Tuesday, July 17, 2007

Getting old before getting rich?

I apologize for pushing my promised C4ISR article off, but I received some questions from Chris M. about demographics, development and China:

I have a question that I would like to run by an actual East Asian specialist. Much is made about how China will be the new world power- the one to replace the US. I just don't see how it is possible. China is in a demographic coffin corner and in 50 years they are going to be totally screwed. Look at the age/sex curve projected by the Census bureau for 2050. Sure, in 2050 they will have 70+ million young males of military age, but they are going to have 450 million people 60+ (they are going to have a population 60+ larger than the entire US!). How can an economy grow, a country afford a military (especially the opportunity cost of those productive young males), and the country be expected to do anything with that much population that old? Short of inventing robots to take care of all those old folks, who will? Indonesians? Who will pay for all of this? Their ratio of workers to 60+ people will be less than 2:1. That will be a severe problem, right?

What happens when a country that is somewhat poor per capita, but has a pretty industrialized economy, goes gray really rapidly? The closest I can think of is Russia and some of the old Communist countries, who have aged tremendously in the past 15 years, but isn't a lot of that due to immigration and economic distress, not totally broken birth rates (leaving the huge sex-ratio disparity in the PRC completely out of the picture)? We also can see what happens when a rich country (per capita) grays- we have Japan and Western Europe to show us the way, but I can't think of a good model for this sort of thing. They would have to fix a lot of problems in their universal education system to be able to follow the path that Japan and Western Europe are blazing.

No one who predicts that China is the coming threat to the US, or that China will soon be the world's economic engine seems to ever mention this problem. Why is that? Am I missing something that people who have actually studied the issue understand? I'm somewhat afraid that this is a kooky position, as I haven't seen it discussed in the popular press.

In answer to your first question - yes, the Census Bureau's figures on Chinese population growth should be considered a fairly accurate prediction of the future. Their country summary shows that Chinese fertility rates are well under the replacement rate. The projections show that China's population growth rate will go negative around 2035, which means their total population will peak at about 1.46 billion. By all accounts, Russia's total population peaked around 1995, Italy and Japan's peaked around 2005. In fact, if you look at the Global Population at a Glance report the Census Bureau issued in 2002, the human population growth rate peaked somewhere around 2000 and the mean global fertility rate is expected to drop below the replacement rate around 2050.

Now we get to the question, "So what does this mean for China?" Before I answer that, I want to dispel the myth that population aging is always a bad thing. Declines in population growth over time will push a country's demographic composition away from a traditional pyramid shape to something more akin to a paper lantern.

Chris is right to point out that this means this will tip the population balance away from the young toward the old, but it doesn't say much about who will work. Japan and Europe have been pretty lucky because they were able to transition their economies from manufacturing towards services, which is far more friendly to older workers. Older workers are generally better at service jobs because their experience and knowledge generally adds the most value. Service jobs are also less physically intense, which allows older workers to stay on the job longer.

This does not come without cost though. Older workers require a higher degree of medical attention and at some point that cost will outweigh their contribution to the economy. This will be particularly problematic if the inflationary trend in the price of medical care in the United States -- 7.9% in 2004 according to the Economist (sorry, subscription only) -- spreads to other countries. All is not lost though because there are two effects that may mitigate the medical care crunch Chris sees over the horizon. First, older workers save more because they don't have to care children. Second, spending on health care generates fairly high margin service jobs.

The key question is, can China fill those jobs? Maybe. The Chinese economic miracle is largely predicated on a delicate balance of fertility, development and migration. The reasonably well-educated middle class that has grown in coastal provinces would not be able to meet demand without the constant flow of unskilled workers from China's interior.

If migration slows down before the Chinese economy moves further up the product life cycle, growth may come to a screeching halt. China could mitigate this by accepting greater flows of immigrants from the poorer states of Southeast Asia (Laos, Cambodia, Vietnam, Burma, etc.), but it is not clear whether they would make such a dramatic policy shift before the foreign direct investment starts flowing somewhere else.

This structural movement is certainly possible. The Japanese and Europeans pulled it off in the 1950s-1960s and the Asian tigers did the same in the 1970s-1980s. So the take-home message on this subject is that population decline could seriously derail its economy, but shouldn't if the Chinese manage it correctly.

As for what things will look like after 2050, I don't know. At that point, the predictions of statisticians and economists are about as certain as fiction novels on the subject. One thing is for sure, China will probably have to get a lot more comfortable with accepting immigrants from the last few high fertility spots in the world (Africa, South Asia and the Near East).

The real question is what will happen to Russia. It looks like the boom in commodity prices and Russia's shrinking population are turning it into a full-blown rentier state. There are definitely indications that the Dutch disease's 'spending effect' is hollowing out parts of the Russian economy.


Christopher said...

Thanks for this. I learned things I didn't know before (Rentier state and Dutch Disease, for example). You also convinced me that I'm not a kook for worrying about this, which is good.

Have a good day.

Robot Economist said...

Chris - You're not a kook for thinking about this kind of stuff. Population aging is going to be an enormous issue for some states in the future, particularly those based on nationality.

The most interesting question out there is what does this issue mean for countries whose populations will continue to grow (the U.S. and Africa) versus those who will shrink (everyone else). Does it mean that even if China surpasses the U.S. in GDP in 2030, the U.S. is destined to take back its lead a decade later?

The issue you've pointed out is also incredibly important to the immigration debates going on in the U.S., Europe, Japan and Russia.

dylan said...

How much of China's projected demographic decline is due to the One Child Policy? If the government of China decided to remove this policy, allowing people to have as many children as they like, would that have any impact on the projections?

Robot Economist said...

Dylan - No one knows for sure. According to the Economist (sorry, subscription again) Chinese demographers say the fertility rates in urban areas, where the one-child policy is strictly enforced, would only be about 1.5 if it wasn't.

I think there is plenty of evidence to support a two-child policy in China, but it isn't politically feasible. First, it would probably allow total fertility rate in China to go (a little) above the replacement rate. Second, rural Chinese frequently see their allowance for larger families as a privilege given in exchange for minimal government support.

Both of these issues are incredibly sensitive and I doubt the CCP leadership would dig them up without provocation.