IMF warns on potential for China decline

Economic growth

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Lewis curve Asia.pngThe blog is awarding itself and co-author John Richardson a pat on the back today, for its pioneering insight into the major changes underway in China’s economy due to the ‘one child policy’. As the chart above shows, China’s economy after 25 years of industrialisation is now in a labour-intensive stage – which will be intensified as the results of the ‘one-child policy’ become apparent in labour shortages.

Readers of Boom, Gloom and the New Normal will no doubt recognise the almost exact parallel between our argument in chapter 6, and the following conclusion from a new IMF paper, ‘Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?‘. It even supports our suggestion that reform of the hukou system and a focus on rural development are essential.

“Demographics, on the other hand, more forcefully suggest an imminent transition to a labor-shortage economy. China is poised to undergo a profound demographic shift within the next decade, driven by the mutually reinforcing phenomena of declining fertility and aging. The UN projects that growth of the working age (15-64) population will turn negative around 2020. This forecast potentially understates prospects of a labor shortage, as industry employees are predominantly young; the growth rate of the core 20-39 subpopulation, for example, shrank to zero in 2010, and is projected to decline faster than the overall working age population through 2035. Population data also show that after a protracted period of “demographic dividends,” the share of dependents – those aged 0-14 and >64 years of age in China’s population troughed in 2010, and will rise to nearly 50% by 2035.

“Because the looming demographic changes are large, irreversible and inevitable in the medium run, they will be key to the evolution of excess labor in China. Other factors could, however, be pivotal in accelerating or slowing this process. More progress in hukou reform could spur rural labor to move the city. Training rural workers to meet the skill requirements of industrial jobs could decongest urban labor bottlenecks.”

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