How to meet population challenges
China’s population is aging as rapidly as anywhere in the world and its low birth rate means it faces a significant population decline in the not too distant future. In part, China’s population will age because people are living longer, an important dimension of China’s great progress. But the country’s low birth rate is the most important reason for population aging, leading to a very top-heavy age structure with many elderly, fewer workers, and even fewer children.
The low birth rate and population aging mean China faces two important economic challenges. The first is maintaining economic growth and poverty reduction, while the second is ensuring economic security for hundreds of millions of elderly.
Since the beginning of economic reform in 1978, changes in age structure have been very favorable in China. Because of the decline in the birth rate, only partly a consequence of the family planning policy, the number of children in China has decreased and the proportion of the population that is of working age increased. This led to a demographic dividend in China that provided an important boost to efforts to increase economic growth. Experts disagree about the size of the demographic dividend, but scholar Wang Feng and I believe that it added about 1.3 percentage points to economic growth between 1978 and 2000, smaller than some have argued, but still an enormous effect.
China’s first demographic dividend is coming to an end as the size of working age population is peaking and will soon begin a rapid decline. Over the next 40 years, China’s support ratio, the effective number of producers per effective consumer, will decline by about 0.4 per cent per year. As compared with the dividend phase, this changing age structure of the population could lead to a downward swing in economic growth of 1.7 percentage points per year. That would be a very serious development and a great setback to China’s efforts to join the ranks of high-income countries.
A second demographic dividend could be the answer to China’s economic growth challenge, but it is far from automatic. First, as countries’ birth rates decline they substitute child quality for child quantity. People around the world are having fewer children but they are spending more on each child. In particular, they are spending more on health and education for children. Countries end up with fewer workers, but workers who are healthier, more educated, and more productive. China’s recent emphasis on improved human capital investment is an important step toward realising this second demographic dividend.
Realising the second dividend also requires an increase in wealth and investment. If the elderly are to be self-sufficient in old age, they will need to save more while they are working. By ensuring that China is well-endowed with both human capital and physical capital, a strong second demographic dividend is well within reach. But three additional steps are necessary if China is to meet its population challenges.
First, China needs to retool its approach to capital accumulation. High rates of saving and investment have been critical to fuelling economic development, but wealth accumulated by State-owned enterprises and in sovereign wealth funds is not creating economic security for China’s elderly.
—Courtesy - China Daily.