China’s declining population and labor shortage will cause global economic crisis

China’s population is shrinking. While the huge country is still home to 1.4 billion people – nearly one in five people on Earth – China’s National Bureau of Statistics announced that its population had shrunk in 2022, shrinking by around 850,000 people.

This shocking statistic is only the beginning of China’s population decline. India is expected to overtake China’s population this year, and in a few years it will overtake China’s working-age population – people between the ages of 20 and 69. The United Nations has estimated that if China’s birth rate remains at its extremely low level and the country fails to position itself as an attractive destination for migrants, the country will lose almost half of its population by the end of this century, i.e. a contraction of about 700 million inhabitants.

The strong growth of its working-age population in recent decades has enabled China to become the factory of the world: more than 70% of solar panels, 60% of agricultural machinery and 25% of robots are built with components from Chinese suppliers. Due to its manufacturing prowess and importance to supply chains, China’s shrinking working-age population has huge direct effects on the global economy. It is also an omen for the United States and Europe: if they do not change their declining birth rate, they will face the same economic fate as China.

Fewer children, fewer workers

For decades, China’s fertility rate – the number of live births per woman – has been declining, which has helped slow the country’s population growth. In 2022, it reached the lowest level ever recorded, 1.1 children per woman. In the main population centers of Beijing and Shanghai, the fertility rate has reached 0.7 children per woman. China’s one-child policy, which limited couples to one child, isn’t the only culprit (although it played a small part). When the one-child policy was implemented nationwide in 1980, the fertility rate had already fallen to 2.6 from over 6 children per woman in 1970. In 1991, it fell below of 2.1 children per woman, the level necessary to maintain the stability of the population during the year. time. At that time, a demographic timer was set, and now the alarm is ringing.

The specter of population decline has worried the Chinese government for years, leading the country to relax its restrictive one-child policy in 2016. The Chinese government began encouraging its citizens to have up to three children enticing them with cash incentives, discounted real estate. , and extended maternity leave. But it appears that these efforts have been largely unsuccessful.

Unlike many developed Western economies, China and other major Asian economies do not use immigration to offset declining fertility. Instead, they close. The proportion of migrants as a percentage of the total population in Japan in 2020 was only 2%. In India it was 0.3% and in China it was only 0.1%. It is virtually impossible for foreigners to obtain Chinese citizenship. On the other hand, 17% of people living in Germany in 2021 were born abroad and a third of them obtained German citizenship.

Fewer children and fewer immigrants mean fewer long-term workers. UN forecasts suggest China’s labor force will shrink more in coming years than almost any other country, and the steep drop in population will set the stage for a reversal of its decades of strong growth. economic, which means that the standard of living cannot improve as quickly. This is a gigantic challenge for the Chinese economy – and for Xi Jinping’s ambitious plans to make China the world’s largest economy and dominant superpower.

The shrinking labor force has already led the government to reorient its economic orientation. After decades of export-led, labor-intensive manufacturing growth, the government’s 14th Five-Year Plan – the latest set of economic growth and reform targets set by the Chinese Communist Party, in 2021 – focused on orienting the economy towards its domestic market and investing in higher value-added products. Instead of being an intermediate step in the global supply chain – importing raw materials and parts, using cheap labor to make finished goods, then shipping that commodity overseas – Beijing wants that his own workers produce these final products and sell them to buyers in his country. own country.

This change is imperative because much of China’s economy depends on an ever-growing population. Take real estate demand: over the past two decades, the Chinese have invested 70% of their wealth in real estate. In the United States, this share is only 35%. The construction and real estate sector accounts for about a quarter of China’s total economic output. China builds like no other country: it has built entire cities from scratch and it consumes half of the concrete produced in the world. And China apparently plans to continue its growth: in 2017, 65 million empty apartments – enough to house the French or Californian population – awaited young families.

But how long will the demand for real estate last? Who will move into empty apartments when the population declines? What will happen to this massive industry when the number of Chinese consumers dwindles and there are fewer people to keep investing? And what will become of the Chinese elderly who have tied up so much of their wealth in their homes?

A shrinking workforce would not only hurt the Chinese economy, it would have spillover effects on the United States and Europe. China’s manufacturing sector, for example, would likely struggle to maintain its recent streak of growth. Thus, in the coming decades, the Chinese economy would not increase global growth rates as it has in the past. Productivity growth in the country could also stagnate. Economists have long tracked the correlation between population density and innovation – a larger population means a larger pool of potential entrepreneurs – so a shrinking population means China’s ability to disrupt markets could also decline. . Taken together, a slowing Chinese economy would have serious repercussions for the rest of the world.

The problem of closed borders

China’s declining population also bodes well for countries that have birth rates at or below replacement level, such as the United States and many places in Europe. Europe is facing the same demographic turning point as China – the continent’s population is expected to decline by 21%, or 157 million people, by the end of the century. Nigeria is poised to overtake Europe as the third largest labor force this century.

Of today’s largest economies, only the United States has a positive population growth projection, albeit at very low levels. But the projected growth is not due to the increase in fertility but to immigration. The Pew Research Center has estimated that in the second half of the century, a third of the American population – more than 100 million people – will be made up of migrants and their children born in the United States.

And immigrants to the United States outweigh their economic weight. More than 40% of America’s 500 largest companies were founded by immigrants or their children, from tech giants like Google to wholesale chain Costco to jeans brand Levi’s. The influence of immigrants on American prosperity is not relegated to the startup scene; the story of the millionaire’s rags-to-riches — or at least middle-class success story — repeats itself frequently. This is impressively demonstrated by a recent study that followed millions of parents and their children and found that children of immigrants of almost all nationalities achieved social promotion at least as often as their peers from non-immigrant families. . For immigrants at least, the American dream is alive and well.

That said, immigration is notoriously difficult to predict and is increasingly politicized. But without an infusion of immigrants, the working-age population in the United States is likely to shrink, hurting the country’s economy. But if U.S. policymakers can keep the door open to new residents, the U.S. will be one of the few industrialized nations that doesn’t have to deal with a shrinking population, which could prove a factor. decisive in its race against China for dominance in the global economy.

The great shortage of people is not an abstract threat – it has very real consequences. Already, many companies are facing major challenges in filling vacancies, especially in crucial sectors like healthcare and education. And in the years to come, both in China and in the West, many other sectors and fields will struggle to find workers. The lack of train drivers, teachers, engineers, doctors, firefighters, nurses and programmers will have greater consequences on the road. With fewer employees, businesses will produce or perform less, leading to fewer sales, less economic growth, and ultimately less prosperity for everyone. And in China, the problem exists on a much more dramatic scale. Unless nations manage to reverse the trend, the problem will only accelerate and could spell disaster for the economy.

Sebastien Dettmers is the CEO of StepStone, which is owned by Axel Springer, the parent company of Insider. He is also the author of a new book on the future of the world’s population.

Chris Forman is the founder and CEO of Appcast, which was acquired by StepStone in 2019. He is a recognized expert in recruitment and talent management.

Andrew Flowers is the Senior Labor Economist at Appcast. He is a recognized expert in economic policy, the US labor market and macroeconomics.

Leave a Reply

Your email address will not be published. Required fields are marked *