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The Economist just released an article discussing China’s Population.  I found it interesting that a lot of the topics discussed in the article, which can be seen here (http://www.economist.com/node/18651512?story_id=18651512), I had discussed in my research paper written after my trip to China during the Winter of 2009.

Population China

2/10/2009

Introduction

It is clear that the world is experiencing some sort of transformation.  The question is what type of transformation.  The headlines claim a global economic recession, the rise of new world powers like China, India, and the Eurozone, or an environmental transformation related to global warming.  Every headline is transforming the globe but there is one transformation that has been left out of the headlines recently.  Arnold Toynbee said in Civilization on Trial, “The things that make good headlines attract our attention because they are on the surface of the stream of life, and they distract our attention from the slower, impalpable, imponderable movements that work below the surface and penetrate to the depths.  But of course it is really these deeper, slower movements that, in the end, make history, and it is they that stand out huge in retrospect, when the sensational passing events have dwindled, in perspective, to their true proportions.” (Longman, 2004) The slow moving, underlying transformation that has escaped the headlines is aging populations.

All over the world countries are experiencing a major demographic change that has been developing for decades.  Europe and Japan are facing a severe aging problem due to a decline in fertility rates that can be attributed to a change in social preference. (Nyce & Schieber, 2005)  Families are choosing not to have children because they would rather spend their disposable income elsewhere.  In the United States, the infamous population surge in the 1940’s and 1950’s, the Baby-boomers, have created a demographic imbalance.  And in China, the controversial One-Child Policy has created an unnatural change in fertility rates designed specifically to depopulate a “crowded” country

These population changes are so fascinating because no one knows exactly how this will affect a country’s success.  It is within this paper these issues are explored by reviewing historical examples of similar population transformations: the Black Death, North Korean famine, Russian fertility decline, and the Baby Boomer generation of the United States.  Each example is unique and each example can shed some light onto China’s population situation.  The Black Death and North Korean famine each witnessed severe population declines that coupled with an economic decline.  Russia’s fertility decline relates to China’s decision for population control when they artificially lowered the fertility rate with the one-child policy.  Finally, the Baby Boomers of the United States example is very similar to China’s own baby boom generation, the “replacement births”, except The United States baby boom started a couple of decades earlier.

Population History of China

Napoleon once said, “Let China sleep, for when she wakes, she will shake the world.” (Kynge, 2007) China is most definitely shaking the world and much of which can be attributed to their population.  China is the most heavily populated country in the world with just over 1.3 billion people.  In comparison, the United States, the 3rd most populous country, has a population of 304 million, which means China is at least four times larger. (U.S. Census Bureau, 2008)  Population in China is a paradox because it is both a major strength and weakness.  “[Population] is at once its greatest strength and its gravest frailty.  An unparalleled stock of human capital allows China to assume the characteristics of several counties at once…Nevertheless these strengths are offset to a considerable degree by the old oppression of numbers.” (Kynge, 2007) The policy on population has been switched many times over the centuries.  Most recently China has experienced two extremes of decline with a population explosion in between specifically the famine following the Great Leap Forward and the One-Child Policy.

In 1958, China began a new movement called “The Great Leap Forward.”  Essentially this was a transformation of a country to focus more on the industrial sector. Workers, capital, and land were redistributed from agriculture to industry.  In 1958, nearly 30 million workers left agriculture to work for the state sector, and the remaining workers were asked to reduce the acreage used for grains. (Naughton, 2007) This quickly created an imbalance, thus creating a food shortage.  By 1960, China was having serious issues feeding their own people. By the end of 1961, about 25-30 million excess deaths occurred due to the famine.  Birth rates also declined during the period because many women did not have the proper nutritional value for successful pregnancies.

Additionally, prior to the famine, the government began to push the importance of having children to help the country.  Mao Zedong, the leader of Cultural Revolution, believed that a large population was an advantage for China.  He felt that more people meant more human labor and creativity, which should lead to a healthier lifestyle, despite a resource imbalance. (Naughton, 2007)  James Kynge, author of China Shakes the World, highlights Mao’s approach: “[Mao Zedong] scorned the notion that the scarcity of land was a restraint on population growth.  Every mouth, [Mao Zedong] said, was attached to two arms.  People could always produce more than they consumed.”  (Kynge, 2007)

Even though the Great Leap Forward caused the catastrophic famine through food supply shortage it was able to do some positive things for the Chinese leading up to the famine. The modernization led to increased focus on sanitation and nutrition.  This allowed for more births and less deaths before and after the famine.  Figure 1 – Vital Rates, shows the drastic population changes between 1957 and 1963 with large spikes in birth rates and death rates.  The birth rate peak prior to the famine can be attributed to Mao’s focus on population increase.  The peak following the famine, in 1963, is a result of a phenomenon called “replacement births.”  (Naughton, 2007)  This is when families will consciously or subconsciously attempt to replace loved ones with children.

