fangwang - 4 Demographic transition implications for growth...

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Unformatted text preview: 4 Demographic transition: implications for growth Cai Fang and Dewen Wang China will need to maintain an annual GDP growth rate of 7.2 per cent to meet official ambitions to raise the general prosperity of Chinese society, with GDP in 2020 predicted to be four times the level in 2000. Achievement of this goal would mean that China had sustained a high rate of annual economic growth for more than 40 years. This would not be unique. Economies in Asia, such as Korea, Malaysia, Singapore, Thailand and Hong Kong all sustained economic growth of more than 7 per cent per annum between 1960 and 2000 (Table 4.1). Growth patterns in the Japanese economy over the past 40 years, however, offer an alternative model. Between the early 1950s and mid 1970s, the Japanese economy grew quickly and overtook many industrial economies. High rates of economic growth in the 1980s were the product of an unsustainable ‘bubble economy’; growth has stagnated since the bubble burst in the 1990sThe annual growth rate in Japan was 5.3 per cent between 1960 and 1990 but only 1.5 per cent during the 1990s. What factors stimulate sustainable economic growth and what are the reasons for low growth rates? The literature is extensive. Growth economists considera range of factors to explain economic growth, such as the domestic and international economic and political environment, improving education and public health standards, the implementation of family—planning and labour market policies, and policy support for greater international trade and savings (Barro 1997; Bloom et al. 2002). Demographic factors, especiallythe population and age structures, affect economic development. The reduction of high fertility rates creates opportunities for economic growth when accompanied by education, health and labour—market policies (Bloom et al. 2002). Sustained, rapid economic growth in East Asia demonstrates that 34 Demographic transition developing economies can move swiftly to bridge the income gap with industrial economies. Recent studies indicate these successes can be attributed to a considerable extent to the demographic transition that occurred in East Asian economies (Bloom and Williamson 1997; Williamson 1997). Demographic transitions in East Asian economies began in the 19405 and 1950s. Prior to 1970, economic growth potential was limited, income per capita was low and accompanied by a high child-dependence ratio. The average per capita GDP growth rate was estimated at only two per cent. As a result of the demographic transition, the proportion of the working population to the total population increased, while the population dependence ratios declined (Table 4.1 ). These population trends favoured the labour supply and savings rate and provided an additional source of economic growth~the demographic dividend. According to Williamson (1997), between 1970 and 1995, East Asian economies grew at average annual rate of 6.1 per cent, 4.1 percentage points above the steady state growth rate. Demographic transition contributed 1.5 to 2.0 percentage points to the steady state growth rate, accounting for one-quarter to one—third of the actual growth rate and one-third to one—half of the steady state growth rate during the period. As the demographic transition progresses, the aging of the population reduces the productiveness of the population and reduces the demographic dividend. Japan completed the demographic transition first in East Asia and now has the most rapidly aging population among developed economies. Some researchers (Hewitt 2003) attribute the sustained stagnation of the Japanese economy to its rapidly Table 4.1 Growth rates and dependence ratios in East Asia China Japan Korea Hong Kong Singapore Thailand Malaysia GDP growth Rate (per cent) 1960—70 2.7 9.4 7.4 8.9 8.5 7.0 5.9 1970~80 6.3 4.5 7.5 9.4 8.9 6.9 7.9 1980—90 9.4 4.1 8.7 6.5 7.4 7.9 6.0 1990—2000 10.1 1.5 6.3 4.6 7.7 4,6 7.2 1960—2000 7.8 5.3 7.9 7.8 8.7 7.1 7.1 Average dependence ratios (per cent) 1960—70 79.2 49.1 84.7 75.3 81.8 95.1 95.4 1970—80 75.3 47.1 71.2 57.0 59.0 89.1 84.1 1980~90 56.9 46.3 52.4 44.8 41.9 66.1 72.3 1990—2000 53.3 49.0 45.5 45.1 43.6 54,9 71.7 1960—2000 65.0 46.8 62.4 54.6 55.8 74.9 79.3 Source: The World Bank, 2003. World Bank Online Database. Available online at http:// devdata.worldbank.org/dataonline/. 