Bernardo M. Villegas
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published: Sep 27, 2019






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Will China Be Number One? (Part 1)

          There is a lot of talk about China becoming Number One economy in the world any time now. This usually means that it will have the highest per capita income in the world.  I am reminded of similar speculations in the 1960s when I was doing my doctorate in the U.S. that Japan would become Number One, surpassing the U.S. in per capita income before the twentieth century would be over.  There were sufficient reasons for such a belief.  The work ethic of the Japanese was the wonder of the world then, especially after their almost miraculous recovery from the horrors of the defeat in the hands of the U.S. military forces and the holocaust of the atomic bombs exploded in Nagasaki and Hiroshima.  Their businesses in the hands of the zaibatsus were breathing down the necks of their U.S. counterparts in improving productivity through technological research and innovations. Their university graduates, many of whom were pursuing further studies in the U.S., were turning out to be world-class professionals who were building a strong industrial base.  Why then did Japan not become Number One?  The quick answer is that the nation committed demographic suicide by the 1990s.   They allowed their fertility rate to decline precipitously so that they faced the serious problem of a rapidly ageing nation having to cope with an increasing number of senior citizens with a much smaller number of younger workers to support them.  This demographic crisis continues to hound the Japanese economy up to this day.

         China’s attempt to be Number One will follow a slightly different path.  Because of the sheer size of the population (about 1.4 billion today), China is already number one in GDP (measured in purchasing power parity) and  in the absolute volumes produced  of  practically all goods and services, from cars to cell phones to washing machines and in internet users, tourists, and university students.  As Martin Wolf, prominent economics writer for the Financial Times, recently wrote, however, China is still very much today  “a middle-income country, ranked by the International Monetary Fund (IMF) at 75th in the world in gross domestic product per head at purchasing power parity—a little behind Mexico and Thailand” (FT April 10, 2019). In his article entitled “Can China be both rich and communist?”, Mr. Wolf enumerated some of the assets of the Chinese economy that will help in its attempt to be Number One: “One is the drive towards education and the entrepreneurship of the Chinese people, which greatly increases the likelihood of achieving prosperity.  Another asset is the ability to transform modern technology into  a system of comprehensive surveillance over virtually every Chinese person.  Yet another is the ability to point to the recent economic and political failures of the high-income democracies:  the global financial crisis; declining productivity growth; the tendency to choose incompetent leaders (such as US president Donald Trump) and doomed causes (such as Brexit).”

         At the end of the article, Mr. Wolf asked the sixty-four dollar question:  “Will China turn itself into a huge Singapore, with high-income levels of prosperity and government effectiveness, but retain one-party rule?  Or will its political system, economic progress or, more plausibly, both together founder?” The comparison to Singapore is very appropriate. Singapore started to face its demographic crisis when it already reached First World status.  China, in contrast, is already ageing very fast while still being a relatively poor country.

         Even if China is able to survive the political challenge of retaining one-party rule indefinitely into the future, the Achilles heel that will prevent its rising to Number One in the global economy is its shrinking population.  In a recent article in the New York Times (January 21, 2019), Steven Lee Myers et al reported that Chinese academics delivered a stark warning to the country’s leaders:  China is facing its most precipitous decline in population in decades, setting the stage for potential demographic, economic, and even political crises in the near future.  A report, issued by the Chinese Academy of Social Sciences, highlighted the problem that a decline in the birth rate and an increase in life expectancy means that there will soon be too few workers able to support an enormous and ageing population.  The academy estimated the contraction would begin in 2027 (less than a decade from now), though others believe it would come even sooner or has already begun. 

         Recognizing the worrisome demographic decline, the Chinese Government in 2013 started to ease enforcement of the “one-child” policy in certain circumstances.  It raised the limit to two children for all families in 2016, in hopes of encouraging a baby boom.  Predictably, as the Singapore case already showed dramatically, any effort to reverse the decline in fertility after a contraceptive mentality has already been formed in the minds, especially of the women, is doomed to fail.  After a brief uptick in 2106, the birth rate fell again in 2017, with 17.2 million babies born compared to 17.9 in 2016.  The figure of 2018 is even more disappointing:  the National Bureau of Statistics announced that the total number of births in 2018 fell to 15.2 million, a drop of nearly 12 percent nationally.  Some cities and provinces have reported declines in local birth rates of as much as 35 percent.  China’s fertility rate has officially fallen to 1.6 children per woman (a rate of 2.1 children per woman is needed for zero population growth).  What makes the situation even gloomier is that there are reports from Yi Fuxian, a professor at the University of Wisconsin-Madison, that the Chinese government has been overstating the fertility rate to disguise the disastrous ramifications of the “one child” policy.  According to his calculations, the fertility rate averaged 1.18 between 2010 and 2018.

         As the Chinese population starts to decline in the next decade, there could be a greater burden on China’s economy and its labor force.  With fewer workers in the future, the government would be struggling to pay for a  population that is growing older and living longer.  A decline in the working-age population could also slow consumer spending and thus have an impact on the economy in China and beyond.  The most pessimistic assessment came from a recent paper of Dr. Yi and Su Jian, an economist at Beijing University, who argued that the population actually contracted in 2018, the first year it has done so since the famines of 1961 and 1962 induced by the Great Leap Forward, the disastrous industrialization campaign of Mao Zedong.  As reported in the New York Times article, Dr. Hi wrote in an email:  “It can be seen that 2018 is a historic turning point in China’s population.  Its population has begun to decline and is rapidly ageing.  Its economic vitality will keep waning.”  (To be continued).