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Sunday, March 27, 2011

Malthus, Demographics, and China's Future

Last week, I had some furious e-mail exchanges with a Media Realism reader. I have never met the gentlemen in person but there is a lot of mutual respect between us and we both really enjoy the lively back and forth that our correspondence generates.

With his permission I am going to cover portions of our e-mail trail from a week ago.

He basically led off with the premise that the United States was finished. Our debt and overhanging entitlement avalanche would eventually destroy the country. China, in his view, would rule the world in 20 years. We might hang on as a military power for a while but our days as a serious economic player are rapidly coming to an end.

I agreed that we certainly face serious challenges and that politicians need to take corrective action soon to avoid a disaster. But, I warned him that as impressive as China’s growth has been in recent years, they appear to be headed for a train wreck that will be harder to avoid and correct than our entitlement and debt problem. It all comes down, like many things in marketing and business, to simple demographics. To explain, let us go back about 200 years.

Thomas Malthus (1766-1834) was a very gloomy economist at a time when the rest of the educated world was getting excited about the ideas of Jean Baptiste Say, Adam Smith, and David Ricardo. One of his most famous arguments was that the western world would have severe trouble feeding itself. Basically, he said that population, when left unchecked, increases in a geometric ratio. At the same time, the ability to produce food increases only at an arithmetic ratio. So, eventually, many nations have to face starvation. Famine and epidemics would help (sic) ease the problem as would the occasional war and plague. Without those sad events, Malthus felt that the only acceptable alternative was very late marriage and abstinence by the population. As a clergyman he was opposed to all forms of birth control (like many economists, Malthus was a fun guy).

Chinese leader Mao Zedong was strongly influenced by Malthus and watched with alarm as the Chinese population grew sharply during his tenure. His “Marxist miracle” was often under criticism by all sides of the political spectrum as he had a hard time feeding his billion Chinese citizens.

After Mao’s death, the next generation of Chinese leaders had the same concerns about Chinese population growth. In 1979, they became authentic neo-Malthusians and instituted the “one child per couple” policy in many provinces that is still intact today.

The Chinese economic growth story has been amazing. Cities have mushroomed seemingly out of nowhere in recent years that now have more than a million people. The average Chinese saves more than 20% of his income which fuels rapid building, investment, and manufacturing. Chinese schools are now turning out more scientists and engineers than anywhere on earth and the universities are gaining ground globally in academic rankings.

So, China is definitely booming but they are heading for perhaps the worst demographic disaster in measured history. Simply put, their strict one child per couple policy will lead to a shortage of workers. And, a labor shortage normally translates to higher wages, which will hurt the comparative advantage they now hold in manufacturing. By 2025, China is projected to have one fifth of the world’s people but one quarter of the 65+ population. Already, other cracks are appearing. For 2500 years, Chinese sons always took care of their parents. Now, with the single child policy a couple is now expected to care for both sets of parents. As Nicholas Eberstadt of the American Enterprise Institute put it “a de facto national pension system has been the family but that social safety net is now unraveling badly.” Columnist Ted Fishman asks ‘will China grow old before it grows rich?”

Another really freaky and ghoulish demographic anomaly is rearing its head in China. Due to the reverence that Chinese families give sons, many infant girls are put up for adoption and taken to foreign countries. Abortions are often undertaken if it is determined that the newborn will be a girl. So, soon China will have a population where there are 123 young men for every 100 young women. Young women will likely move to the cities where they will be highly prized by young men and only the more successful men will tend to find partners.

For a few decades in the old American West, we had gender imbalances such as this. Alaska might face this in certain regions as well. But for a country of a billion people, this is unprecedented and has to cause huge social problems including crime.

We have all heard the problems about demographics in Western Europe with Spain and Italy getting special attention. Mark Steyn refers to the present as “Europe’s Gelded Age.” The Chinese threat appears much greater. The Chinese economic growth over the last few decades has been nothing short of remarkable. They are big polluters but are taking steps to clean things up. Life is getting better for many millions of Chinese as they enter the middle class each year. But demographics are a tidal wave that no one can hold back and they are going to hit China very hard. All of us have to be impressed with what China has accomplished the past 20 years against stiff odds but taking on demographics is virtually always a losing battle.

Are demographics really that important? Well, when asked that question I always conjure up the old quote from mid-20th century writer and raconteur Damon Runyon: “The race does not always go to the swift nor the battle to the strong, but that’s the way to bet.”

May I suggest that you do not bet your life savings on China, but instead, bet on demographics?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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