The Demographic Challenge

China’s recent announcement of its first population decline in more than 60 years has demographers – and economists – worried.

Hong Kong

Published Mar 19, 2023 11:31 PM by G. Allen Brooks

(Article originally published in Jan/Feb 2023 edition.)

“Demographics is destiny” is an old phrase attributed to the nineteenth-century French philosopher, mathematician and writer August Compte, often considered the father of sociology. He believed that falling birth rates in Western countries would result in their eventually losing global influence, leading to a changed world order. 

History is replete with empires succumbing to neighbors from poor leadership, reckless spending and greater sums spent on military forays at the expense of social needs. We’re not sure of the role of demographics. Today’s world faces a future while dealing with two major demographic trends – aging populations in developed and emerging economies and high population growth in parts of the developing world.

These demographic trends will drive profound economic changes.

China Shocker

The issue of demographics framing the future came front and center following China’s announcement that its population shrank last year. In a year-end data release, officials announced that mainland China had 1.41175 billion people at the end of 2022 compared with 1.42126 billion a year earlier. The 850,000-decrease is tied to the country’s record-low birth rate of 6.77 per thousand.  China recorded only 9.56 million births last year, a drop of 10 percent from 2021. At the same time, it had 10.41 million deaths, a rate of 7.37 per thousand, a nearly three percent increase from the prior year. 

China’s population decline was the first since 1961. It followed a three-year famine spurred by then-leader Mao Zedong’s “Great Leap Forward” industrialization drive, which is estimated to have killed tens of millions of people. Concern about rapid population growth in the 1970s caused China’s leadership, headed by Deng Xiaoping, to encourage families to have no more than two children, with one child preferred. 

In 1979, a one-child policy was urged by officials, but a strict requirement was applied unevenly nationwide. The following year the central government mandated all families adhere to the one-child policy. The ending of this policy was announced in 2015 as Chinese officials worried about slowing population growth when the government was shifting its economic policy to emphasizing domestic consumption over industrialization and export growth. 

U.N. forecasters are now predicting that India will surpass China as the world’s largest population by the end of this year. What is happening with the populations of these two countries is occurring around the world with profound economic and social implications. 

Western European countries have been experiencing declining birth rates and rising death rates for years as has Japan, the epitome of an old country. U.S. population growth continues but is largely driven by migration as the nation’s birth rate has fallen below the 2.1-rate associated with population stability. 

The China data was a real shock to economists and social scientists. A 2008 report by the Center for Strategic & International Studies predicted China’s population peaking in 2029. Others put the peak even later. In 2021, a Chinese state think-tank said the country would hit a “turning point” in its development between 2026 and 2030 because of fewer births. 

The report noted that China’s 12 million births in 2020 marked a birth rate of 1.3 children per female, the lowest since 1960. In the two years from 2020 to 2022, China’s births fell by nearly 2.5 million. The lower rate is partly due to a decline in the number of young, working-age people.

Disappearing Demographic Dividends

China’s declining population reflects a growing middle class, according to Kent Deng, Professor of Economic History at the London School of Economics and Political Science.  “Once you have well-qualified, well-educated urban people, they will decide not to produce a lot of kids,” he says, especially given China’s rising cost of living. 

Zhai Zhenwu, a professor at the China Population and Development Research Center, in commenting on the 2021 report, wrote: "The era of zero or even negative population growth is gradually approaching."  He went on: "During the 15th five-year plan period, we will usher in the 'turning point' of China's population." This means China’s supply of high-quality labor is declining, bringing with it problems for an economy that has long relied on so-called demographic dividends to underpin its growth. 

Ernan Cui, an analyst at Gavekal Dragonomics in Beijing, said he expected the population to peak before 2025. Moreover, the proportion of elderly people will continue to grow. "An older population will increase the fiscal burden of old-age pensions and health care provisions and also push down the household savings rate – both factors that will constrain the government's ability to continue the investment-driven growth model of recent decades," Cui states. 

Those views were reinforced when China released its latest population figures. Officials noted that working-age people aged 16 to 59 made up 62 percent of the national population, down from 70 percent a decade ago. At the same time, people 60 and older accounted for 20 percent of China’s population, a share that’s growing. 

These two trends will have profound impacts on China’s cheap labor dynamic and its social fabric as the country has roughly 30 million more men of marrying age than available females and fewer workers available to support the growing number of older people. One wonders whether the recent Covid-related protests are the first sign of growing social unrest caused by demographic trends.

Global Impacts

As China’s historic economic advantages that drove its rapid industrialization and rise on the geopolitical stage are challenged, what global impacts will be felt? 

Countries with lower-cost and skilled workforces will gain market share. We saw that when we purchased a pair of shoes made in China two years ago. The country’s Covid shutdown prevented us from purchasing a different colored pair. Last fall, when that model became available again, the shoes were made in India. 

Look for many “Made in China” products to come from other Asian and South American countries with lower-cost labor. Because of its North American location, Mexico’s economy and skilled workforce will benefit. 

While globalization is being realigned, new supply routes will be needed, impacting cargo ship journeys. As the reshoring of manufacturing occurs in major consuming markets, global trade will shift and likely shrink. As the cost of Chinese manufactured goods rises, will this inflation be exported around the world? These are trends not immediately visible, but they will underlie faster or slower economic growth in countries in the months and years ahead. 

The aging populations of Western Europe are causing economic problems that will likely worsen. The cost of government (welfare programs) is consuming larger shares of incomes that will strain consumption. Fewer workers will cut into manufacturing output, currently suffering from exploding energy costs. Labor shortages in these countries have stimulated immigration from Africa and the Middle East, straining the social fabric of European nations. 

The U.S. is also experiencing labor shortages due to demographic factors as well as capital availability issues that will contribute to sustained higher interest rates. With smaller Millennial and Gen Z populations than the retiring Boomers, the U.S. faces an estimated 400,000-worker shortfall that will grow to 900,000 or more by 2030, leading to a tight labor market causing greater wage increases that contribute to higher inflation. 

As the Federal Reserve tries to check inflation by hiking interest rates to slow consumer spending, a sustained tight labor market will hamper that effort. 

As for capital availability, with the Boomer generation retiring at a rate of 10,000 a day, their investment portfolios are suddenly switching from saving to liquidation in support of retirement. This will drain financial resources that will boost the cost of capital for enterprises – another factor upending global economies with long-term implications. 

More elderly people has society and U.S. politicians turning their attention to the financial health of the Social Security and Medicare trust funds. Shortfalls in these funds will necessitate higher taxes or cuts in benefits. Politicians understand that older people vote in greater numbers, so their voices are heard. 

That’s been the case in France where President Emmanuel Macron is lifting the retirement age from 62 to 64 to keep his nation’s pension system viable, a system consuming 14 percent of GDP. Over one million people marched in French cities protesting the government’s plan while strikes shut down rail traffic, impacted tourist locations and prompted police and health workers to walk out. These pressures come as citizens deal with high inflation and stagnant economic conditions. The social strains from aging populations are sweeping through Europe’s countries. 

New World Order

The long-term beneficiary of aging populations around the world will be Africa where population growth remains high and workforces are becoming more skilled. The continent will become a larger consumer and an investment haven attracting businesses worldwide. 

Demographics are reshaping the world order with long-term implications for economic growth and geopolitical developments. In the near term, the aging population challenge will result in slower economic growth, less energy consumed, higher interest rates and worker wages, and more inflation. 

The next decade will be very different from the past twenty years. Navigating this new world order will be a challenge, but successful companies and countries should look forward to better futures in the 2030s. 

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.