The United States and China are competing for economic dominance. China has experienced decades of rapid growth due to its integration into the global economy, mobilization of its massive work force, and economic reforms. Yet, as of last year, U.S. GDP was about 30 percent larger than China’s at market exchange rates, while U.S. GDP per capita was more than three times larger than China’s at purchasing power parity exchange rates. Just before it reaches high-income status, China is on the cusp of a large demographic shift—a shrinking population of working-age adults coupled with an increasing population of retirees—and its economic growth prospects will be negatively impacted. Based on political, social, and technological circumstances, China’s limited ability to react to this demographic shift will likely lead to slower growth outcomes in the next twenty to thirty years and impact its ability to compete on the world stage with the United States. The United States, despite its own political gridlock and low fertility, is comparatively less constrained than China to address future population shifts.
Economic prosperity is the most effective contraceptive for population growth. Countries moving through the Demographic Transition Model of economic growth—how a country’s economic development is linked to its population—often see a sharp decline in birth rates as they become richer. This patterned population decline is ideally coupled with an increase in innovation and total factor productivity (TFP), or output produced with a certain set of inputs, to offset the shrinking workforce with heightened per-worker productivity. Japan and South Korea experienced rapid economic growth along this pattern and achieved a high-income status before their fertility dropped sharply. Unfortunately for China, each of these economic powers have yet to employ a successful solution: no precedent exists to reverse the demographic challenge. For China, the lack of a clear solution for its soon-to-be-shrinking population will likely be met with slower growth rates: its population is “growing old before it grows rich.”
Today, China’s birth rate rests below the 2.1 replacement rate at 1.7 births per woman, and the population is projected to peak around 2031. A diminishing pool of working-aged individuals implies a rise in wages for Chinese laborers, which would make it more costly to produce today’s level of output with tomorrow's workers. China’s economic growth is likely to drop to 2–3 percent growth each year by 2030 as the nation grapples with declining birth rates and an aging population.
The United States faces challenges to its demographic stability as well: the U.S. birth rate is also below the replacement rate at 1.7 births per woman, it ranks 34th in life expectancy at birth, and an imbalance in responsibilities for childcare for women dissuades many from having children. Despite these shortcomings, the United States does not face the same existing political and social barriers to accommodating its shifting demographics as China and will not experience the same transitional period of slower growth linked to a shrinking workforce. For example, while U.S. GDP is also projected to slow in the coming years, China’s GDP contraction is more directly linked to its demographic challenges. Both countries have a similar birth rate, average population age, and percent of the population currently employed, but the United States’ statistics are kept relatively stable by the inflow of immigration. The United States does not experience an adjustment period of slow growth while incoming populations reach an appropriate work age, as China would if it prioritized increasing the birth rate in its demographic policy.
Barriers to China’s Demographic Transition
China’s policy options—family planning and encouraging movement to other urban areas—to slow its demographic decline are costly, time-consuming, or politically unfavorable in the short run.
Encouraging families to have more children through policymaking or propaganda is inefficient as an immediate solution to China’s demographic decline. While the Chinese Communist Party (CCP) exercised control over family planning through its one-child policy (restrictions on most urban populations to have only one child from 1980 to 2016), relaxations allowing two and three children over the last six years to address declining birth rates have yet to see substantial success.
The costs associated with raising children altogether place a large burden on parents and dissuade families from having more children. The price tag associated with raising a single child is 6.9 times China’s GDP per capita. Proposed expansions to CCP-offered child cost relief—cash rewards, housing subsidies and child care centers —are estimated to cost up to 5 percent of China’s GDP to boost the birth rate. Despite its increasing attractiveness as an immigration destination pre-pandemic, China does not attract as many immigrants as necessary to supplement its large existing population of working adults in the market while policies encouraging births run their course. The eighteen-year window that China has to achieve its target population does not afford enough time for it to prevent an economic growth slowdown without an increased inflow of immigration and is overall dependent on the public’s willingness to oblige.
Encouraging Movement to Other Urban Areas
To address the immediate problem of mobilizing its existing workforce, China could provide greater incentives for families to move to various urban areas. Advanced economic hubs in China remain an unsustainable environment for lower-class working populations to move with their children due to high costs of living. Coupled with education and resource disparity for their children, migrant families are largely dissuaded from moving into such areas. This is a direct consequence from the hukou system–an initiative created during the Great Leap Forward that separates rural citizens from urbanites and limits access to city benefits for the former.
Increasing the desirability of individuals to move between urban markets provides necessary workflows with the current population to fill open jobs available in city centers and spark innovation. Compared to the United States, where many innovation centers are adjacent to large cities, the cost of living in the tier one cities limit opportunities for China’s migrating populations to offer fresh ideas and bring laborers into industrial centers in the country. Innovation coupled with migrant family movement to cities would potentially boost the country’s TFP and make the shortcomings of a shrinking population less pressing. To encourage family movement, some localities are offering greater child support and monetary aid for parents with two or more children, but with limited success thus far.
Encouraging movement between cities raises separate challenges for the CCP in weakening the support of key constituencies. Increasing movement to certain urban areas increases costs and competition amongst all individuals for privileges in welfare, education, and job selection. Wealthy municipalities are not keen to increase their spending on incoming city migrants, and thus the party trades reform for support group stability. Ensuring ease of movement to urban areas and access to urban jobs challenges the privileges that powerful CCP constituents have enjoyed for several generations and may shake the CCP’s support foundation.
Despite China and the United States’ similar demographic ratios, the intensity at which China experiences population shifts poses a larger threat to its economic prowess. The options available in the CCP’s toolkit to address China’s demographic shifts in the short run—family planning and encouraging movement to other urban areas—do not fully offset the population decline that is likely to impact economic growth and competition. Despite China’s best options, there is no concrete example of a successful reversal of low fertility amongst other aging Asian economies. While the great powers competition between China and the United States appears neck and neck, demographic discrepancies are ultimately the catalyst to determining who will dominate the global economic stage.
"China’s Demographic Trends in the Context of Economic Competition" by Julia Fadanelli
Reprinted with permission from the Center for Strategic and International Studies (CSIS) 'New Perspectives on Asia' blog. Original text published on August 18, 2022.