UK academic says “China will grow rich before it grows old”

Kevin McGeary , January 8, 2014 10:00am

John Ross, courtesy of Google Images

It has long been argued by those who are sceptical about the rise of China that the country will grow old before it gets rich due to its one-child policy. The argument was made as recently as October 2013 by Benjamin Shobert, managing director of consulting firm Rubicon Strategy Group. Such distinguished China hands as Isabel Hilton have made similar arguments in print.

However, John Ross of Chongyang Institute for Financial Studies at the Renmin University of China wrote in a piece published in his China Daily blog yesterday that this assertion is wrong. Reacting to the discussions generated by the recent relaxation of the policy, Ross punctures some of the arguments commonly made to claim that the country will grow old before it gets rich.

The main points usually made to argue that the country’s demographic problems will scupper its economic ambitions are as follows:

1. China is about to run out of the cheap labour that has fuelled its growth for over three decades.

2. The gender imbalance caused by the preference for a son over a daughter will have unforeseen social consequences.

3. The shrinking workforce will have to support the unprecedentedly large elderly population. Today, the worker to elderly dependent ratio in China is 16:100; by 2050 it will be 64:100.

Ross, a former economic adviser to Ken Livingstone when he was Mayor of London from 2000 to 2008, mainly challenges the claim that that China’s growth depends essentially on increases in labor and therefore China’s economic growth faces a serious “demographic challenge” due to the end of the increase in the working age population.

From the beginning of reform in 1978 up to 2012, the average annual increase in China’s population aged 15-64, the international definition of working age, was 1.7 percent. Over the same period the annual average increase in China’s GDP was 10.2 percent — almost six times as fast. The increase in China’s working age population was therefore only 17 percent of the rate of increase of China’s GDP — showing clearly that the rate of growth of population could not possibly explain, or be the main reason for, China’s rapid economic growth.

Looking at the trends in more detail shows still more clearly that population trends did not determine China’s economic trajectory. Taking five year moving averages for changes in working age population and GDP, to remove the effects of short term fluctuations, China’s average annual growth rate of working age population was 2.8 percent in 1983, five years after the beginning of reform. By 2000 this had fallen to 1.6 percent, and by 2012 it was only 0.6 percent. The growth rate of China’s working age population was therefore consistently falling.

He does concede that although the decline in China’s working age population does not pose a risk of significant economic slowdown due to lack of labor, it could cause a problem due to fall in savings.

However, he counters that households are only one of three sources of savings. Of the other two, government savings are small in almost all countries, and usually negative. But company profits are the biggest source of saving in China. If savings via company profits were to increase, this can compensate for any decline in household savings due to the fall in the percentage of the population which is working.

Ross concludes:

The claim that China faces a significant slowing of its economy due to population factors, and therefore China will “grow old before it grows rich,” is a typical example of myths created by engaging in woolly rhetoric without using numbers. Increases in labor supply play such a small role in China’s economic growth that the end of the rise in the working age population will have only a very small effect in reducing China’s growth rate. It is what happens to China’s productivity, and above all its investment, that overwhelmingly will determine its economic growth and therefore its prosperity. Provided the correct policies are pursued, China will certainly become rich before it becomes old.

Ross also contributes to left-wing broadsheet The Guardian. In it, he has made such arguments as the UK should stay out of China’s internal affairs and China’s economic success sets an example the world should follow.

His colourful career has taken him to Russia and he is a former member of the International Marxist Group. Ken Livingstone, the London Mayor who he was employed by, was long nicknamed “Red Ken” for his socialist beliefs.

Kevin McGeary

China hand, bawdy balladeer.