The one-two-four problem

In 1975, there were six Chinese children for every pensioner. By 2035, there will be two Chinese pensioners for every child.

I pity that poor baby. When she grows up, either she will be burdened by an oppressive tax regime providing transfers for her older relatives, or she will be surrounded by an army of hungry poverty-stricken old people.

This grim vista is an inevitable consequence of the one child policy. The Chinese call it the 1-2-4 problem; in the future one child will have to look after two parents and four grandparents.

Yet from the perspective of today, China appears to be a very threatening prospect. It has grown at a fantastic rate, and now dominates world export markets. This future chinese demographic crisis is obscured by its astounding economic transformation.

Scratch the surface and China's success seems far from sustainable. It rests on three principles; and undervalued exchange rate, huge foreign direct investment inflows with its parallel inflow of technological know-how, and a huge pool of cheap labour arriving from the countryside and into the cities.

These three principles have produced economic benefits for ordinary Chinese. However, an even greater wave of benefits has flown out of China and into the West.

This economic success is also a huge subsidy from the Chinese people to the consumer-debt-serfs of North America and Europe. Chinese factory workers work long hours, for low pay, producing huge quantities of cheap goods. The Chinese ship them out at ridiculously low export prices, in return they receive dollars, euros, and sterling. The Chinese then lend this cash back to us in order to supply the necessary cash to buy yet more cheap Chinese goods.

It is hard to see how that kind of scheme could keep the world economy ticking over for another 20 years. At some point, the Chinese will want more than nice colourful pieces of paper for their products. The continuation of this generous subsidy scheme is all the more improbable when one considers Chinese population dynamics.

Still, it was great while it lasted. For my part, I received a cheap iPod, a laptop, and a flatscreen TV. The thing I can't understand is what the Chinese child of 2035 is going to get out of it.