How China has been working through its population problems

In a time when ageing populations have become the new norm, countries should refer to China’s economic demography strategy, Lauren Johnston writes.

Some 85 per cent of world GDP is now derived from countries facing an unprecedented reversal of their population pyramids. Failure to comprehend the consequences of this newly rapid process of population ageing has influenced our perspectives on sluggish growth since the Financial Crisis of 2008.

Ageing-related fears for China’s long-run development in the 1980s may, however, help us better understand the relationship between economic demography and the economy.

In 1978, leaders of poor and demographically youthful China embarked on an experimental economic modernisation agenda commonly known as ‘reform and opening’. The approach aimed to modernise the country’s industrial structure by 2049 – one hundred years from the revolutionary founding of the People’s Republic of China.

Together with a fairly recent famine, this led to a complementary population policy: the one-child policy. By fixing its already falling fertility rate, China would also fix its demographic dividend window – a transitory window in which falling fertility and mortality rates combine to produce a period of high working-age population-share.

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That window of high productivity growth, in turn, would be tightly grasped with both hands, through incentives for labour-intensive employment to help realise the national modernisation agenda.

Falling fertility and mortality rates, as well as rising life expectancy, would, on the other hand, mean that China’s population would age rapidly. China’s median age in 1980 was 21.9 years and had risen to 37.0 years by 2015.

China’s policy-making and research community, meantime, set about exploring the range of possible consequences of restrictive family planning. They soon realised that, from the impoverished baseline of 1980, there was no feasible growth rate that would bring about high per-capita income levels ahead of the predicted ageing of their population.

In general, the ageing of a population poses various economic challenges.

Rising labour scarcity and the redirection of public and corporate resources to the retired segment of the population, away from prime productivity generating activities and population cohorts, are among them. Caring obligations are placed on working-age persons, which redistributes resources in a similar way – away from investments in future generations.

Since the 1980s, policymakers in China have worried that facing such challenges as a ‘poor’ country would hinder China’s prospects of becoming ‘rich’. Advanced literature around the idea of wei fu xian lao (未富先老), commonly known in English as ‘getting old before getting rich’, has emerged since.

The underpinning logic of continuous study of the interaction of demographic and economic change over time may also be contextually applied in both current rapid population ageing and for future demographic dividend-based growth countries.

Implicit in China being ‘poor-old’ are three parallel economic demography categories: ‘poor- young’, ‘rich-old’, and ‘rich-young’. Together these form the economic demography matrix (EDM), a framework for studying the interaction between demographic and economic transition within and across countries over time.

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The timing of onset population ageing in the economic development cycle determines a country’s EDM category at any point in time.

Countries with low-to-middle per capita income and in an advanced phase of demographic transition are classified ‘poor-old’; countries that are in late-stage demographic transition and have a high income are ‘rich-old’.  ‘Young’ populations are similarly classified as ‘poor-young’ or ‘rich-young’.

The sequence of movement of countries between EDM categories may offer vital clues into how its economy and demography are interacting. For example, whether a country ‘got old’ before or after it ‘got rich’. This may be important to understanding how demographic transition stages, economic timing, and speed itself are affecting the dynamics of the economy.

The experiences of non-immigration countries like China, Japan, and South Korea whose populations have aged rapidly may be especially informative with respect to population ageing.

China is old and not, yet, rich; Japan is ‘old-after-rich’, having become rich while being demographically youthful. South Korea became ‘old-as-rich’ meaning it transited to the high per-capita-income group around the same time it became demographically old.

In rich-old countries, like Japan, for example, and as compared to poor-old countries, like China, a relatively high share of human capital is embodied in the older generation.

Whether or not this serves to advantage or disadvantage the productivity of the smaller working-age cohort will form part of what determines the effects of intensified population ageing on Japan’s economy.

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The world’s largest economies are moving rapidly out of their demographic dividend windows. This means understanding national economic demography dynamics is increasingly essential to shaping growth- and productivity-enhancing taxation, the provision and subsidy levels of social services, labour-market policies, and even monetary policy.

At the other extreme, today’s young and poor countries, mostly concentrated in South Asia and sub-Saharan Africa, can – even should – learn from China’s economic demography transition strategy to maximise their own chance of ‘getting rich after getting old’.

Based on current income per capita growth and demographic trends, many are on-trend to age before getting rich. Such countries are also well-positioned to take advantage of China’s own ageing population process.

Rapid population ageing across most of the world’s major economies is the new normal.

Whether this stagnates global growth – that is, whether it effectively also ‘ages’ economies – or whether economic and social structures can sustainably and continuously adjust will determine how late-stage demographic transition affects the global economy.

How today’s youth-filled countries make the most of this new normal will similarly shape the century to come.

All countries, regardless of their demographics, should consider how to adjust fiscal and monetary policies over time accordingly before time and opportunity are lost and change becomes even harder.

Countries and their policymakers – regardless of if they’re old-before-rich, old-after-rich, or poor-young – should learn from China by advancing their own national, and ideally collective, economic demography strategies. Understanding the absolute and relative dynamics of their own economic demography transition is the first step in that process.

This article is based on the author’s paper ‘The Economic Demography Transition: Is China’s ‘Not Rich, First Old’ Circumstance a Barrier to Growth?‘ published in The Australian Economic Review.