May 24, 2019 Reading Time: 5 minutes
Lauren A. Johnston*
To the displeasure of other European Union (EU) nations and the United States, Italian President Sergio Mattarella recently hosted Chinese President Xi Jinping in Rome to sign a Memorandum of Understanding (MoU) that pledges Italy’s support for China’s transcontinental Belt and Road Initiative (BRI).1 While Rome now hopes that Chinese companies will invest in Italy’s ageing infrastructure, the country’s partners worry about a gradual loss of Western sovereignty in the face of perceptions of China’s geopolitical ambitions.
But this framing of China’s interest in instigating the so-called Silk Road Economic Belt (through central and southern Asia) and the new Maritime Silk Road (through the Indian Ocean) is partial. In fact, a leading driver of Beijing’s outbound ambitions lies in economic demography—the interaction of economic and demographic change.
Since launching its ‘reform and opening’ agenda in 1978,2 China has already once re-shaped the world economy and global geopolitics. For the first three or four decades of that agenda, China’s industrialisation was underpinned by a low-wage demographic dividend.3 Falling birth and mortality rates boosted the working-age population share and kept wages low,4 and Chinese leaders took full advantage of these interdependent trends. The export of low-cost manufactured goods led to an industrial revolution.
But that economic boom was always going to be temporary. As powerful as China’s leaders may be, even they cannot stop the ageing of the country’s workforce, nor the effect that rising education levels will have on wages. The drop in the flow of low-wage migrant workers into coastal manufacturing hubs came as the first sign in 2003.5 The working-age population share in China has been declining for around a decade now.6 This combination marks a new era for China’s labour-related economic fundamentals.
This marked the start of cheap-labour scarcity and wage-related pressures for China’s factories and its export-driven economy. On top of that, demand for China’s exports never quite recovered from the shock of the global financial crisis, which roughly coincided with peak workforce in 7 Those labour-supply and product-demand factors are compounded by over-investment: China’s mostly state-owned steel mills and other industry-intensive sectors are less productively busy.
Such pressures have shifted the attention of China’s leaders away from low-wage industrialisation. In addition to meeting the needs of the rising number of pensioners, Chinese authorities must also ensure appropriate jobs are available for the young people entering the labour force. The number of youth entering the labour force is less than it was 40 years ago,8 and they also have different skills – for example, top-quality university degrees.9 The young, in principle, should be more productive to maintain total output as the working-age population share continues to fall. But the transition to such jobs can be fraught with challenges.
Such economic pressures explain why China is encouraging Chinese companies to invest in labour-saving technology and innovative sectors at home and, crucially, in infrastructure and light manufacturing industries abroad.10 The latter is particularly good news for any developing country that offers an investor-friendly business environment and a population structure that promises a demographic dividend – the kind of country China was some four decades ago.
It so happens that countries around the shores of the Indian Ocean are relatively well positioned to take advantage of China’s new interest in investing abroad. Not only are these countries host to key ports serving many resource-rich countries in their landlocked hinterlands, but the Indian Ocean is also home to more than two billion people, most of whom are young. In fact, it is the world’s youngest region,11 one in which newly paved roads and newly built bridges would boost economic output and demand of all sorts.
The logic of President Xi’s Belt and Road Initiative has stirred debate since its launch in Kazakhstan and Indonesia in 201312. In Indonesia, strategically important to both the Indian and Pacific Oceans, he spoke of a ‘Maritime Silk Road of the twenty-first century.’13 But it is now clear that there was always more in play for him than China’s own history in the region, and any notion of Xi himself making history. Crucially, he has also recognised the Indian Ocean countries as a strategically located reservoir of prospective low-wage labor—and a potentially huge consumer market for Chinese companies in the twenty-first century.
Some of the region’s largest populations and economies – including India, soon to become the world’s largest population – are trending in the broad direction of the kind of demographic-dividend window that China starting profiting from in the 1980s. These countries, like China before them, will have to make sure they also profit as foreign investors prospectively reap the dividends investment and economic growth. And they will need to develop policies and institutions to underpin rapid economic changes, just like China did also.
With China already investing in infrastructure and heavy industries in a growing number of these countries, economic rivalry with Western industrialised countries grouped in the Organization for Economic Development (OECD) is emerging on a new dimension. Japan, for example, recently launched the Asia-Africa Growth Corridor together with India and multiple African governments.14 The question is whether state capacity in these countries is ready to navigate and sustain such a new level of international interest, led by China but not exclusively limited to the Chinese.
