Rob Salkowitz on China’s demographic challenge in creating sustainable economy

A very interesting blog article from Rob Salkowitz in Fast Company. It is about China’s soaring economy in the face of its demographic challenges: aging workforce and less dynamic and innovative entrepreneurial society.

FC Expert Blog

China: Number Two With a Bullet

BY FC Expert Blogger Rob Salkowitz Mon Aug 16, 2010

This blog is written by a member of our expert blogging community and expresses that expert’s views alone.

Shanghai,  China

Recently-released economic statistics confirm what a lot of people could see coming: China officially passed Japan as the world’s second-largest economy last quarter, reporting a quarterly GDP of $1.33 trillion. Some forecasters believe that it’s only a matter of time before the world’s most populous nation also becomes the world’s most prosperous, by overtaking the US.

China’s rise — from an impoverished agrarian nation limping along under a stridently-ideological dictatorship to the world’s leading exporter and manufacturer — took just three decades. Today China’s infrastructure, government, and workforce are significantly better-developed. The country’s trade policies, currency valuation, lack of labor standards, and vestiges of a command economy give it some short-term tactical advantages over more liberal, market-oriented competitors in North America, Asia and Europe. China is capable of operating at a scale that is inconceivable elsewhere in the world. What could possibly go wrong?

One word: demographics.

Today, China has the world’s largest population, more than 1.3 billion. The median age is just over 34: slightly younger than the U.S. (36.7), much younger than Japan (44.2), but also significantly older than other emerging economies such as India (26.5) and Brazil (28.6).

That’s the good news. The bad news is that after 2016, China will face the steepest aging curve of any large population in world history. By 2028, Chinese demographers predict that the population over 65 will exceed that of the population under 15, and number in the hundreds of millions; by mid-century, China’s average age will rise above 50. India’s is projected to remain around 26.

These crooked numbers were created by China’s one-child policy, initiated in the 1980s to bring the population under control. It succeeded, and perhaps saved a growing China from starvation, but the “4-2-1 problem” (4 grandparent, 2 parents, 1 child) and a growing gender imbalance has created a structural workforce aging issue even more severe than ones faced in Europe and Japan.

Faced with a population of hundreds of millions of elderly retirees dependent on a shrinking number of young workers, China is in a desperate race to get rich before it gets old. The country’s much-maligned high savings rate, which is starving the world economy of much-needed consumer demand, is driven in part by the realization that demographic trends will rapidly erode the country’s productive capacity.

We’ve already seen signs that China’s booming manufacturing sector is running short of manpower. Employers are increasing wages and offering unprecedented incentives to lure workers to more productive factory jobs. China’s schools can’t produce qualified graduates quickly enough to fill middle management and professional roles.

There’s a qualitative dimension to China’s demographic conundrum as well. For a country so enterprising, it is not exactly entrepreneurial, and that too may be age-related.

Even today, despite hundreds of millions of talented, highly-educated young people in its workforce, China does not exhibit the personality of a young society. This is not just because of its aged leadership and ancient culture. Its institutions are centralized and exert a powerful conforming influence over new ideas and new innovations.

 Billions of Entrepreneurs

In sharp contrast to the noisy and unruly market democracies that prevail in places like India, the Chinese government’s approach to technology appears motivated more by a desire to control the spread of ideas than to let the chips fall where they may. In his 2008 book Billions of Entrepreneurs, Harvard Business Professor Tarun Khanna notes that, in China, “the government is the entrepreneur.” Big investments are state-driven and many new ventures are financed through the machinations of China’s opaque financial sector.

The systemic aversion to risk, which is more characteristic of the graying societies of Europe and Japan than to the youthful nations of the emerging world, influences and inhibits the impact of entrepreneurship. Without that spark, China may be hard-pressed to compete on the basis of manufacturing muscle alone.

China needs to take some risks to maintain its momentum in the face of demographic headwinds. But for a variety of reasons, it seems disinclined to do so. The longer they attempt to grow along an unsustainable track, the more dramatic a change of direction will be required to set them right. It is entirely possible that the greatest threat in 2025 is not a China moving up to number one, but a China poised to drop below more dynamic younger competitors.



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