An economy’s long-term potential growth rate is—in simplified terms—a function of the future growth rates of the working age population (labor), the capital stock (capital), and total factor productivity (innovation). Unfortunately for China’s growth prospects, we know from the relatively reliable demographic statistics for future decades that China’s working age population will decline rapidly by at least half a percent annually in the coming years. President Xi Jinping’s policy of encouraging women to bear children and not work will likely backfire, however.
China’s population is too big for immigration to matter, so the workers entering the workforce for the next 15 to 20 years have already been born. Second, since around 2009, China has had gross fixed capital formation (i.e. investments, or additions to China’s capital stock) shares of GDP of 42 to 44 percent, an unprecedented level for any country to sustain, even among fast-growing Asian economies. In other words, China’s current levels of investments will eventually slow down and so will the future growth rate of its capital stock. The average growth rates of both labor force and capital investments in the Chinese economy will therefore likely be negative.
For the Chinese long-term potential growth rate to remain higher when compared to developed economies like the United States, the European Union, or Japan, a relatively high level of future productivity growth has to be assumed. Yet the International Monetary Fund (IMF) recently estimated China’s total factor productivity (TFP) to have been just 0.7 percent annually from 2010 to the outbreak of the COVID-19 pandemic, representing a significant slowdown from earlier decades. Unless Xi’s economic policies in China can engineer a major productivity rebound, the middle kingdom will not continue to grow faster than the big economies of the Organization for Economic Cooperation and Development (OECD), and China’s economy will never become the largest in the world.
One can doubt whether Xi’s crackdown in recent years on his country’s biggest and most successful technology companies will spur entrepreneurial creative destruction in China’s economy, even if Alibaba and other large Chinese technology firms had accumulated potential monopolistic powers in recent years. Forcing most private Chinese firms, the country’s engine of growth and job creation, to host communist party cells, which are often more powerful than firm management, will similarly have questionable effects on these firms’ innovative focus and abilities.
On the other hand, there is absolutely no doubt that Xi’s recent push to “foster a new type of marriage and childbearing culture,” and its potential to undercut decades of rapid progress in the educational attainment and labor market participation of Chinese women, will have potentially disastrous effects on Chinese productivity growth.
The reason is straightforward. China’s total labor force remains relatively less skilled than those in many advanced economies. Only 19 percent of people aged 25-64 in China had acquired tertiary educational attainment in 2020, compared to 50 percent in the United States and 56 percent in Japan. More important for the future, however, since 2016, the majority of China’s students in higher education has been women, rising to 55 percent among all masters students by 2020.
In educational terms, women in China have recently held up more than half of its attainment, and attempting to stunt their careers and labor market participation in favor of traditional childrearing roles will waste the many resources the Chinese state has invested in them and also rob China’s economy of too many of its future innovative minds. Should Xi push through a material future deterioration in highly educated women’s economic opportunities in China, prospects for future productivity growth in the economy will dip accordingly.
It is difficult to imagine a worse policy for productivity and China’s long-term potential growth rate—especially as we know from Japan and South Korea that blocking highly-skilled women’s careers will not raise fertility levels.
This publication does not include a replication package.