Demography still shaping China

Chinese society needs to be better prepared to face a falling working age population and look after the coming millions of elderly

The transformation of China from a poor farming economy to an economic superpower and the manufacturing hub for the world has been the most important world event of the last three decades. One key factor behind China's rise has been its massive demographic dividend thanks to the high birth rate, around four children per woman, in the decades up to the 1970s. This has been followed by a precipitous fall in the birth rate, as the family planning policy took hold, leading to a sharp rise in the working-age population and to a fall in the dependency ratio, as the proportion of children in the population shrunk rapidly.

This, and internal migration, meant readily available labor allowing an efficient government to massively scale up the growth of manufacturing capacity without running into human resources constraints. The rise in wages and living standards was much higher in China than in the West, so was productivity. The overall costs of production thus generally remained much lower than in the West.

That demographic dividend peaked around 2010 and is now reversing sharply. The birth rate is now well below the sustainable rate of 2.1 children per woman, while aging and rising life expectancy are increasing the proportion of retired and dependent old. The working-age population is now falling quite markedly. That is the case not just in China but also in much of Europe. It would also be falling in the United States and the United Kingdom, were it not for inward migration. The combination of more retirees and a smaller working-age population means that the ratio of dependents to workers is now rising sharply.

However, the major problem is not so much the aging of the population, but rather the increased incapacity of the old to look after themselves. Those who are medically dependent on others for help rises in the UK from 30 percent of those aged between 65 and 75, to 49 percent of those between 75 and 85, and to 78 percent of those over 85.Much of such dependency is due to neurodegenerative diseases, such as dementia, against which medical science has made scant progress. The growth rates of such older generations in China are now the highest. Although lifestyles in China are healthier than in the West, Chinese society is far from being well prepared to look after the coming millions of incapacitated old folk who cannot look after themselves.

As the working-age population falls, so will aggregate growth, since the latter is a function of a combination of the growth in the number of workers together with their rising productivity, as workers become scarcer, and so more costly. We do expect productivity per worker to rise, but it would be overly optimistic to expect that to be fast enough to offset the sharp decline in the working-age population. Moreover, each worker will have more elderly dependents to support, via taxation or saving, which will reduce the benefits of improving productivity on their living standards.

If growth starts to fall, and debt is already high, how will China pay for its elderly dependents? Borrowing more seems inevitable, but financial markets will need to deem the ageing-related government spending as "sustainable". For that, a sustainable model of economic growth that generates persistent productivity growth is necessary.

Given this worrying outlook, what should policymakers focus on?

First, the process of preparing the medical and social infrastructure for the rapid increase in the cohorts of the elderly must start today. Adequate supervision and staff training are required to avoid the issues seen in old people's homes in the advanced economies.

Second, China needs innovative incentives to increase the birth rate, and maintain its economic growth. Working-age population projections show an extreme decline while policies to encourage a rise in the birth rate have not (yet) been very successful elsewhere. Two possible changes might help.

For one, modern studies of birth rates suggest that women are now more prepared to have babies if their partners bear a sizeable share of looking after the young children. So why not offer a mother's partner, as well as the mother, fully paid, partial (perhaps 10 hours per week) time off work to help with childcare (up to, say, 8 years old), with the employer's cost (partially, say 75 percent) reimbursed by the State.

For another, in many Asian countries, parents spend a large amount of time and money trying to coach their children in order to get their offspring into the best universities. How about offering any mother with three children the unconditional right to have the brightest (e.g., as measured by exams?) of these three children entered into the university of their choice?

Finally, policymakers could adapt the model of growth. Reducing the role of housing is a welcome strategy, but a new driver of growth needs to take its place. There needs to be greater guidance on credit allocation within the technology sector, and activities most compatible with the broader social goals. Despite the dramatic rise of the private sector, State-owned enterprises continue to gain the lion's share of bank credit－that needs to change, though this is easier said than done. Getting the growth model "right "for the changing future is a critical step in financing a graying society.

There is time to address aging in China, but the process needs to start now.

Charles Goodhart is emeritus professor of Banking and Finance at the London School of Economics. Manoj Pradhan is the founder of Talking Heads Macro, an independent macroeconomic research firm. They, the authors of the book The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival, contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn