Thursday, March 21, 2013

The Red Dragon is dying

CHINA IS BEGINNING to self-destruct, and there’s nothing it can do to prevent this.

A report commissioned by the International Monetary Fund (IMF) estimates China’s economic decline will become irreversible beginning 2020.

The Black Hole that will put paid to China's goal of becoming the next global hegemon is a little known demographic twist called the "Lewis Turning Point."

Vanishing manpower pool 
China’s 9.9% average annual GDP growth from 1979 to 2010 was fueled by a vast surplus army of rural workers numbering in the millions. This army became the factory workers paid some P3,000 a month who made the cheap products that allowed China to become the “Factory of the World.”

Two years from now or by 2015, China’s working age population will reach its highest level and then tumble into an irreversible decline.

By the 2030s, China’s working age population will shrink by 0.7% per year causing a labor shortage of 140 million workers within the decade. In contrast, China's working age population since the 1980s grew at the average annual rate of 2%.

More ominously, the growth rate of the core working group or those with ages from 20 to 39, the most productive segment, shrank to zero in 2010 and is projected to decline faster than the overall working age population through 2035.

Crossing the Lewis Point of no return
China this January confirmed this contraction had already begun. It admitted its working age population had indeed fallen—but far sooner than expected.

The IMF report said that based on current trends, the Lewis Turning Point will emerge in China between 2020 and 2025. The disintegration of Communist China will then become inexorable.

The Lewis Turning Point is the point at which an economy like China moves from a vast supply of low-cost workers to one with an acute labor shortage. The cost to China of this transition will be severe.

The Lewis Turning Point means China can no longer rely on cheap labor, copycat technology and export-led growth to keep growth going. It is also forcing foreign manufacturers to transfer operations to cheaper countries such as India and Vietnam whose minimum wages are currently some 40% lower than China’s.

As China’s agriculture surplus labor evaporates, “. . . industrial wages rise faster, industrial profits are squeezed, and investment falls. At that point, the economy is said to have crossed the Lewis Turning Point,” said the IMF in its report, “Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?”

All these will signal the end of the old economic model based on low-cost labor and massive exports that made China so successful.

The Lewis Turning Point is named after Nobel laureate Sir Arthur Lewis, an economist, who first broached the concept in “Economic Development with Unlimited Supplies of Labor,” a paper written in 1954.

A report by a separate team of researchers said the concern “. . . raised by China's changing demographics is not the prospect of slower economic growth itself, but the potential for slower growth to trigger a social and political crisis.

“By the 2020s, demographic trends may weaken the two principal pillars of the PRC government's political legitimacy: rapidly rising living standards and social stability.”

And as it is run by an inert communist bureaucracy, China will be unable to transition to a private consumption economy from an investment-driven economy in time to blunt the effects of the Lewis Turning Point.

Adapt or die
The result of this failure will be intense economic pain the likes of which China has not experienced since the disastrous Great Leap Forward of the late 1950s when millions of Chinese died from starvation due to communist mismanagement.

For China, the Lewis Turning Point means that its extensive growth model will not be sustained. China is left with the options of accepting the consequences of this inevitable demographic danger, or denying it and curtailing individual freedoms to curb the social unrest that will most certainly follow.

There is little China can do to prevent the Lewis Turning Point. Ensuring this are the effects of China’s misguided “One-Child Policy” begun in 1979 that prevented some 400 million babies from being born, and China’s current low fertility rate of 1.8 lifetime births per woman (from 5.0 in the 1970s).

Besides losing its young work force, China’s population is also aging faster. The United Nations estimates the share of elderly Chinese (or those 65 and older) in the population will double from only 8% in 2010 to 16% by 2030 and will triple to 24% by 2050.

In the next 25 years, China will have an older population than the USA.

Still a developing nation
China’s rapid aging comes at an awkward moment in its history. Today's developed nations became affluent before they became aging societies. China, however, will achieve the opposite.

This means that China will not be able to fully implement the social protections such as social security, pensions and other safety nets for the elderly that are the norm in developed economies. Today, less than a third of China's workforce has formal retirement benefits.

For China’s elderly, the future is dire since the state and a smaller pool of younger workers will be unable to support them in their “Golden Years.”

The UN said China had 7.8 working age adults available to support each of its elderly in 2010. This ratio will fall to 3.8 by 2030 and to 2.4 by 2050.

This decline means the average burden borne by each worker will triple. As a consequence, many of China’s elderly will face death alone and without adequate social safety nets.

Too heavy a price
There is a price to pay for progress. In China’s case, that price has been obscured by its enviable economic growth over the past three decades.

Despite a per capita GDP double that of the Philippines, China remains a developing nation like the Philippines.

China’s goal of becoming a developed nation is in serious jeopardy—if not already an impossibility—because of the Lewis Turning Point and unfavorable demographics.

This turning point that will shatter its ambition of sustaining itself as the world’s largest economy, and could ignite a social upheaval that might destroy the communist state.