China’s lessons for ageing developing countries

Developing ageing nations like Sri Lanka must look to China’s past tactics, such as its modest welfare policies and its youth-favouring education policies, to ensure that their economies can best sustain their populations, Lauren Johnston writes.

Over recent decades, most countries have seen a rise in average life expectancy, while fertility rates have fallen. In rich countries, this transition has been underway for many years, and now, most of the world’s high-income countries are in the latter phases of a demographic transition.

These economies are now home to populations characterised by intensifying population ageing, and policymakers face the unprecedented challenge of working out how to adjust their economies and societies to the reversal of their population pyramid.

Falling fertility and mortality rates are, however, also seen in countries with lower per capita income levels. Middle-income – or ‘poor and old’ – countries are increasingly finding themselves in a similar position too. Prominent among them are G20 members Brazil, China, Russia, and Turkey, where at least seven per cent of the population is aged 65 or over.

Where the economics literature is rich in ideas for addressing the developmental challenges of youth-filled developing countries, there is little equivalent around development processes in the presence of an ageing population.

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But just as a high birth rate in poor countries can lead to widespread starvation with falling per capita resource availability – the Malthusian trap – in principle, the weight of the old, in rich and poor countries alike, also risks stagnating growth by setting off a downward productivity spiral – the Johnston trap.

Thanks to a 1980s decision to align its population policy with the newly initiated ‘opening and reform’ economic agenda, China offers a useful reference point and some related literature.

‘Poor-old’ Sri Lanka’s policymakers should indeed grasp the opportunity to better understand China’s decades-long economic demography transition strategy.

Following the dramatic implementation of a One Child Policy in the early 1980s, China’s policymakers sought to extrapolate the consequences. Research has revealed that China was predicted to enter a process of rapid population ageing and that the economy would not, under any feasible scenario, have reached the high-income per capita group.

In other words, China’s destiny was to become ‘old but not yet rich’. The country feared that getting old while still being a developing country might prevent it from attaining a ‘rich economy’ status.

This fear was also fuelled by comparisons with neighbouring economies Japan, Taiwan, Singapore, and Hong Kong, which had all become rich economies with young populations. China was also afraid that an increasing share of resources – financial and human – would need to be re-directed to elderly care, leaving insufficient resources to maintain modernisation and productivity levels.

Ever since China has taken steps to ensure that it both grasped its demographic dividend window while it was open and, in parallel, taken steps to ensure its economy can best sustain its demography in the long run. This is why, in the 1980s and 1990s, foreign investors in low-wage labour-intensive industries were incentivised to enter China.

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Now, as China’s economy matures and wages rise, advanced manufacturers and services sector investors are encouraged.

Further, authorities have only ever promised the older population very modest pension entitlements, so that these promises would not derail a substantial share of the resource envelope before China had attained its development goals.

Similarly, it invested in the education of the future young cohort – the cohort that would need to be more productive per capita than its immediate ancestors to maintain productivity per capita, and to continue an intended national advance toward the economic frontier.

As a result, China’s human capital is not evenly spread across the population but favours younger generations. At least theoretically, China has, through such economic demography strategies, better positioned itself to navigate the precipitous risks of this stage of its economic and demographic journey. Only time will prove its success.

Developing countries hoping to avoid rapid population ageing that would undermine successful economic development might benefit from emulating – appropriate to national conditions – China’s long-term approach to the challenge. That is, to evolve their own long-run approach to economic and demographic change, or an economic demography transition strategy,

For example, if the weight of pension and related obligations is high, this may have the same adverse effect as a debt overhang. If the redirection of resources towards older people becomes similarly high, countries may enter a downward productivity cycle.

In other words, where the incentive to invest in the economy or the chance of receiving related government support is so low, the investment itself won’t actually eventuate, even if it has the potential to be profit-making in the short or long-run.

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Countries like Sri Lanka should, for example, also study the efficiency of their taxation and social welfare systems as a falling working-age population share sets in. It may, for example, make sense to shift the tax burden away from heavy reliance on income-related taxes and instead toward a more weighted balance including more extensive wealth, land and consumption taxes.

Some 85 per cent of global GDP is derived in countries that are now home to rapidly ageing populations, including many developing countries. This is both a boon and a curse for today’s poor countries.

It may mean lower consumption and hence lower export demand, but also more tourism, more labour shortages in rich countries and even sustained lower interest rates for borrowing for developing countries. Reflecting these new global economic circumstances and adapting to them is essential.

Meanwhile, ageing rich economies confront a unique set of issues of their own. The former Governor of the Bank of Japan, Masaaki Shirakawa, recently acknowledged that failure to understand the impact of demography on the economy contributed to a downward economic and demographic spiral over recent decades. He urged other countries not to repeat Japan’s mistakes.

Japan is one of the world’s most aged societies, and its workforce has been shrinking since the mid-1990s. A country cannot start preparing early enough to accommodate the challenging, co-integrated reality of economic and demographic change.

To avoid the effects of an ageing population, developing countries will need to make difficult policy choices as early as possible in their economic demography transition, especially if poverty among the elderly is to be avoided and a process of development sustained.

Understanding China’s experience over recent decades is a useful first step in that process.

This piece is based on an article first published in The Prospector.