After the “replacement births” the birth rates quickly declined to levels below what was occurring prior to the famine.  This can be attributed to basic social changes that lead to fewer children.  Women began working more.  Families shifted from agricultural to industrial work, which put less emphasis on big families because the field labor was no longer needed.  Also, as education standards rose, it became more important to finance each child’s education.  Finally, the government began implementing policies like the “Later-Longer-Fewer” Policy.  This urged adults to wait longer before having children and leave more time between births, thus lowering the amount of births in a woman’s lifetime.  But the government felt this was not enough.  The “replacement births” would soon be ready to bear children and the government worried about the impending population boom that would happen and potentially put a strain on resources.

In September 1980, the Chinese government implemented one of the most effective family planning policies ever, the one-child policy.  The government believed this was the most effective way to get birth rates below the replacement level of 2.0 births.  This policy limited most females to one only child and enacted penalties to those women that bore more than one.  Over the years the policy has become less strict.  For instance, after 1984 forced sterilization and forced abortion were renounced.  Then provincial governments began allowing two children if the first child was a girl or had “hardships”.  The government also allowed additional children to those families that worked in agriculture due to the required human capital.

This has not only been one of the most effective government policies (the fertility rate is below replacement level) but it is also one of the most controversial.  Socially, the policy has had an extreme impact on the culture in China.  Males are very important in the Chinese culture and this has forced the ratio of males to females to become severely imbalanced.  There are reports of infanticide to females, not reporting the birth of females, or sex-selective abortions.  As these children get older it is expected to cause a “bachelor problem” with not nearly enough women to be brides to match the large male population.  It is estimated that by 2020, 30 million men will unable to find marriages. (Chang, 2008)  Table 1 – Sex Ratio (males per 100 females) shows the increasing ratio of males to females over the years. (Naughton, 2007)  It was recently reported in 2007 that the ratio is now 123 males to 100 females. (Eberstadt, China’s One-Child Mistake, 2007)

Table 1 – Sex Ratio (males per 100 females)

Year

At Birth

Population aged 0-4

1953

104.9

107.3

1964

103.8

106.5

1982

107.6

107

1990

111.8

109.8

1995

116.6

118.8

2000

117.8

120.8

2003

121.2

Another unexpected social consequence of the one child policy is the “Little Emperor Syndrome”.  Since families have only been allowed to have one child, that child receives an “excessive” amount of affection from the two parents and in many cases the four grandparents. (Lim, 2004)  There are reports that many of these children are having significant mental health issues like depression or behavioral problems like aggression, lying, and stealing.  Experts believe this is because the children have been excessively spoiled and were sheltered from their problems by their parents and grandparents. (Lim, 2004)

Future of China’s Population

China’s recent but eventful population history creates some interesting scenarios, including a 4-2-1 society and a top heavy population pyramid followed by a population decline.  These are all significant occurrences that will make economic and social waves as they progress due to a severe demographic shift.

The 4-2-1 society is when the predominant family structure comprises of four grandparents, two parents, and one child.  This is directly related to the decision to implement the one-child policy, “Although rising life expectancies play a role, China’s increasing older population reflects the maturing of its national one-child policy.” (Nyce & Schieber, 2005)  Currently, China has an economic advantage by having a very young population with low dependency.  But this is expected to change as parents and grandparents get older and require the child or grandchild to support the family.  In a traditional family structure there will be multiple children or grandchildren to help support the aging family.  But this is not possible in the 4-2-1 family structure.  Figure 2 – Dependency Rate predicts the percentage of working age population through the year 2050.  By 2030, the senior citizens will significantly outnumber the children and make up the majority of the population. (Naughton, 2007)

Then consider that China does not have a formal pension system in place to help the elderly.  Richard Jackson, demographer at the Center for Strategic International Studies, said “You have the prospect of 400 million Chinese elderly, age 60 and over, by 2040, 80 percent of whom, do not have any formal retirement pension, either public or private, most of whom won’t have access to government-financed health care.” (McElroy, 2008)  It is China’s tradition that the youth is to support the elderly because the government will not, but now the government is not allowing them to have that family support.

