CORE Metadata, citation and similar papers at core.ac.uk Provided by Research Papers in Economics PROGRAM ON THE GLOBAL DEMOGRAPHY OF AGING Working Paper Series Population Aging and Economic Growth in China Judith Banister, David E. Bloom, and Larry Rosenberg March 2010 PGDA Working Paper No. 53 http://www.hsph.harvard.edu/pgda/working.htm The views expressed in this paper are those of the author(s) and not necessarily those of the Harvard Initiative for Global Health. The Program on the Global Demography of Aging receives funding from the National Institute on Aging, Grant No. 1 P30 AG024409-06. Population Aging and Economic Growth in China Judith Banister, David E. Bloom, and Larry Rosenberg March 2010 Executive Summary According to current UN projections, the population of the world age 60 or older will be 2 billion by 2050. With populations aging in nearly all countries, there has been widespread concern about the possible effects on economic growth and on the ability of countries to provide support for their elderly populations. In particular, because the elderly are in general less economically productive than younger people, a preponderance of old-age individuals would seem to suggest that (a) economic growth will be slower than in the past, and (b) relatively smaller working-age cohorts of the future will be burdened by the need to care for, and pay for the support of, the elderly population. These concerns have found resonance in China, where more than 30% of the population is expected to be age 60 or older in 2050. In part as a consequence of China’s process of population aging to date, the ratio of individuals age 15-64 to those younger and older, which grew rapidly during the last few economic boom decades, has reached its peak and is slated to decline rapidly in coming decades. Because a labor force that is large in size relative to the dependent population is plausibly crucial to rapid economic growth, the decline of this ratio could conceivably herald economic difficulties. The roots of population aging in China are the same as elsewhere: a low fertility rate, rising life expectancy, and the cumulative effect of past changes in birth and death rates. In China, obviously, the decline in the fertility rate, brought about in significant measure by the one-child policy and government efforts leading up to its adoption, has been a central factor in the changing age structure of the Chinese population. Greater longevity has also obviously been a key factor in population aging. If an older population is in fact cause for concern about the future of the Chinese economy, it would be prudent to identify, as soon as possible, measures that could serve to counteract any negative economic effects of population aging. Numerous countries have identified policies that might mitigate the potential economic problems associated with population aging. These policies seek to raise the age of retirement, spur higher savings, facilitate work for those caring for children, increase the labor force participation of women, liberalize immigration, and give more incentives for education. China could indeed begin to change the legal age of retirement, for those to whom this applies. It is unlikely to seek a higher savings rate, since its savings are already very high, and there is reason to think that increasing domestic consumption, rather than savings, will be a necessary policy measure in the coming years. However, China could attempt to redirect some of the household, societal, and private sector savings toward secure instruments to fund future retirements. Although education receives strong emphasis in Chinese families, and educational attainment, particularly in the cities, has risen rapidly, there are still large swaths of the population where even secondary education is not guaranteed and technical training is unusual. Improving the education and skill levels of Chinese workers could make the economy more productive and more able to compensate for the impending decline in the share of working-age people. In the short run, increasing the skills that the labor force brings to the production of goods and services is a central means for further raising productivity, which is the key factor underlying rising incomes. Strengthening education is the primary means of improving such skills. In the long run, the most promising avenue for China to avoid the possible consequences of population aging is to mobilize the portion of its potential workforce that is dormant or poorly utilized. Consideration of the possibility of adding to China's workforce when many millions are already unemployed or underemployed may be counterintuitive, but it is this very reserve labor force that can lay to rest concerns that China will not have enough workers in the future to preserve the country's impressive growth in GDP and in GDP per capita. In the cities, a higher proportion of women were employed in the past than now, and many women would like to work who cannot presently find jobs. Many people in cities are looking for work and will be available to fill most potential labor shortages as soon as they loom. In addition, the hundreds of millions of agricultural workers are not nearly as productive as those working in industry and services. China has benefited enormously by a large shift of workers out of agriculture, but there is scope for increasing this shift if the mechanization of agriculture is increased or if controls on internal migration are reduced. In an economy full of increasingly well-off consumers and that benefits from extraordinary demand for its exports, the forces of supply and demand will tend to raise wages in sectors where labor is in greater demand. Such increases will tend to draw more people into the workforce. In addition, the mix of goods and services that are produced will be affected by supply and demand. If hundreds of millions of elderly need something, the economy will produce it, unless it is restrained from doing so. Since the evolution of needs will not be sudden, there is every reason to believe that needs will be satisfied. The specter of shortages, whether of labor, goods, or services, has little basis. As the population ages, it will of course be necessary to devote more resources to the care and health of the elderly. And as China proceeds in its epidemiological transition toward an even greater preponderance of noncommunicable diseases, it will benefit by adopting programs that aim to diminish behaviors that lead to debilitating chronic conditions. Pension coverage is another arena in which governmental action may benefit the elderly. Rural areas are particularly bereft of this key element of social protection. China will face numerous choices in how to construct a financially viable pension system, and it will benefit from studying the experiences of other countries. At present, and for the foreseeable future, China, like many ii of its neighbors, benefits from a very strong system of family responsibility through which the elderly can count on extensive support. Population policies are also important. An easing of the one-child policy would allow for a gradual increase in the relative size of the working-age population, as compared with the elderly population. In addition, such easing might be effective in helping to reverse the extremely highly skewed ratio of males to females in the Chinese population – a circumstance that is based on selective prenatal abortions and the neglect or worse of girl babies, and that prevents millions of men from marrying and leaves them without the support of spouse or grown children or grandchildren in their old age. Current government efforts to spur economic development in the non-coastal provinces may also be important in avoiding any economic problems stemming from population aging. If the working population of the interior provinces is mobilized to be more productive, the Chinese economy as a whole will benefit, and regional economies will be better situated to provide care to the elderly. China's economic growth rate is expected to gradually slow down in the future, in comparison to the breakneck pace of economic development from 1978 to today. But population aging will not be the only, or even the major, cause. One of the most important reasons for this expectation is that nearly all countries, as they develop, experience a significant slowing in economic growth; other things equal, rapid growth is typically fastest at lower levels of income. China has made considerable gains, and its economic growth is likely to moderate as the country moves toward a higher level of income. The bottom line is that population aging is unlikely to cause significant economic problems for China. Its highly productive economy is awash with skilled workers and with those seeking to join the labor force. There is little prospect of a lack of workers leading to a marked slowing of growth in GDP or GDP per capita. To the extent that older workers are retiring, there are more than enough working-age people to fill their shoes and to support the daily needs of China's elderly population. Nevertheless, policy reforms – in education, health, pensions, labor policy, and internal migration – could make China's economic future all the more secure. iii Population Aging and Economic Growth in China Judith Banister, David E. Bloom, and Larry Rosenberg March 2010 Introduction Population aging is taking place in most countries of the world. During the next few decades, the share of global population ages 60 and older is likely to rise to historically unprecedented levels (see Figure 1).1 The 680 million people in this age group make up 11 percent of world population, up from 8 percent in 1950.