When less means more

Concerns that China's demographic pat-tern will endanger growth and prosperity are misplaced. Adjusting the retirement age will instead ensure progress, prosperity and environmental preservation.

The dramatic decline in fertility rates in the Chinese society in the past six decades ultimately reduced China's population in 2022, sparking concerns about the country's future labor productivity and economic growth. The anticipated population aging as well as the projected reduction in size of the workforce have led some to argue that this demographic pattern will drastically hinder China's economic prosperity. Nevertheless, it appears that these concerns are largely misplaced.

China's sharp decline in fertility rates, from 7.5 children per woman in 1963 to 1.3 children in 2020, has been associated with the country's phenomenal growth in per capita income over the past six decades.

More generally, the sharp decline in fertility rates that has emerged in the world over the past 150 years has been widely viewed as a central driver of the unprecedented improvement in living standards that has been experienced globally during this period. As is highlighted in The Journey of Humanity (published in China by CITIC), this dramatic decrease in fertility rates has allowed the growth process to be freed from the counterbalancing effects of population growth, stimulating massive investment in education, and fostering technological progress and sustained growth in per capita income. The decline in fertility has shattered one of the cornerstones of the epoch of stagnation that had lasted over 99.9 percent of human existence. Higher incomes were no longer channeled toward sustaining an expanded population and for the first time in human history, technological progress led to a long-lasting elevation in living standards.

Undeniably, the decline in fertility rates below the replacement level of 2.1 births per woman will inevitably lead to a decrease in the fraction of the population of working age. Additionally, with rising life expectancy, this trend will increase the dependency ratio, which is the ratio of dependents to the working-age population. Yet, these changes are not indicative of a decline in labor productivity and the growth of income per capita.

The decline in fertility rates has generated several major benefits for the growth process. First, a reduction in population growth diminishes the dilution of resources over a larger population, increasing resources per worker and thus labor productivity. Second, the reduction in the number of children allows for greater investment in each child's education, contributing ultimately to the productivity of the working-age population. Third, fertility decline fosters female labor force participation as women have fewer children to care for, further contributing to productivity per capita.

In the aftermath of a fertility decline, the working-age population will be more educated and productive than older generations, leading to an increase in the earning capacity of members of the labor force. While the dependency ratio is likely to increase due to the decline in fertility rates and the rise in life expectancy, the productivity-adjusted dependency ratio may decline, and the productivity growth could be sustained. Moreover, since the improvement in life expectancy is associated with a significant increase in the productivity of people even beyond their current retirement age, a policy that will properly increase the retirement age will further foster labor productivity and assure sustained growth in labor productivity and per capita income.

Importantly, declining population growth will lead to a reduction in costly environmental degradation, thus promoting sustainable economic growth and saving resources that would otherwise have been directed toward the mitigation of climate change and environmental destruction.

Thus, concerns that the current demographic pattern in China will drastically hinder China's economic prosperity are largely misplaced and with proper adjustment in China's retirement age, the decline in the Chinese population could be beneficial for the country's economic prosperity and environmental preservation.

Oded Galor is the author of the international bestseller The Journey of Humanity (CITIC, 2022), the founder of Unified Growth Theory and professor of Economics at Brown University in the United States. The author contributed this article to China Watch, a think tank powered by China Daily. The views don't necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn