China is ageing rapidly, sparking widespread concerns that the country may grow old before it becomes rich (fig. 1). Population ageing has often been put forth as the single biggest economic challenge facing China in the 21st century. In the past, a relatively young population was a big boon to China’s remarkably sustained rapid growth. More specifically, China’s large and growing labour force delivered an ample supply of workers to the factories that transformed the country into the ‘workshop of the world’.
Looking to the future, however, the demographic dividend that has contributed to China’s growth over the past 40 years is turning into a demographic tax that is restricting China’s growth. Simply put, the share of workers in the population is falling and the share of economically inactive individuals is rising. According to Asian Development Bank (ADB) research, favourable demographics added 1.2 percentage points to China’s average annual GDP growth from 1981 to 2010, but they are projected to subtract 0.3 percentage points from 2011 to 2030 (fig. 2).
Figure 1: Share of the population over 65 years of age in China, 1950-2050
Note: Population projections start from 2016 and onwards. Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, custom data acquired via website.
Economists who worry about the economic impact of China’s demographic transition look nervously at the Japanese experience. In the immediate post-war period, Japan grew rapidly on the back of export-oriented industrialisation, much as China did later after the market reforms of 1978. However, since an asset price bubble burst in late 1991, the Japanese economy has been mired in extended stagnation, popularly known as the ‘lost decade’. Japan’s post-1991 stagnation has been characterised by slow growth, weak consumption and investment, deflation, and falling equity and property prices.
Favourable demographics added 1.2 percentage points to China’s average annual GDP growth from 1981 to 2010, but they are projected to subtract 0.3 percentage points from 2011 to 2030.
Japan’s slump coincided with exceptionally rapid population ageing. Not surprisingly, ageing has been widely blamed for the Japanese economy’s lack of dynamism during the last quarter-century. More recently, South Korea too has simultaneously experienced rapid population ageing and declining growth, and many now view ageing as the country’s top economic challenge. The South Korean experience provides further grounds for demographic pessimism.
Figure 2: Projected contributions to annual growth rate per capita GDP, 2011-2030
Note: GDP = gross domestic product. Source: ADB. 2011. Asian Development Outlook 2011 Update: Preparing for Demographic Transition. Asian Development Bank.
The popular phrase ‘demographics are destiny’ sums up the sense of inevitability and powerlessness presented by population ageing. More precisely, the phrase captures the notion that population ageing is necessarily harmful for the economy and the magnitude of the harmful effects is necessarily large. Japan is a poster child for those who subscribe to this view.
In France and the United States, it took 114 years and 65 years respectively for the population share of the elderly – i.e., individuals aged 65 and older – to rise from 7% to 14%. The projected corresponding figure for China is 25 years, a similar trajectory to Japan, where the share of the elderly shot up from 7% to 14% between 1990 and 2015.
However, there were other factors besides ageing, most notably inappropriate monetary policy, that contributed to Japan’s slump. More fundamentally, there are plenty of ways to mitigate the negative economic effects of ageing. Above all, to compensate for the slower expansion or reduction of the workforce, each worker must become more productive. In the simplest terms, more productive workers can partly offset the adverse impact of fewer workers. Structural reforms such as slashing business regulations, liberalising the labour market and the agricultural sector, and cutting corporate taxes can boost productivity but Japan has made very little progress on these fronts.
Another strategy to offset the decline in working-age population is to tap new sources of labour, such as women, older workers, and foreign workers. Here too, Japan has signally failed to make any significant progress. In sharp contrast, Singapore, another rich Asian country experiencing a sharp decline in fertility, continues to enjoy solid population growth due to a liberal immigration regime.
Under the aegis of Abenomics, Japan has belatedly tried to pump up aggregate demand through expansionary monetary and fiscal policies. Such policies can give a fillip to short-term growth but they do nothing to mitigate the threat posed to long-term growth by population ageing. Therefore, a more accurate reading of the Japanese experience suggests that Japan’s post-bubble stagnation is due as much to a glaring failure to embark on structural reform in the face of rapid demographic change as to demographic change itself. Therefore, the key takeaway for China is that structural reform is indispensable for tackling the demographic challenge.
One common denominator in the demographic experience of the two Asian giants is the sheer speed of population ageing. In France and the United States, it took 114 years and 65 years respectively for the population share of the elderly – i.e., individuals aged 65 and older – to rise from 7% to 14%. The projected corresponding figure for China is 25 years, a similar trajectory to Japan, where the share of the elderly shot up from 7% to 14% between 1990 and 2015.
Such exceptionally rapid population ageing strengthens the case for structural reforms to mitigate the negative economic effect of population ageing and, equivalently, the high cost of failure to reform. This helps to explain why Japan has been stuck in the economic doldrums for so long. The fact that China is rapidly ageing at a lower income level than Japan in the past, and thus has fewer resources, further strengthens the case for reform. In the Chinese context, structural reforms would include financial sector reform, which would improve the efficiency of resource allocation, and the reform of state-owned enterprises.
On the positive side, the Japanese experience highlights the need for innovative thinking on long-term elderly care. While China has made big strides in building up a viable two-tier national pension system in a short period, it has long way to go in the area of long-term elderly care. Yet as China becomes home to not only a growing number of old people, but also to a growing number of very old people, the issue of providing adequate care for them will come to the fore.
In this regard, Japan introduced a mandatory public programme of long-term care insurance in 2001. The programme provides social care for the frail elderly, covers both home-based and institutional care, and is financed partly out of general tax revenues and partly out of premiums paid by the insured. In addition, the programme differentiates between individuals who are above 65 and those who are between 40 and 65. Japan is also a pioneer in the use of advanced technology such as robotics and sensors in elderly care. In short, China has much to learn from Japan in long-term elderly care.
China is ageing rapidly and ageing will pose two key strategic challenges: sustaining economic growth and providing old-age security for the fast-growing elderly population. It is helpful to look at the Japanese experience since China is closely following in Japan’s demographic footsteps. At first sight, Japan’s economic stagnation since the onset of rapid ageing provides grounds for pessimism about China’s own economic future. However, a closer examination of the Japanese experience suggests that China can achieve a more dynamic economic future by embarking on structural reforms to improve productivity. On the other hand, Japan’s relative success in delivering old-age security also holds valuable lessons for China, especially regarding elderly care.
At the same time, China can offer Japan some lessons as well. For example, the labour-force participation rate of women has always been noticeably higher in China than in Japan or South Korea.
While there is an element of truth to the oft-cited dictum ‘demographics are destiny’, since population ageing can indeed have adverse economic effects, China is hardly powerless to mitigate those effects and to alter the course of its demographic destiny. Above all, it must be bold enough to undertake painful but necessary productivity-enhancing structural reforms.