Figure 3 – Population Pyramid Shapes gives the typical shape and the general definition for each shape.  A population pyramid is a great tool to do a visual analysis on the ratio of dependents to the typical labor force and to get a basic sense of population trends.   Pyramids depicting the population trends of Italy, United States, and Japan are in the appendix.  All three countries are in the middle of the aging population transformation and offer excellent examples of trends overtime

Figure 4 - China’s Population Pyramid will give an idea of the population shift that China will experience between now and 2050:

In 2000, China’s population was in a transition from a Stage 2 – Expanding Pyramid to Stage 3 – Stationary Pyramid.  As the years progress China’s population pyramid reflects the Stage 4 – Contracting Pyramid.

As more retired citizens retire, they will begin to outnumber the working population and put a heavy strain on the economy.  Their overall productivity is expected to drop, thus causing a decline in output.  Figure 5 – Operations of the Macro Economy is the formula explaining the calculation of gross domestic product (GDP).  This figure points out that the two factors for GDP growth is labor and productivity.  As the population ages there will be less workers and less productivity thus leading to a decrease in GDP.  Table 2 – Growth of Working-Age Population shows an overall decline in working-age population in China, especially in rural areas. As it stands an older population could hurt GDP, assuming technological improvements are not able to increase productivity enough to balance out the labor decline. (Nyce & Schieber, 2005)

Table 2 – Growth of Working-Age Population

Year

National

Rural

Urban

1982-1990

2.5

0.0

0.0

1990-1995

1.7

0.0

0.0

1995-2000

1.4

0.0

0.0

2000-2005

1.6

-0.1

4.1

2005-2010

1.0

-0.9

3.2

2010-2015

0.5

-1.6

2.5

2015-2020

-0.1

-2.4

1.6

2020-2025

0.0

-2.3

1.5

2025-2030

-0.2

-2.8

1.1

2030-2035

-0.7

-3.8

0.6

2035-2040

-0.8

-3.9

0.3

2040-2045

-0.5

-3.5

0.3

2045-2050

-0.6

-3.6

0.0

The elderly consume less than other demographic segments.  Figure 6 – Age Profile of Total Consumption Expenditures for Various Countries gives trends of consumption in other countries.  In the chart it is clear that spending peaks between 45-54 and then declines thereafter.  The other important note of the older consumer is the type of spending that occurs.  “Not only do older populations demand fewer goods and services; they tend to purchase a different basket of goods, with fewer consumer durables and more services, particularly health and living support services.” (Nyce & Schieber, 2005)  Those sectors typically have lower rates of productivity and productivity improvements than goods-producing sectors. This could impede economic growth in addition to falling aggregate demand.

John Maynard Keynes, one of the great economists of the 20th century, once wrote, “…an era of increasing population tends to promote optimism, since demand will in general exceed, rather than fall short of, what was hoped for…But in an era of declining population trends the opposite tends to be true.” (Nyce & Schieber, 2005)  Keynes later warns in his book, The General Theory of Employment, Interest, and Money, that a declining population might be “disastrous.”  Right now, China’s fertility rate, the most significant measurement of population sustainability, is far below the replacement level of 2.0 births.  The current rate is still up for debate but sources have cited 1.7 births and 1.8 births. (Eberstadt, China’s One-Child Mistake, 2007) (McElroy, 2008) Based on the fertility rates and the population pyramids, the Chinese population is almost certain to experience a population decline. Asian Demographics, a research organization, supported this conclusion with projections that were released in 2005 stating, “…China’s total population, which hit 1.3 billion in January, inching up to 1.31 billion in 2019 and declining rapidly thereafter.” (Business: China’s Golden Oldies; Business in China, 2005)

Keynes prediction of a disaster is simply that — a prediction.  We simply do not know if there is a definite affect related to population decline.  However, there are a couple of times in history where a population decline and the economic impact can be observed: the Europe (1346 – 1352), North Korea (1995), and Russia (1992). (Yea, 2004)

Historical Examples

The impact of population decline on an economy is not completely known.  There have been instances of population decline that coincides with a drop in the economy.  Here are a few examples that show this positive relationship.