35 The China Boom and its Discontents aging population and inadequate pension system.The dependence ratio in Japan declined much earlier than in other East Asian economies and then rose again, suggesting that, as the population aged, Japan lost an additional source of economic growth (Table 4.1). With the implementation of family-planning programs, China has undergone demographic transition more rapidly than most industrial economies. Challenging questions currently face Chinese scholars and policymakers. First, will China become an aging society before it becomes wealthy (Jackson and Howe 2004)? Second, how can China sustain the demographic dividend through policy adjustments? Third, through what other sources can China generate a demographic dividend? This chapter attempts to answer these questions by identifying the turning point where the demographic dividend becomes the demographic debt, analysing the mechanisms by which the demographic transition affects economic growth, and estimating the contribution of the population factor to economic growth. Demographic transition, demographic dividend and sources of growth A variety of theoretical models is used to illustrate the relationship between population and economic growth. These models also indirectly influence the orientation of policymakers. Prolonged debates have not produced a consensus.Observation reveals a conflict between the facts and theoretical assertions (Hodgson 1988). Population should be acknowledged as a factor affecting the conditions of economic growth, but the nature of population‘s impact on economic growth is uncertain, although its influence is certainly not independent (Kelley 1988). One shortcoming in conventional economic theories of growth is that theories consider population change as a steady process—that is, they only focus on the magnitude and growth of population, while neglecting changes in the age structure during the demographic transition (Williamson 1997). The process of demographic transition is characterised by a time differential, as the decline ofthe birth rate and mortality moves through three phases, from a high dependence ratio of children to a high proportion ofworking population and finally a high dependence ratio of the aged. Different age groups within the population have different consumption patterns, savings behaviour and labour participation, and therefore different age groups will have specific effects on economic growth. A high proportion of aged population and/or children increases the burden on society of dependents and reduces productive, therefore negatively affecting 36 Demographic transition economic growth. Similarly, when the working population is relatively larger. the population structure is more productive because the labour supply and savings rates are larger. The demographic dividend is created in these circumstances (Bloom et al. 2002). A developing economy or region with a productive population structure can take full advantage of the potential demographic dividend. The demographic dividend provides an additional source of economic growth. Changes in the population structure during the demographic transition have both a direct and indirect impact on economic growth. The first impact is through the effects of labour supply on growth. The growth of the working population may not keep pace with the growth of the total population during the process of demographic transition. The demographic transition changes particular segments of the population as it passes through the three phases. While the working population grows more slowly relative to the total population, the population must assume a greater economic burden for dependents. In contrast, faster growth of the working population relative to the total population is accompanied by a declining economic burden on the population. Without economies of scale, the production process and factors of production could be substituted for one another and changes in the labour supply would have little effect on long-run growth. However, the division of labour creates economies of scale and a decreasing labour supply will weaken the effects of the division of labour and reduce total output and income per capita. Even assuming the unchanged productivity of labour, any reduction in the magnitude of labour supply will cause a proportional reduction in total output. The second effect is the impact of changes in the population structure on the relative shares of consumption and savings in national income (Kelly 1973). Demographic transition is a prolonged process, encompassing the full lifespan of individuals or even several generations. Over an individual‘s lifespan, savings will increase upon entering the workforce and decrease in retirement. Thus, the national savings rate and overall national capital formation will rise as the working population increases. As the population ages, public investment expenditure increases with the provision of pensions and medical care. As the proportion of non-productive expenses in total income increases, the proportion of public investment in productive investment declines. Decline in the levels of private savings and public investment reduces the growth of total output and income per capita. Peterson (1999) summarises six negative effects of an aging population for society. Feldstein (1995) finds an increase in social security expenses crowds out 60 per cent of 37 The China Boom and its Discontents private savings. Another study (Pench 2000) demonstrates that shocks from the labour supply and public finances