It's too late for China to stabilise its shrinking workforce

There are growing murmurs that China will soon end or significantly modify its one-child policy - arguably one of the largest social experiments ever attempted. This comes with a growing realisation that the country's future trajectory could be severely impaired by a shrinking pool of young people. In January 2013, China's National Bureau of Statistics announced that the working-age population (defined at 15-59 years) had declined for the first time in 2012, by 3.5 million.

Projections by the United Nations' Population Division suggest that China's working-age workforce will decline modestly from 944 million to 929 million by 2020, but will then drop sharply to 877 million by 2030 and further to 823 million by 2040. Indeed, unless the trajectory changes, the United Nations expects the working-age cohort to shrink to 548 million by the end of the century. Other forecasters show an even sharper decline. This is a very large contraction in what is still the world's largest pool of workers. In turn, it implies a very big change in China's economic model, which, till now, has relied heavily on the bulk deployment of labour and capital into infrastructure building and export-oriented manufacturing.

It is reasonable to expect that China's economy will adapt to these demographic changes by changing its economic model in the long run. However, the speed of the change is so quick that there is a danger that its existing industries could be severely squeezed by shortages of workers. China has seen sharp increases in wages in the last few years, but these demographic projections would imply even greater wage pressure. An 18 per cent decline since 1990 in the number of children in the primary education system gives us an indication of the pipeline of future workers. No matter how successfully China increases per capita productivity, this shift will have a big impact.

One way to track demographic trends is to look at the total fertility rate, which is defined as the number of live births per woman. A developing country like China needs a total fertility rate of at least 2.2 to keep its population stable, but the ratio is currently running at 1.66 - far below the "replacement rate" (in comparison, India's total fertility rate is currently 2.6).

The obvious solution is the abolition of the one-child policy, and there are growing indications that a change may soon be announced. Unfortunately, this might not add to the effective workforce within any meaningful time frame because of a number of factors.

First, the country's birth rate was falling sharply even before the one-child policy was instituted in 1980. China's total fertility rate fell from 6.1 in the early 1950s to 2.7 in the early 1980s, just as the one-child policy was being imposed. Thus, rapid urbanisation and changing social mores were likely to have reduced birth rates significantly even without the one-child policy, as witnessed in Korea, Japan and Taiwan. The one-child policy probably just accelerated what was happening anyway and, consequently, it is very unlikely that the fertility rate will jump back over replacement rate even after the removal of restrictions. Singapore's repeated failures to pump up birth rates show that total fertility rates can be very difficult to revive once the social context has changed.

Second, the country's skewed gender ratio has fundamentally impaired the future reproductive capacity of the country by reducing the pipeline of women of child-bearing age. Over the last decade, China has had 116 boys being born for every 100 girls (the natural ratio is about 105). Since reproductive capacity is driven by women of child-bearing age, China's effective fertility rate is even lower, around 1.5 - which is far below the replacement rate. The number of women of child-bearing age is slated to drop from 378 million in 2010 to 340 million in 2020, then to 317 million in 2030 and further to 276 million in 2040. Given that most of these women have already been born, this trajectory is now largely hard-wired. Basically, China simply does not have enough young women to stabilise its population even if it wanted to.

Third, even if the birth rate did jump up, it would take a minimum of 20 years for any of the gains to show up in the workforce. Meanwhile, China would have to withdraw most of its female workers from an already shrinking workforce in order to give birth and tend to children. More schoolteachers and doctors would also be needed to service the new cohort of babies, thereby diverting even more workers from infrastructure building and export-oriented manufacturing.

In short, China's workforce is likely to witness a very sharp contraction in coming decades, irrespective of what the country does to its one-child policy. It should still go ahead and make the change in order to reduce the now unnecessary human cost it imposes on common citizens. Removal of the policy may also smooth the demographic trajectory in the very long run. Meanwhile, the unavoidable decline of China's workforce opens up opportunities to younger countries like India, Bangladesh, Indonesia and the Philippines to deploy their workforce in the world economy even as China shifts from being the "factory of the world" to becoming the "investor to the world".