April 14, 2011

Investors and pundits alike have shown unbounded excitement, and some anxiety, about China’s economic growth. Extrapolating current trends, some forecasters predict that China’s economy will vault ahead of America’s in 15 years. Yet simple extrapolation is the economists’ poorest guide. To accurately map the future, we need to consider whether the factors that fueled China’s rapid growth in past decades will continue in years to come.

From 1980 to 2010, the growth in China’s labor force was among the fastest in the world. At 1.7 percent per year, it contributed almost one-fifth of annual economic growth. Urbanization — a key source of productivity gains, as workers shifting from farms to urban manufacturing and services brought huge increases in output per worker — rose by 3.8 percent annually, as city residents soared from 20 percent to 45 percent of China’s total population. Education underwent a similar boom: The number of undergraduates rose 25 percent annually, from 3.4 million in 1998 to 13.3 million in 2004. The number of Western-style PhDs awarded leaped from just 19 in 1985 to 50,000 in 2006. These trends underwrote annual growth rates of 10 percent.

Yet a reversal of each of these trends has already begun. Workforce growth ceased in 2010 (a legacy of Deng Xiaoping’s one-child policy), and China’s working-age population will decline by more than 9 percent by 2040. This shift from 1.7 percent annual growth to an annual contraction of 0.33 percent will by itself knock two percentage points off China’s annual growth potential. Moreover, the U.N. Population Division projects that from 2010 to 2030 China’s urban growth — perhaps the chief driver of productivity gains — will drop by half compared with 1980-2010. As for educational growth, it has clearly reached diminishing returns. China has announced that it will limit the growth of doctoral programs. The biggest concern of new college graduates is that their numbers have increased much faster than the economy can employ them, as white-collar jobs are proving extremely hard to find.

While the parallels are not exact, it is useful to look at Japan, which previously brandished the specter of coming economic domination. From 1950 to 1990, Japan’s workforce nearly doubled. A fast-growing generation of young workers with better educations, new skills and great geographic and social mobility propelled Japan forward. Yet in 1990, Japan’s labor force ceased growing; since then, it has been aging and declining. First came a decade of stagnation and then a decade of decline in Japan’s labor force, exactly the trajectory looming before China from 2010 to 2030.

China faces other obstacles as well. Merchandise exports, three-quarters of which went to high-income countries, rose in annual value by 17 percent from 2000 to 2008; at the latter date, China’s merchandise exports were 30 percent of its total gross domestic product. Yet this growth pace cannot be sustained, for the economies of Europe, South Korea and Japan are entering what are likely to be lengthy slowdowns as they cope with their own aging and stagnating populations, while the United States must focus on reducing its debt and trade deficit.

In addition, the raw materials needed to fuel China’s growth will grow more expensive and increasingly must be imported. China has gone from being self-sufficient in oil as of 1990 to being the world’s second-largest net importer of oil in 2009. Moreover, China’s chief international advantage — cheap but highly disciplined labor — is diminishing with wage gains for its workers.

Given fewer gains from further urbanization, slower growth in export markets, more expensive imports, an aging population and a shrinking labor force, it would be surprising if China’s annual economic growth from 2010 to 2030 exceeded 5 percent. Yet at that rate, if the U.S. economy recovers to grow at 2.5 percent per year, China’s economy will increase from slightly more than one-third as large as the U.S. economy today to just under two-thirds as large in 2030. After 2030, China’s workforce will continue to plunge and age at a rapid rate, while the U.S. workforce will continue to grow, so there is no reason to expect China’s relative gains to continue after that date. Even if those growth rates do continue, China’s economy would not draw equal to that of the United States until almost 2050.

Put another way, 2010 was China’s year of the tiger, but 2011 begins the year of the rabbit. This could also be the year that China’s economy begins to shift to a significantly slower and more sustainable rate of economic growth.

The writer is Hazel professor and director of the Center for Global Policy at George Mason University.