will negatively affect economic growth rates in the European Union and Japan by 0.5 percentage points and the United States by 0.25 percentage points. In China, the demographic transition began to occur as early as the 1950s. Its first effect was a dramatic decline in the mortality rate. ln 1950, the mortality rate in China was 19 per 1,000, whereas the birth rate was 37 per 1,000.The natural rate of population growth was a high 19 perthousand. In the following two decades, with the exception of 1960, the mortality rate continued to decline and was accompanied with a more slowly declining birth rate. As a result, the natural rate of population growth increased, a trend which continued until its peak in the 1960s The introduction of family-planning programs and the effects of socioeconomic factors combined to alter population trends, and the birth rate began to decline gradually in the 1970s. Since the 19803, the birth rate and natural growth rate of population have declined significantly as a result of economic and social reforms and the adoption of strict state family-planning policies in urban and rural areas. The structure of age within the population changes as the demographic transition moves through the three consecutive phasesThe proportion of children in China’s total population has declined and the proportion of working population increased, while the proportion of the aged population has not increased significantly. ln the period between 1953, when first National Census was conducted, and 2000, when the fifth National Census was conducted, the proportion of children (0—14 years old) dropped from 36.3 per cent to 22.9 per cent, the proportion of working population (15—64 years old) increased from 59.3 per cent to 70.2 per cent, and the proportion of the aged population (65 years old and above) increased from 4.4 per cent to 7 per cent (National Bureau of Statistics 2001 ), Changes in the population structure have reduced population dependence, in terms of both child and overall dependence, and enhanced the productiveness of the population (Figure 4.1). The result has been strong labour supply and high savings rates, defined as the ratio of fixed asset value to total GDP, and potentially an additional source of economic growth— the so-called demographic dividend. Given the potential economic advantages from the age structure of a population, high labourforce participation and employment allow the productive use of human resources engendered by the population structure. in the period from 1978 to 2002, the size of the economically active population steadily increased and the labourforce participation rate reached 70~86 per cent (Figure 4.2)—higher than 38 Demographic transition Figure 4.1 Changes in the population dependence and savings rate 90 DAged—dependence ratio Youth-dependence ratio DSavings rate 60 Per cent 30 O 1949 1959 1969 1979 1989 1999 Source: National Bureau of Statistics (NBS), various issues. China Population Statistic Yearbook, China Statistics Press, Beijing. most economies around the world. Despite changes in sectors of the economy and ownership structures, economic growth has driven employment growth in urban and rural areas.With favourable labour endowments and increasing expanded opportunities for employment, economic growth in China has been supported by an ample supply of low—cost labour, enabling the transformation of an advantageous population structure into a comparative advantage in labour-intensive industries. The growth of the economically active population and employment has produced an economic surplus and helped China establish a high savings rate. The savings has remained more than 30 per cent and peaked at 44 per cent in 1993 (Figure 4.1), primarily because of the decline in the total dependence ratio under the development of markets for production factors, which has lessened the social burdens of dependents and enhanced the productiveness ofthe population. The demographic transition and savings rate Although there is little evidence of an absolute positive correlation between the savings rate and income levels, a critical minimum savings rate is an important 39 The China Boom and its Discontents Figure 4.2 Economically active population, employment, and labour force participation - economically active population , Cem loyment 800 —- labgrforce participation rate T 100 700 P 90 v 80 A600 — c .5 ’ 70 S = ‘ U V o. g 400 ' ‘ 50 g L; 300 4° 5 g » 30 IL 200 « 20 100 , ,0 0 t r O 1978 1982 1986 1990 1994 1998 2002 Note: Labour force participation rate is the ratio of economically active population to working population; working population is calculated based on China Population Statistic Yearbook. Source: National Bureau of Statistics (NBS), various issues. China Population Statistic Yearbook, China Statistics Press, Beijing. factor for developing economies to take off and a sustained high level of savings is necessary for long-term growth. The general level of income per capita and growth rate are preconditions