little earnings – although they sometimes benefit from family support or state transfers – so they have little or no capacity to save. If a country has a high percentage of older people, the total savings rate will tend to reduce. With reduced savings at hand for investment, economic development will tend to slow down. These issues, considered together and without any preventive measures, create a potentially difficult situation (Tten, 2010:34). All factors constant, an aging population will experience lower output growth per capita and a lower savings rate. Moreover, the elderly need care and support, and if these need financing, such financing will limit the resources available for alternative purposes. All in all, China must address the problem of its rapidly aging population imminently by adopting long-term measures to contain the rapid expansion of this population segment (China Development Research Foundation, 2014:34). Failure to do this could lead to increasingly adverse effects on the economy. References Perry, E. (2010) Chinese society: Change, conflict and resistance (3rd ed.), Abingdon (Oxon), Routledge. Powell, T., & Martin, S. (2012) The Negative Impact of the One Child Policy on the Chinese Society as it Relates to the Parental Support of the Aging Population, New York, W.W. Norton. Tten, J. (2010) Moral Issues and Concerns about China's One-Child Policy: A Cosmopolitan Perspective, München, GRIN Verlag GmbH. Wang, L., & Tybout, J. (2014) Should China cancel the one child policy? 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