The Black Death, between 1346 and 1352, was a catastrophic epidemic that depleted populations all over Europe.  This Medieval Times catastrophe has been analyzed and debated many times to determine the economic impact.  G.D. Snooks, writer of Economies without Time, argues that the decrease in people of the Black Death caused economic decline in Great Britain.  Sanghan Yea, writer of “Are We Prepared for a Population Implosion”, summarized Snook’s work saying, “…the economy shrank, productivity fell, and the fast deterioration of the unused constant capitals and the technological retrogression followed…” (Yea, 2004)

North Korea experienced a severe famine from 1995 to 1997.  The amount of deaths caused by the famine is undetermined but it is clear that they suffered population loss.  Figure 7 – Trend in indexed North Korea population and GNP shows the timing relationship between GNP and population.  In 1995, there was a severe drop in GNP coupled with a decrease in population and there was not improvement in GNP until the population began to rise again. (Yea, 2004)

The Russian population decline closely resembles China’s future population trends because the population decline is due to fertility rate decrease and an aging population. Figure 8 – Russian population and GDP shows a similar chart to the one prior. Dr. Medkov of Moscow University said recently at the World Congress of Families in 2000, “Since the collapse of communism, Russia’s birth rate—previously very low—had plummeted, and now Russia’s population is falling by about one million a year, due to an aging population and a dearth of babies.”  Vladamir Putin said during his first annual presidential address that the number one problem facing Russia is a declining population. (Yea, 2004)

The Baby Boomers

2008 and 2009 have been trying times in the United States.  Millions of jobs are gone.  Fortune 500 companies are reporting multi-billion dollar losses.  The United States government has had to spend trillions of dollars to bail out financial institutions and other domestic industries.  However, the United States is not experiencing a population decline and it does not look like they will.  Unlike many other countries the United States has remained above the sustainability fertility rate.  But the United States is experiencing a demographic shift that appears to very similar to be China’s future population situation.  Figure 9 – Juvenile and Elderly Dependents per Worker illustrates an eerily similar “evolving demographic dependency”. (Nyce & Schieber, 2005)

Baby Boomers are a product of a soldiers returning home after World War II.  Many times they are referred to as “War Babies”.  This generation is defined as births between 1945 and 1964.   The peak of birth rate in the population was 1957 to 1963.  Author of The Age Curve, Kenneth W. Gronbach, believes that each generation passes through time like a parade, and in this parade they consume different products at different times.  If the generation is significantly larger than the others before and after it there will be a noticeable difference in performance from that industry. An example is the car industry.  The top automobile consumer is a 43 year old male.  Coincidentally, the peak of the car industry was between 2000 and 2004, which is the same time the peak of the baby boomers turned 43.  Since then sales have dropped significantly.  Generation X cannot match the Baby Boomer’s consumption because they have 9 million less people. (Gronbach, 2008)

The combination of the parade theory and the age consumption profile from Figure 6 – Age Profile of Total Consumption Expenditures for Various Countries, can provide one interesting hypothesis.  Sanghan Yea summarizes that, “…there has been a positive relationship between the three—the work force, the consumption of resources and the world population…Therefore, the contracting population will trigger the chain reaction like the following that it causes the demands for labor- and resource-inputs to decrease first and then, this change ultimately brings about the output to diminish.” (Yea, 2004)

Can China Expect the Same?

The combination of a baby boom phenomenon with the replacement births and one-child policy will most likely result in demographic transitions and a population decline.  China will inevitably have a top heavy aging population.  Most families are structured in a 4-2-1 style, four grandparents, two parents, and one child.  In fact, “China is projected to have the largest increase in its older population compared to its working-age population between 2000 and 2030.” (Nyce & Schieber, 2005)  That one child will be expected to support the rest of the family as the elders get older and are not able to work anymore.  This is the primary difference between China and other aging societies like the United States.  Another difference is that China does not have a government funded pension system.

