China’s Double-Edged Sword: The Role of Demographics in the China Model

Below is my essay, 'China’s Double-Edged Sword: The Role of Demographics in the China Model,' which was one of the runners-up for the Young China Watchers and Lau China Institute King's College London annual essay competition.

Introduction

The concept of the ‘China Model’ has taken think tanks, the media, and political organisations by storm. Claims that China is exporting their economic and political model of development to the Global South have gained considerable traction. Some have gone as far as arguing that China is “training future authoritarians” as part of its efforts to export its political and economic methods. In light of this, alarms have been raised regarding what a world based on the China Model could look like. Whilst China’s methods were successful in bringing about the Chinese economic miracle, the nation is now facing a series of multifaceted challenges. This essay will consider the role of demographics as an opportunity and challenge in China’s economic growth and in turn the China Model. It will argue that demographic trends played an unparalleled role in China’s economic success and slowdown and are also a fundamental reason why the Chinese experience cannot be replicated elsewhere.

Demographic Dividend

China has been characterised by its large population, which was a determining factor for its economic success. For one, it made China a uniquely large market, turning it into an attractive destination for foreign investors seeking access to over 1 billion consumers. More importantly, China’s demographic trends have been critical in shaping its labour supply and its economic take-off. When opening up to external markets in the 1980s, China was massively favoured by its demographic dividend. This is a demographic trend which sees a “large share of the working-age population in the total population.” The ratio of the working-age population in relation to the entire population of China between 1960 and 2022 is shown in Figure 1.

This spiked productivity in China because of decreased dependency levels within the population. However, the primary benefit of China’s demographic dividend for its economy was its increased labour supply, which was essential for its role as an export processing country. Since the 1980s, China has established Export Processing Zones (EPZs), which have attracted massive waves of Foreign Direct Investment (FDI) due to their low costs of production. Alongside cheap imports of raw materials, the hyper-productive Chinese labour force catalysed the success of EPZs and in turn the stunning economic growth. There have been reports of low labor force participation, despite the high proportion of working-age people. Yet, overall participation rate against the entire population still stood at a high 84% in 2000.

Middle-income trap

However, since the mid 2010s, China’s demographic dividend was reversed, which has proven detrimental for its economic growth. The end of the demographic dividend has created the phenomenon of an aging population and higher dependency rates, which yields higher costs of maintaining the dependent ratio. China’s One Child Policy only intensified this phenomenon through its impact on fertility rates. The dual implications of a labor shortage and an increasingly dependent and aging population has contributed to China’s economic slowdown from double digit annual growth to a modest 5% in 2023. This is likely the result of China finally experiencing its Lewis turning point, which refers to a point in which “labor supply is no longer unlimited.” Wage increases are characteristic of the Lewis turning point, an implication that China has experienced dramatically since 2003, with wages across agricultural, non-agricultural sectors, and wages of migrant workers skyrocketing.

Therefore, China has been at risk of losing its revealed comparative advantage in the production of labour-intensive products, especially in the context of the rise of other cost-efficient exporting countries like India, Brazil, and Mexico. China has mobilised government investments to control the damage of the above trends by investing in high technology sectors such as batteries and has managed to reduce the average price of Chinese goods by 10% between 2022 and 2023. Yet, the Chinese economy is still facing an imminent threat, namely the middle-income trap. Middle-income countries are nations that “despite economic growth and falling poverty rates, were never able to become high-income countries.” For China this means that it has outgrown its role as the world’s leading exporter of cheap goods, but not yet risen to the occasion of being a high-income innovative economy. This is an evident problem with the Chinese economic success, which was overly reliant on a withering supply of cost-effective labour.

Implications for the China Model

The above reveals the challenges of the China Model. The first such challenge is the immense difficulty of reproducing China’s economic miracle elsewhere. China’s demographic dividend in combination with its uniquely large population and national industrial policies, trialled in Special Economic Zones (SEZs), helped China develop its comparative advantage of low-cost production. However, this ‘model’ is hardly replicable anywhere else as it requires the delicate harmony of the above factors, amongst other unique aspects of the Chinese political economy. Even in India, the only country with a similar population size, important aspects of the China Model such as the success of SEZs have proven difficult to replicate.

Furthermore, the interplay between demographics and the middle-income trap proves the unstainable nature of the China Model. Although the unique One Child Policy expedited the decline of China’s demography, its characteristic monomaniacal prioritisation of cheap product processing and exporting also damaged the economy considerably. More specifically, the increasingly aging and highly dependent population can no longer differentiate China from other economies, and its lacking approach to investment in innovation has created a type of mono-economy. As a result, if the Chinese government does not effectively diversify the economy, it could find itself stuck in the middle-income trap.

Conclusion

This paper has considered the role of demographics in the infamous China Model. It argued that China’s demographic dividend played a significant role in the development of the economy by creating a low-cost labor force and thus attracting FDI. However, demographics have now become a socio-economic challenge for the country. The potentially detrimental impacts of the aging population underscore the limits of the China Model and the difficulty of replicating it successfully elsewhere.