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Business News/ Opinion / Online-views/  Opinion | China’s ageing problem is a serious threat to growth

Opinion | China’s ageing problem is a serious threat to growth

The impact of the slower growth in the workforce, in turn, is lower total economic growth

Photo: BloombergPremium
Photo: Bloomberg

The trade war between the US and China is obscuring a key fact: economic growth for both countries will be significantly slower than in the past, for the simple reason that their populations are ageing rapidly.

Let’s start with the facts on ageing. The share of the US population aged 65 or above is expected to rise to 21% in 2050 from 13% in 2010. In China, it is expected to rise much more rapidly over that period, to 24% from 8%.

The result of these ageing populations is slower workforce growth. The potential labour force in the US grew by 2.5% per year between 1974 and 1981. It has been declining since, because of ageing, and is expected to be just 0.5% per year over the next decade. In China, the situation is even direr: The workforce has actually fallen recently. So the US is struggling with a lower but still positive growth rate, while China has to cope with almost no growth and perhaps some declines.

The impact of the slower growth in the workforce, in turn, is lower total economic growth. Since economic expansion is arithmetically the sum of workforce growth and labour productivity growth, achieving the same top-line growth as the population ages would require substantially higher productivity growth rates. While higher productivity growth would be welcome, no one really knows how to spur it.

So it is worth turning our attention back to the demographic component, with the focus on China, where population ageing is more acute. The key driver of the rapidly ageing Chinese population is a low number of births per female. To avoid a decline in a population without immigration, the total fertility rate (that is, the average number of children per female throughout her childbearing years) needs to be slightly above two.

In 1960, the fertility rate in China was almost six. It is now about 1.5. One commonly cited reason for the dramatic decline was the infamous one-child policy, limiting couples to one child each, put in place in 1979. Yet the Chinese fertility rate was declining sharply even before the policy was put in place, in part because of an earlier “longer, later, fewer" discouragement of larger families (that
people should marry later, wait longer between children, and have fewer of them). Indeed, research suggests that three-quarters of the fertility rate decline since 1970 was not formally related to the one-child policy, even if it was importantly driven by other formal and informal government action.

After a long history of discouraging births, the Chinese have started encouraging larger families. In 2013, the country began raising the limit for some families from one to two, and expanded that pilot programme to all families in the beginning of 2016. The general expectation was that the shift would create larger families, though the impact on economic growth would be delayed because the newly born children would take two decades or so to enter the workforce.

As some predicted at the time, however, the problem is not a delayed demographic benefit—it’s that it will not happen at all. Joan Kaufman, the director for academic programmes at the Schwarzman Scholars Program, wrote in 2016: “Thirty years of constant reminders about China’s population problem and restrictions on births created a new norm. Most urban youth are only children and that feels normal."

Most do not want more children and the policy change can best be described as too little, too late.

Kaufman has been proven right: after a brief uptick, the fertility rate in China is no higher than before the higher limits were put in place. The reasons are many, including the social norm that she highlighted, along with other factors such as the difficulties of paying for healthcare, education and additional housing for larger families. Meanwhile, some of the consequences of encouraging more children have been unintended and unfortunate: more generous maternity leave policies are discouraging some firms from hiring young women.

The government is now considering eliminating the limit altogether. As the vice-president of the China Society of Economic Reform noted: “It’s late for China to remove birth limits even within this year but it’s better than never.
Scrapping birth limits will have little effect on the tendency of China’s declining births."

The Chinese government is also considering financial incentives to encourage births, and provinces are considering their own child-related bonuses. Will this work? Some evidence suggests a large effect of such child-related payments on fertility in France. Other research, however, shows smaller effects in other countries. Furthermore, it is not clear whether the effects from these types of payments persist; a study of payments in Quebec suggests a short-term impact but no longer-term one. In addition, even if they work, the incentives can be quite expensive, since the payments are made for all children and not just those that parents choose to have because of the programme: evidence from Australia suggests a cost of more $90,000 per additional child. So it’s unlikely that financial incentives will be a panacea in China.

The conclusion? China’s population will continue to age rapidly for decades, and as a result its economic growth will be lower too. And for those who believe the Chinese authorities are always and everywhere able to take the long view and address gradual, predictable problems before they take root, the difficulties the country is facing in belatedly raising birth rates might be a cautionary note.

bloomberg view

Peter R. Orszag is a Bloomberg Opinion columnist.

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Updated: 30 Nov 2018, 12:02 AM IST
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