Since first moving towards an open economy in the late 1970s, China has become the third largest economy in the world after the United States and Japan. Its gross domestic product (GDP) has grown by an average of 10 per cent since 1978 and by a staggering 11.9 per cent last year. This year, reflecting the worldwide economic slowdown, its growth has slowed to 9 per cent.

Now, to sustain growth and employment during the global recession, Beijing has announced a massive fiscal stimulus programme worth 4 trillion yuan. Perhaps this will see the country through the current crisis, but can China sustain, in the long run, the growth that it has experienced since it began to open up to the global market?

China’s economic policy has been geared to providing employment for its huge population and thus preventing social unrest. But this policy has been only partially successful. The distribution of income has not grown at the same rate as GDP, and some 300 million Chinese live on less than $1 a day. There is a widening income gap between urban and rural areas, and this growing inequality is also reflected in the national wealth distribution, which is 3.7 times larger than the national income distribution. The spread of inequality is meeting more and more resistance among the public.

The flip side of boosting economic growth is Beijing’s decades-old policy of decreasing population growth -- an approach common to developing nations throughout the world, although rarely to the extreme practised under China’s one child policy. China’s population of 1.3 billion is the largest in the world and, for various reasons, many in the West have applauded the strict population control policy that has brought the population growth rate down to a mere 0.6 per cent a year.

However, this suppression of fertility is spawning major weaknesses that will undermine the economy in years to come. Of these, the most critical is the aging of the population and its implications for the workforce and social security for the aged.

A rapidly aging population

Already, 11 per cent of Chinese are over 65 years old, 69 per cent are aged between 15 and 65 and only 20 per cent are between the ages of 0-14. Based on the present age distribution, China’s working age population will peak by 2015 and then it will begin to shrink. The aging of the population is accelerating and will have a major impact on future economic growth.

There is no debate over if or when an aging population will manifest itself. As one can see from the accompanying diagram, even though there is some variation in the size of cohorts, by 2035, unless the one child policy is eliminated, China will have a reversed age pyramid. From 2000 to 2025, people above 65 will triple while youngsters under 15 will increase only by only 6 per cent.

Above: China’s Population Distribution (2005)

The causes of the present aging are complex. Some sources can be found in the living conditions and socio-cultural changes that China has faced in the past 30 years. Among these are: decreased infant mortality; sharply increased mean age at which women first give birth; labor codes that do not facilitate women’s desire to harmoniously integrate their family life and professional activity.

There is also the influence of developed countries, with their widespread attitude that keeping a certain quality of life is more important than having children. This poses a paradox that Wattenberg describes in The Birth Dearth: “In the wealthier age of history many youth say that they can not afford to have more than two children.” What the West has chosen, China’s policy for years has imposed, with costly and severe policies to families having more than one child. Some analysts also point to a divergence between pessimism and hope within the population.

The leading cause of aging, however, remains the population control policy, which has been in place for almost 50 years and took on its one-child form three decades ago. In addition, the aging effect has been taking place at an accelerating speed. China is among the fastest aging countries, facing a critical turning point in only 27 years from now. This is particularly important as it is also the country with the largest number of aging people.

The 4-2-1 problem

There are two very different groups in the Chinese population: those who have greatly benefited from the economic growth experienced by the country since the late 1970s and those who have not. Population in China, especially its rural area, which constitutes approximately 60 per cent of the population, faces serious health and poverty problems.

Importantly, many Chinese are without aging security as they have no access to sound social security systems. Their social security system only covers 44.9 per cent of the urban employees and 85.4 per cent of the urban retirees. Furthermore, there is a great disparity between the rural and the urban areas in the coverage as well. For example, according to a survey by the China Research Center on Aging at the end of 2000, more than 70 percent of the urban elderly were covered by a pension scheme, as opposed to 3 percent of the elderly in the rural areas. The average social security expenditure per capita in urban areas is 10 times that of rural areas. The social security premiums of urban employees are continuously increasing, while rural migrant workers, employees of township enterprises, and farmers —who represent the majority of Chinese labor— are virtually excluded from the system.

As a consequence, the social security system is provided by their families, yet, these are small due to the one child policy. In fact, a so-called “4-2-1 society” has emerged in China, where single child families are the norm, and each only child is responsible for supporting two parents and four grandparents. As population ages, the government will not be able to count on the family security net, which, thus far, Chinese policy makers have used in lieu of a sound social security system.

Within the active population there is a tension between the young and the somewhat older people, as the latter try to protect their jobs while younger generations enter into reduced job markets. Additional sources of tension between the young and older generations are caused by the heavy financial burden imposed by the “4-2-1” family structure.

Education may suffer, since, in order to provide for the economic burden of the elderly, there is a great temptation to cut down on the money allocated for the training of new generations. Consequently, the transmission of cultural, scientific, technical, artistic, moral and religious common goods is endangered. China’s investment in education, although it has grown, is not only insufficient but the quality is poor.

Again, in an aging population there is the danger of “moroseness”, or a lack of intellectual, economic, scientific, and social dynamism, and therefore reduced creativity resulting in systemic stagnation.

And already there is increasing loneliness among the population because of small families and reduction of extended family.

Sadly, parents who have satisfied their sole child’s every desire may find that the child in adulthood is not particularly interested in them. Various surveys have found that young adults are self-centered, money driven, have abandoned morals, and have a tendency to neglect their responsibilities towards their parents and grandparents. Apart from anything else, this means a lower standard of living for the parents and grandparents.

Need for change - now

To meet the challenges of an aging population China would need much more flexible institutional structures than it has. As things stand, it can neither sustain its level of economic growth nor the savings required to meet their needs. The fact that other developed economies and middle-income countries are facing a similar problem eliminates the probability of access to some of the mitigating tools that China could have resorted to such as foreign flows of capital or immigration.

In opting to suppress population China has made the mistake of adopting the Malthusian assumption that population growth will necessarily outstrip resources and impoverish everyone. What the empirical evidence demonstrates in China is that neither the Malthusian assumption nor its long-run predictions about growth are supported.

To sustain its growth, China needs to further support the growth of the private sector, which has been the sector thus far driving the elevated growth rates that China experienced in the past 25 years. Yet, even if China could get richer before it gets old, the effects of aging on savings, investment, and productivity would make the levels of economic growth required to support an aging population unsustainable.

China’s population policies must be addressed by its government. As the numbers indicate, time is running short.

Maria Sophia Aguirre is Associate Professor of Economics in the Department of Business and Economics at the Catholic University of America, Washington DC. The above article is adapted from her paper, “Chinese Fertility Decline and Its Effects on Economic Growth”, delivered to the International Studies Association at its meeting in San Francisco earlier this year.