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July 2024

The next convergence

Nobelist Michael Spence discusses with Charlie Rose on the next convergence, where China and India and other emerging economies potentially catch up with the industrialized world.

The convergence is in reference to the Great Divergence that sent Great Britain, France and other Western European countries into the leading world economies.

This transition, most likely, will not be smooth. I am writing a paper on what could stall fast developing economies, like China, into a middle-income trap, where income growth becomes stagnant and gets stuck in around $12-15K range.

Demographics and Wealth of Nations

Following my previous post, “India needs manufacturing“, in which future population growth trend was analyzed, today I post another analysis from WSJ’s David Wessel on the relationship between demographics and nation’s wealth.  Before that, I would like to give some background.

China’s huge population was long thought to be a development burden for the country. High population density puts all kinds of resources under pressure – water, energy, environment, traffic, etc. And if you take a static view, more population simply leads to lower living standards (if you measure living standards simply by GDP per capita).  Simple math shows despite the fact that China is the second largest economy in the world (with total GDP 1/3 of the US), China’s GDP per capita is only 1/10 of the United States, as its population is 3 1/2 times larger.

China’s population surge during the second half of the 20th century was largely man-made.  After 1949, when China’s Communist Party established People’s Republic, there was a big fear that the US may invade mainland China, along with the defeated Nationalist Party.  During the era of conventional warfare, the size of army mattered.  Chairman Mao, China’s paramount first-generation leader, encouraged every Chinese family to have more children – three, four, or even more.  Such policy rendered probably the sharpest population growth in China’s modern history.

China’s policymakers soon realized they made a huge mistake. The immediate concern was how to feed the rising population when China was still in total blockage under Western Sanction (like today’s North Korea).  The deliberation at the highest level then manufactured China’s unique “One Child Policy” (OCP), now worldly famous – which went into effect since mid 1970s, and got really tough since early 1980s.  In urban China, OCP is strictly enforced; in rural China, it is more relaxed, especially when the first baby happens to be a girl.
Now after more than 30 years, Chinese policymakers had another problem – The rapidly shrinking young labor force.  Over the past 30 years, China’s huge labor reserve (or cheap labor) has contributed a great deal to her fast economic growth.  Ironically, once the growth engine started, population turned out to be a growth dividend, not a burden.  China’s huge population also attracted tremendous foreign investments – who would not want a bite in the largest domestic market in the world?

But the ‘young’ developing China is forecast to face ageing problem much sooner than most countries at its development stage.  To replenish population, the fertility rate should stay at least 2. Any rate below 2 means declining population (this assumes birth rate and death rate are roughly the same, but if people live longer, this will generate a larger share of older population).  For thirty years, China’s fertility rate has only been slightly above 1.  OCP effectively controlled China’s population growth, but also put China onto a “fast lane” toward ageing society.

Let’s get to details: One-Child Policy started roughly around 1980, so the first cohort of young population (about 20 years old) entered labor force around year 2000, that’s when China suffered its first dent on labor force.  It’s no coincidence that during the same time various reports surfaced that manufacturing firms in China’s east coast started to feel labor shortage, defying the popular image that China seemed to have unlimited labor supply.  The shrinking labor supply will become more severe when the last large cohort of population born right before OCP exits the manufacturing.  I assume this is going to happen from now to the next five years (2010-2015), when most of these workers reach their middle-age (35 to 40).  With more working experiences and skills, especially, the migrant workers in this group will seek more stable income and better location with equal social benefits. This often means exits from coastal manufacturing.

China’s young labor force will continue to shrink until 20 years after the major policy reversal.  The policy reversal now in effect is to allow qualified couples to have up to two children, if both husband and wife are the only child in their own families. Let’s assume these couples will have their children between 25 and 35 years old (or between year 2005 to 2015 for the first cohort). Only when their children grow old enough to join labor force, i.e, when they become abut 20 years old (or between 2025 and 2035), will China’s young labor force start to grow again.  This simply means within roughly a 30-year range, from 2000 to 2030, China’s young labor force will continuously trend downward. For a country still at its early development stage, this forecast should sound high alert to policy makers.

If you want to know about the role of population in country’s growth and development, feel free to download my lecture notes on the population theory.  Economist Magazine also has a terrific article, “Does Population Matter?”

Now without further adieu, I introduce you to David Wessel’s analysis on the “Demographics and Nation’s Wealth“. Pay special attention to the US’ future demographic trend, and what can we learn from it.

Demography is not destiny. In 1300, China was bigger than Europe and had the world’s most sophisticated technology. But China blew it. By 1850, its population was 65% larger than Europe’s, but—thanks to the Industrial Revolution—Europeans were far richer.

Yet demography does matter. “We never pay enough attention to demography because it’s so long term,” says Dominique Strauss-Kahn, head of the International Monetary Fund. So turn for a moment from angst about the disappointing pace of the economic recovery and daunting government budget deficits, and look over the horizon.

Over the next 40 years, Japan and Europe will see working-age populations shrink by 30 million and 37 million, respectively, according to United Nations projections. Birth rates are low and so many of their people are already elderly.


China’s working-age population will keep growing for 15 years or so, then turn down, the result of its one-child policy and the tendency of birth rates to fall as incomes rise. In 2050, the U.N. projects, China will have 100 million fewer workers than it does today. India’s population, in contrast, will grow by 300 million working-age persons over the next 40 years.

The U.S. is in between, benefiting from a higher birth rate and younger populations than Europe and Japan and more immigration. It is projected to add 35 million working-age persons by 2050.

So what?

History, as interpreted by modern economists pondering the mysteries of growth, teaches that more people lead to more ideas. And unlike land or oil, ideas can be used by more than one person simultaneously. Before countries began sharing ideas, the biggest had the most rapid technological progress. Now, trade, travel and the Internet speed new ideas around the globe ever-more rapidly. So the benefits are dispersed. Belgium is rich not because it is big or has invented a lot, but because it has the wherewithal to employ technology invented by others, notes Michael Kremer of Harvard University. Zaire is bigger, but lacks the wherewithal.

“China’s population is roughly equal to that of the U.S., Europe and Japan combined,” optimistic Stanford University economists Chad Jones and Paul Romer observed recently in an academic journal. “Over the next several decades, the continued economic development of China might plausibly double the number of researchers throughout the world pushing forward the technological frontier. What effect will this have on incomes in countries that share ideas with China in the long run?” Somewhere between a lot and really a lot, they say. In fact, they say that even if the U.S. had to bear all the costs of mitigating the added carbon emitted by a rapidly developing China, ideas generated by the Chinese would boost U.S. per capita income enough to more than compensate.

For China, the challenge is to build social structures and retirement schemes to sustain a growing cadre of old folks that, unlike previous generations, won’t be able to rely so much on its children for support. Today, 1.4% of Chinese are over age 80; in 2050, 7.2% will be, the U.N. projects.

And the U.S.? For all today’s gloom, it may be in the sweet spot. A growing population, an openness to ambitious immigrants and trade (if not disrupted by xenophobic politics) and strong productivity growth (if sustained) could lift living standards and bring faster growth, which would reduce big government budget deficits far easier for the U.S. than for slower growing Europe and Japan.