The challenge of China’s dwindling workforce

In 1980, the population of the People’s Republic of China numbered close to a billion, and most were among the poorest people on earth. China produced barely a third as much steel as the US. Thirty five years later, it makes more steel in six weeks than the US does in a year, and has engineered the greatest fall in poverty in world history. Set beside the arrival of China into the global economy, no event since the industrial revolution has had a greater impact — not the financial crisis, nor even the collapse of the Soviet Union.

The Middle Kingdom is still — just — the world’s most populous country, but the number of its people that are of working age is on a downward trajectory. There is growing evidence of labour shortages, wages rising faster than productivity, and of the flow of migrant labour from the rural interior slowing sharply. Named for the Nobel Prize-winner Sir Arthur Lewis, countries that hit this Lewis Turning Point usually see economic growth fall. Handling lower growth will preoccupy China’s rulers in the decades to come, and provide the rest of the world with much to think about.

It is important not to exaggerate the significance of this turning point. While the sheer number of its people mesmerises the outside world, China has long been far more than a sweatshop. Closer examination shows a pattern of growth based more upon increased capital than labour, and by combining the two more cleverly. In recent years, investment has made up more than half of GDP, while the reforms launched by Deng Xiaoping in the late 1970s triggered a 30 year-long spurt of productivity growth.

The cheap goods churning out of Chinese factories were a boon to the developed world, helping to bring about a long spell of non-inflationary growth. There is no need to fear the loss of this tailwind; India alone could add three times more people to its workforce than China will lose, and other countries such as Nigeria and Bangladesh are on a similar upswing. The challenge is for such countries to upgrade their infrastructure, improve their business environment, and thereby come to compete effectively for the business.

As much as to adapt to this demographic slowdown, China’s task is to wean itself away from a risky overreliance on investment. Its incremental capital output ratio, the GDP eked from each extra unit of capital, has deteriorated, and will be further undermined by rising wages. Shifting investment away from construction and towards productivity-enhancing machinery is one way forward; by 2017, China is forecast to have more robots installed in its manufacturing plants than any other country.

But even better is for Beijing to push through structural reforms, such as subjecting more state-owned enterprises to market discipline and liberalising the financial sector. This last reform also ought to help encourage ordinary Chinese consumers to open their wallets, thereby rebalancing growth towards household spending.

China’s leaders have never been complacent about the country’s growth prospects, even as rivals remain daunted. Somehow they need to provide higher living standards, clean up their polluted cities and husband a water supply shrinking to dangerously low levels. There is a reason that international busybodies like the International Monetary Fund and World Bank clamour tirelessly for more structural reform: in the end economic growth comes down to producing more from less. The past 30 years are proof that China can pull it off. The dwindling number of workers in China will not so much change the agenda as reinforce it.