In spite of a global economic slowdown, China’s economic managers have skilfully avoided a hard landing and, while growth is picking up, the limits to its astronomical rise are plainly visible. The National Bureau of Statistics of China recently reported that in 2012, the working age population in the country declined by 3.45 million. Although this decline is not something that will alter its fortunes overnight, it marks the start of a shift that will have implications for China and the world.
The Chinese, over the decades, enjoyed the benefits of demographic dividend, as the proportion of working age population kept rising, which allowed savings and investments to grow at a higher rate and helped turn the country into a manufacturing powerhouse. But all this is now beginning to change, a development that has its roots in the one-child policy adopted in 1979.
The fear now is that China will age much faster than earlier anticipated, which not only poses serious challenges to policymaking but will also have a spillover effect on the global economy. The shrinking supply of labour will push wages, signs of which are already visible, making the production of labour-intensive manufacturing unviable over time.
Further, lower saving and investment, combined with higher wages, will bring down its growth rate. In addition, slow growth portends political turmoil for China.
Political stability in China rests on a compact between citizens and government on providing the former with fruits of growth. Once that is suspect, less wholesome developments will follow in its wake.
For the world, a rise in wages in China means that it is the beginning of an end of cheap Chinese goods, which has been the reason for low inflation in the developed world. The possibility of shrinking exports from China, as it moves towards consumption due to higher dependency ratio, could lead to the developed world facing higher inflation at a time when its own population is shrinking and ageing at a fast rate.
The Chinese problem of shrinking working age population and incoming labour crunch, however, opens up an opportunity for India, as its working age population will continue to rise in the decades ahead. However, as of now, the possibility of manufacturing jobs shifting from China to India is more like a dream. India simply lacks the ecosystem needed for pushing manufacturing output, both in terms of necessary infrastructure and the flexibility in the labour market.
Therefore, as the Chinese prepare to face the new normal where the most populous country will be short of hands, the world will pay higher price for goods, and India is in danger of missing another opportunity.
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