to obtain the minimum savings rate. Savings rates in high and middle-income countries are generally greater than those in low—income countries (Table 4.2) because households at subsistence level have little surplus income for savings. Savings rates tend to be higher when incomes are rising. During their economic take-off, East Asian economies such as Japan, South Korea, Thailand, Malaysia, Singapore and Hong Kong had high savings rates, which offer a good explanation for their economic performance. Savings rates in East Asian economies were significantly higher than both the world and developed economy averages (Table 4.2). For example, the savings rate in Japan was more than 35 per cent in the 19605, while savings rates in Hong Kong, Korea, Thailand and Malaysia were 20 to 30 per cent in the 1970s and continued to increase during the subsequent two decades. As the Japanese economy and population matured, the savings rate dropped gradually during the 1980s and economic growth slowed in the 19903. 40 Demographic transition Table 4.2 Comparison of international savings rate (per cent) 1960—69 1970—79 1980—89 1990—99 2000~02 World average 24.5 25.3 23.4 23.1 21.6 High-income countries 25.6 25.5 23.1 22.8 20.6 Middle-income ocuntries - 25.3 25.7 25.3 26.1 Low-income countries 11.3 17.3 19.6 20.7 20.0 OECD countries 12.9 25.4 22.9 22.6 20.4 United States 19.9 19.6 17.8 17.0 154 Japan 353 35.6 31.8 30.7 26.9 European Union - 24.8 21.4 22.6 22.4 East Asia region - 27.8 31.6 36.4 35.8 China - 30.5 34.7 40.9 41.1 Hong Kong 22.5 30.8 33.5 32.4 31.0 Korea 8.7 22.3 31.0 35.1 293 Thailand 18.7 22.3 26.5 35.3 31.1 Malaysia 21.9 27.1 30.2 40.7 43.8 Singapore -4.0 28.6 41.7 48.2 45.6 Sources: World Bank, 2003. World Bank Online Database. Available online at http:// devdata.worldbank.org/dataonline/. The savings rate in China has continued to rise since the 1950s, with the largest fluctuation in the period between the Great Leap Forward and the Cultural Revolution. With the initiation of economic reforms in the late 1970s, income per capita has substantially increased and the savings rate has also steadily risen (Figure 4.3). The high savings rate has been viewed as a key factor contributing to rapid economic growth since the reforms. While most debates about the savings rate focus on government efforts to mobilise savings and capital market development, whether household savings and consumption behaviour has an impact on national savings and the extent of the impact has not been extensively discussed in the existing literature. As the Chinese economy continues to undertake market liberalisation and the structure of the population changes, the effects of the demographic transition on individual saving behaviour will have important implications for policymakers. In addition to factors such as income level, the real interest rate, resident location in rural or urban areas, the mobility and maturity of the capital market and macroeconomic policies, demographic characteristics such as household size, household savings, consumption behaviour and population dependence have recently been included in models to explain the savings rate in the Chinese economy. Shi et al. (2002) constructed a model that explains the impact ofthe demographic 41 The China Boom and its Discontents Figure 4.3 Trends of savings rate and per capita GDP Savings rate —- Trend of SR ---‘- per capita GDP index 50 W T 2000 45 e f" 1800 a C 40 r + 1600 2 C <94 8 ~ 1400 8 g; 1200 f: g r 1000 ‘5 E . o g 20 a / ~ 800 g E 15 + ,f’ w 600 5% m i 0 ‘0 10 w/ ~ 400 :3 5 " W.M»\..,.,,,.mw/-“'*""‘““""’ ~ 200 E O~)r//ll)’l)r»l’ s) arm/1‘. 1‘ r l 1 ~17 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Source: National Bureau of Statistics (NBS), various issues. China Population Statistic Yearbook, China Statistics Press, Beijing. transition on China’s savings rate by employing variables such as the real interest rate, child-dependence ratio, aged-dependence ratio, and economic growth rate and time trends. Using a time—series dataset from 1958 to 1998, a cointegration regression was run, which showed that both the child and aged-dependence ratios were negatively correlated with the savings rate. However, the results are sensitive to the dataset. Left (1969, 1971 ) ran a cross-section regression using data from 74 countries in 1964 and found variables such as per capita income, economic growth rate, child-dependence ratio, aged—dependence ratio and total dependence ratio have a significant effect on the national savings rate. Ram’s (1982) further study used cross-section data of 128 countries in 1977 with similar findings. Following Leff’s (1969, 1971 ) model, this paper examines the impact of the Chinese demographic transition on the savings rate using a provincial panel data set. The data was collected in China's population censuses in 1982, 1990 and 2000, population sampling over 13 years (1987, 1989, 1991—99, 2001 and 2002), comprehensive statistical data an...
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