Will There Be High Growth in the US and Low Growth in China?

Three years have passed since the American economic recession. The average GDP growth of the United States was only 2.4 percent in those three years. The growth rate for this year probably will be even lower. In the meantime, China’s GDP just fell below 8 percent. To many people it’s the beginning sign of heavy rain. A growth rate of 4 to 5 percent in the U.S. would be regarded as a pretty healthy sign. But why does a growth of just under 8 percent in China make many people anxious?

The explanation generally heard is that China is a developing economy yet America is a developed economy. We cannot use the same ruler to measure their growth. “Chinese Speed” is born to be higher than “American Speed.” That’s also the reason why a majority of economists predict that China will surpass America to become the world’s biggest economy in the next few years.

Then, what on earth is the GDP? Can “natural” growth rate be analyzed specifically? Simply put, GDP is the result of the output per capita of a country multiplied by its population. In other words, GDP is the sum of a country’s labor production output. As children and retired people do not work, growth depends on two factors: the per capita labor output and the numbers of workers.

US Retirement Age Is Higher Than That of China

Demographers have made estimates about the number of workers. From 2000 to 2050, China’s population will increase from less than 1.3 billion to more than 1.4 billion, an increase of 16.53 percent. American population will increase from less than 300 million to 400 million, an increase of 46.59 percent. More importantly, during this time period, the Chinese population between the ages of 15 and 64 will decrease by 10 percent, while the American population will increase by 42 percent. Obviously, not only is the American population growth rate far ahead of China’s, but also its labor force growth rate is much closer to its total population growth rate. It shows that the aging of the population in America is comparatively moderate. Of course, it does not take the retirement age into consideration. The retirement age is 65 in America and will be extended to 67 soon. Many Americans are white-collar workers. Its service industry makes up a large part of the economy. Thus America is much more able to create employment opportunities for the elderly. In China the retirement age is still 60 for males and 55 for females; for heavy laborers, it is 55 for males and 45 for females. It’s very hard to imagine that the retirement age in China can be raised to the same standard as that of America in the short term. All these factors will result in an even more insufficient labor supply for China.

China’s economic growth in the past 30 years has a close relationship with the growth of its population aged 15-64. From 1980 to 2010, the ratio of this age group increased sharply from less than 60 percent to above 72 percent, an increase of 13 percent. The ratio of the same age group in the American general population shows ups and downs. In 1980 the ratio was a little bit more than 66 percent; in the next five years it grew very slowly, and then experienced a lasting drop-off until 1995, when it was slightly higher than 65.5 percent. It then climbed to a peak of 67 percent in 2006 and continued to fall below 67 percent in 2010. In 2010, the ratio of the U.S. working population aged 15 to 64 was a little more than 66 percent, the same level as that of 40 years ago, only increased by half a percentage point. Perhaps Japan provides us with a valuable reference. In 1980, the ratio of 15 to 64-year-olds in the Japanese general population was above 67 percent and continued to rise until early 1992, when it was close to 70 percent. After that, it dropped sharply and fell below 64 percent in 2010.

If we turn all these figures into curves, we will see that the curve of the ratio of the labor group resembles remarkably the curve of economic increase. China’s economic growth took a direct train in the past 40 years: its economy increased as the ratio of its 15 to 64-year-olds grows in the generation population. The time when the ratio of the same age group in America experienced the fastest growth is also the time when the American economy experienced rapid growth, even though in the beginning of this century there was an IT bubble. By the end of the 1980s, the ratio of Japan’s labor force to its general population was higher than that of America in any other period since 1980. It still keeps growing. Just as at that time, the income per capita in Japan surpassed that of America. However, starting in 1991 Japan’s economy fell into a recession and experienced two “lost decades.” The labor ratio in the general population has fallen dramatically since 1992.

Negative Growth Doesn’t Necessarily Affect Social Stability

This data only shows a very simple common sense: the more people working, the more value they create. Economic growth has a clear relevance to the labor supply. When the labor supply is sufficient, the economy experiences high growth. If at this time the economy has low growth, there will be a large loss of jobs that will affect social stability. Correspondently, when workers are in short supply, the economy will experience low growth, even negative growth. But this snail’s pace doesn’t necessarily affect social stability, and it might even accompany a rise in people’s living standards.

The Wall Street Journal recently did an analysis of Chinese employees’ salary growth. It said in 2009 that when Chinese economic growth rates fell below 8 percent, 20 million migrant workers returned to their hometown facing the pressure of high unemployment, with an average of 0.85 job vacancies per worker. Today the economic growth again falls below 8 percent, but there are 1.1 jobs available per worker — more jobs than people — and the unemployment rate is relatively lower. So the GDP growth rate cannot be separated from the demographic structure and become the only indicator of economic health.

From the perspective of demographic data, in the future, the ratio of China’s workers in the general population will drop dramatically, a much greater drop than that of America. According to one estimate made by the United Nations, the population of China aged 15 to 19 in 2005 was more than 120 million, in 2010 it dropped to a little more than 100 million and in 2015 it is estimated to drop to less than 95 million. In 10 years the labor force decreased by more than 26 million. The ratio of workers becomes smaller and smaller. What will then support economic growth?

Of course, if the productivity of China’s labor force improves greatly, theoretically it’s possible to maintain high economic growth regardless of the decrease of the labor force. But that requires significant technical revolution, which, regretfully, is not seen in China — while in America, such technical revolution is on the stage. That’s something we cannot discuss here. Nevertheless, it’s hard to imagine the improvement in China’s productivity can substantially offset the shrinkage of its labor supply.

Based on the above analysis, we can come up with an assumption that runs counter to the common impression: In the next 10 years, the Chinese and U.S. growth rate trends will probably be reversed. America is likely to experience high growth, yet China will maintain a natural low growth. This reversal is first determined by the number of workers. At least we can say that the assumption that China’s economic growth will be faster than that of the United States in the next 20 years is simply groundless from a demographic perspective. If the government designs its development strategy based on such an assumption, it might be led down a wrong path.

The author is an Associate Professor of History at Suffolk University.