Indian Defence Review

Demographic pressures help explain Beijing’s outbound agenda

To the displeasure of other European Union nations and the USA, Italian President Sergio Mattarella on Saturday hosted Chinese President Xi Jinping in Rome to sign of a memorandum of understanding that pledges Italian support for China’s trans-continental Belt and Road Initiative. 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 an 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 economic demography, the interaction of economic and demographic change.

Since launching its “reform and opening” agenda in 1979, China has already once re-shaped the world economy and global geopolitics. For the first three or four decades of that agenda, China’s industrialization was underpinned by a low-wage demographic dividend.  Falling birth and mortality rates boosted the working-age population share and kept wages low, interdependent trends of which Chinese leaders took full advantage. The export of low-cost manufactured goods led to an industrialization 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, and nor the effect that rising education levels will have on wages. First signs that the flow of low-wage migrant workers into coastal manufacturing hubs was beginning to slow came in 2003. China’s working-age population share has been declining for around a decade. The 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 itself roughly coincided with peak workforce in many Western economies. 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 than earlier.

Such pressures have shifted the attention of China’s leaders away from low-wage industrialization. Together with now meeting the needs of a rising number of pensioners, Chinese authorities must also ensure appropriate jobs are available for the young people entering the labour. Not only are there fewer of them than forty years ago, they also have different skills – for example, top-quality university degrees. The young in principle should be able to be more productive – which they will have to be given to maintain output as the working-age population share continues to fall. But the transition to such jobs can be fraught.

Such economic pressures help 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. 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 some four decades ago.

It 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, 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 2013. In Indonesia, strategically important to both the Indian and Pacific Oceans, he spoke of a “Maritime Silk Road of the twenty-first century”. 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 recognized the Indian Ocean countries as a strategically located reservoir of prospective low-wage labour – 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 industrialized 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.  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 which is not exclusively Chinese.

The Indian Ocean region has started a nascent process of greater intra- and inter-regional cooperation through the Indian Ocean Rim Association (IORA), first founded in 1995. In addition to China, IORA dialogue partners include Egypt, France, Germany, Japan, the UK, and the USA. China’s interest in the Indian Ocean, now under the umbrella of the Belt and Road Initiative, is influenced by ongoing changes in its economic demography. The intended belts and roads might broadly be something to explore for other countries also experiencing rapid population ageing to explore in their own style. Italy is among them.