The Indian Ocean region has started a nascent process of greater intra and inter-regional cooperation through the Indian Ocean Rim Association (IORA), founded in 1997.15 In addition to China, IORA dialogue partners include Egypt, France, Germany, Japan, the UK, and the US.16 China’s interest in the Indian Ocean, now under the umbrella of the BRI, is influenced by ongoing changes in its economic demography. The intended belts and roads might broadly be something for other countries facing a rapidly ageing population, like Italy, to explore in their own style.
Johnston, L.A. (forthcoming 2019). The Economic Demography Transition: Is China’s ‘not rich, first old’ circumstance a barrier to growth? Australian Economic Review (to be published in 2019 volume)
Johnston, L.A. (2019) An economic demography explanation for China’s ‘Maritime Silk Road’ interest in Indian Ocean countries. Journal of the Indian Ocean Region, 15:1, 97-112, DOI: 10.1080/19480881.2019.1569326
1Al Jazeera. (2019). Italy joins China’s Belt and Road Initiative. [online] Available at: https://www.aljazeera.com/news/2019/03/zealand-attack-suspect-donated-money-austria-190327120423080.html [Accessed 3 March 2019].
2Lardy, N. (2003). Trade Liberalization and Its Role in Chinese Economic Growth. Institute for International Economics. [online] Available at: https://www.imf.org/external/np/apd/seminars/2003/newdelhi/lardy.pdf [Accessed 3 March 2019].
3Johnston. L. (2018). Harvesting from “Poor Old” China to Harness “Poor Young” Africa’s Demographic Dividend? International Centre for Trade and Sustainable Development. [online] Available at: https://www.ictsd.org/bridges-news/bridges-africa/news/harvesting-from-%E2%80%9Cpoor-old%E2%80%9D-china-to-harness-%E2%80%9Cpoor-young%E2%80%9D-africa%E2%80%99s [Accessed 3 March 2019].
4Congressional Research Service. (2018). China’s Economic Rise: History, Trends, Challenges, and Implications for the United States. [online] Available at: https://www.everycrsreport.com/files/20180205_RL33534_bd04d9e3a7b7179620fffe919dad820380ed27a9.pdf [Accessed 3 March 2019].
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6Myres, S. et al. (2019). China’s Looming Crisis: A Shrinking Population. [online] Available at: https://www.nytimes.com/interactive/2019/01/17/world/asia/china-population-crisis.html [Accessed 3 March 2019].
7Lardy, N.R. (2012). Sustaining China’s Economic Growth After the Global Financial Crisis. [online]. Available at: https://piie.com/bookstore/sustaining-chinas-economic-growth-after-global-financial-crisis [Accessed 7 May 2019].
8World Bank. (2007). China’s Modernizing Labor Market: Trends and Emerging Challenges. [online] Available at: http://siteresources.worldbank.org/INTEAPREGTOPTRANSPORT/PublicationsandReports/21875724/ChinasModernizingLaborMarket.pdf [Accessed 3 March 2019].
10Institute for Security & Development Policy. (2018). Made in China 2025. [online] Available at: http://isdp.eu/publication/made-china-2025/ [Accessed 3 March 2019].
11Daily News. (2018). Ocean of the future. [online] Available at: http://www.dailynews.lk/2018/10/30/features/166915/ocean-future [Accessed 3 March 2019].
12Daily FT. (2018). President Xi gives new impetus to BRI. [online] Available at: http://www.ft.lk/opinion/President-Xi-Jinping-gives-new-impetus-to-BRI/14-661905 [Accessed 3 March 2019].
13CGTN. (2018). Belt and Road five years on: Chinese President Xi Jinping’s words of wisdom. [online] Available at: https://news.cgtn.com/news/3d3d774e7945444d7a457a6333566d54/share_p.html [Accessed 3 March 2019].
14The Diplomat. (2018). Japan’s Belt and Road Balancing Act. [online] Available at: https://thediplomat.com/2018/11/japans-belt-and-road-balancing-act/ [Accessed 3 March 2019].
15Indian Ocean Rim Association. [online] Available at: https://www.iora.int/en/about/about-iora [Accessed 3 March 2019].
*Lauren A. Johnston is a Senior Research Associate (Economics) at Mercator Institute for China Studies (MERICS), Berlin. She was a consultant to the World Bank and UNICEF in Beijing, and a Research Fellow in the Faculty of Business and Economics, University of Melbourne. The opinions expressed in this article are the author’s own and not the institutional views of LKI, nor do they necessarily reflect the position of any other institution or individual with which the author is affiliated.