With that said, there are other differences that are in favor of China compared to the United States.  Currently the United States is on a higher economic level that may prove to be more difficult to maintain.  “The United States has much higher standards of living, wealth, and worker productivity.  China, on the other hand, may be able to significantly increase worker productivity as a mechanism to finance the economic burdens associated with a growing retiree population.” (Nyce & Schieber, 2005)  Another difference in China’s favor is the financial position they are currently in.  The United States has trillions of dollars of debt on their books whereas China has a surplus of foreign exchange reserves.  Yao Jingyuan, chief economist at the National Bureau of Statistics of China, recently reported that China has exceeded $2 trillion in reserves. (People’s Daily Online, 2008)

The historic examples of catastrophic population decline used in this paper, the Black Death and North Korea, are intriguing comparisons, but those must be considered with caution.  There is a huge difference in population decline by choice and by catastrophe.  China has been aware of this population shift for the last thirty years; whereas, the other examples are nothing the governments could prepare for.  In addition, a disaster has many more affects on a community than just a loss of human capital.  Food supplies were devastated.  Communities were crippled with the loss of loved ones and personal fears.  The example of Russia is more applicable but China is in a far better situation than Russia at their period of decline.  Russia was less than a year removed from the Cold War and was in the process of transitioning from a communist regime.  They also did not experience unprecedented economic growth like China.  This does not mean China is immune to such economic implications but that many things need to be considered when making comparisons.

It is undeniable that there are similarities between China’s “replacement births” and America’s “War Babies”.  Both generations are considered baby boomers for their respective countries.  Kenneth Gronbach used the example of a parade to explain the concept of a generation moving through time.  Both generations should show similar effects to industries as their consumption patterns change. Companies need to have the foresight and vision to prepare themselves for the demand fluctuations as each generation passes through time.  Clint Laurent, of Asian Demographics, refers to China’s again population as a “a demographic earthquake.”  A marketer at Kraft also warns that, “…there is a huge and dramatic change in the demographics in China. We need to take action.”  Fortunately for China, they have a cushion of time before the aging population is ready to retire and they change consumption patterns whereas the United States is already feeling the effects of a demographic shift.  However, the United States may be more prepared to feel the shift from a material consumption economy to a healthcare and service sector economy.

The final difference between China and the United States is that it does not appear the United States will feel a population decline like China.  After the baby boomer generations pass the United States will be enjoying the prospects of Generation Y, or the Echo Boomers, and China will be battling with the unknown of a population decline.

China’s population is a unique situation.  They are the largest population in the world and they have one of the largest generations in history.  They have implemented population control devices more successfully than any other country.  However, there is no way to completely know if China’s population policy decisions will be a “success” or a failure until the affected generations pass through the system.  James Kynge, author of China Shakes the World, suggests, “It may be that China will grow old before it ever becomes rich.”

Cited:

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Dalgaard, C.-J., & Kreiner, C. T. (2001). Is Declining Productivity Inevitable? Journal of Economic Growth , 187.

Eberstadt, N. (2007, September 17). China’s One-Child Mistake. Wall Street Journal , p. A.17.

Eberstadt, N. (2004, April 28). The Population Implosion. Wall Street Journal , p. D.12.

Gronbach, K. W. (2008). The Age Curve. New York: American Management Association.

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Kynge, J. (2007). China Shakes the World: A Titan’s Rise and Troubled Future-and the Challenge for America. New York: Houghlin Mifflin Company.

Lim, L. (2004, October 11). Mental health fears in China. Retrieved February 15, 2009, from BBC Learning English: http://www.bbc.co.uk/worldservice/learningenglish/newsenglish/witn/2004/10/041011_china_children.shtml

Longman, P. (2004). The Empty Cradle: How Falling Birthrates Threaten World Prosperity and What to do About It. New York: Basic Books.

McElroy, W. (2008, June). China’s One-Child Disaster. Freeman , pp. 19-23.

Naughton, B. (2007). The Chinese Economy: Transitions of Growth. Cambridge: The MIT Press.

Nyce, S. A., & Schieber, S. J. (2005). The Economic Implications of Aging Societies. New York: Cambridge University Press.

People’s Daily Online. (2008, November 28). Yao Jingyuan: China’s foreign exchange reserves exceed US $2 trillion. Retrieved February 16, 2009, from People’s Daily Online: http://english.peopledaily.com.cn/90001/90776/90882/6542790.html

Specter, M. (1998, July 10). Population Implosion Worries a Graying Europe. New York Times , p. A.1.

U.S. Census Bureau. (2008, December 12). Internation Data Base. Retrieved February 5, 2009, from Internation Data Base: http://www.census.gov/ipc/www/idb/index.html

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Yardley, J. (2008, March 11). China Says One-Child Policy Will Stay for at Least Another Decade. New York Times , p. A.10.

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