To what extent will an aging population negatively affect economic growth in china and what solutions can be established to negate these effects?
By 2050 the percentage of Chinese people over 60 years of age is projected to increase from 15% to 39%, this is the vast demographic shift crisis currently materializing in China. For a country which initial exponential development depended on its young workforce in the secondary sector, does an aging population spell doom on future economic growth of the country?
The aging phenomenon is occurring on a world scale, by 2050 half the world’s population will live in countries where more than 20% of people will be over 60 years old. For China though it is particularly problematic, other countries that experience an aging population are fully developed, it is through increased life expectancy due to quality healthcare and high income that their population ages. China is not yet a fully developed country, only very recently starting to build a stable middle class. It is experiencing this problem earlier and more rapidly than any other country has, it will take China 20 years for the proportion of elderly people to double from 10% to 20% compared to 61 years in Germany and 64 in Sweden. One of the reasons for the reasons for this occurrence is the implementation of the one child policy in 1979, allowing urban couples to birth only one child. It was originally introduced to curb overpopulation, said to have prevented the births of 400 million people, however it has since been relaxed in recognition of this arising problem. The one child policy is neither the singular driving force behind the decrease in fertility rates, there was also a fall before the one child policy due to social pressures on couples. Overall fertility rates in china fell staggeringly from 5.8 children per women in 1970 to a mere 1.7 in 2013. Along with a decrease in fertility rates, another reason for the demographic shift is due to an increase in life expectancy from 65 to 75 years while the one child policy was in effect. As china developed as a country, people could afford good food, water and healthcare. With people dying older and less babies being born it is clear to see why China’s population is aging. This is resulting in less of the population being able to work and contribute to the economy, negatively effecting growth.
As aging of the population continues to occur, China’s once plentiful labour pool continues to shrink, Deutche Bank forecasts the labour force to fall from 911 million in 2015 to 781.8 million in 2030. A shortage of labour causes wages to rise, production costs to increase and economic growth to stall simultaneously with output per capita, especially true in China which until recently, has thrived on a manufacturing sector requiring young, healthy and physical workers. We can already see these effects beginning to surface, just in the last year wages have increased 4.7% in real terms and economic growth has fallen from 10.6% in 2007 to 6.7% in 2016. As the demographic starts to shift even more the effects could be more catastrophic, despite this there is hope for the Chinese labour market and economy. As it has become more developed China is transitioning from the manufacturing sector to the service sector, backed by the government trying to push the initiative, from just last year the service sector in China has grown 8.2%. Transitioning to the service sector is beneficial to China in wake of an aging population, it doesn’t require a young and physical workforce, making better use of the new demographic. Perhaps this is the reason for growth increases in the last year, from 6.7% in July 2017 to 6.9% in July 2017. In the future, however, as the demographic starts to shift towards a predicted median age of 46 in 2050, China must enact more proactive solutions.
Another issue an aging population causes for China is financial strain on the government. More elderly people will be claiming pensions and less working people paying taxes gives growth to a rapidly rising pension gap. It has been tradition in china for young family members to look after their older relatives, however as old people become in abundance compared to their younger counterparts it is no longer feasible for young Chinese people to support multiple elder relatives. This burden now must be placed on the government to provide. The OECD predicts China’s percent of GDP spent on healthcare to increase from 3% to 5.2% in 2030, money for spending on vital areas for boosting growth rates such as infrastructure must take a hit, lowering potential levels of economic growth. China’s social support system is also scarcely developed, many of the facilities offered are difficult for the elderly to access, especially those living rurally.
The first and most basic solution would be to increase the retirement age, which in China is sat at 60 years old for men and 50 years old for women, high compared to the average of the OECD countries which is 65 years for men and 63.5 years for women. China wouldn’t be alone if they decided to push up the retirement age, many other countries are deciding to do so in line with increases in life expectancy. Not only would this move relieve pressure from a tightening labour market, it would also be of great relief to the pension system, something which I will explain more about further on. This initiative has already been planned to take effect, yet it will be gradual, taking up to 5 years according to the country’s minister for human resources. Another solution for many countries facing the problem of an aging population is to allow young immigrants to replenish the labour pool and raise fertility rates. In the USA, also suffering from an aging population, immigrants and their descendants from 2005 to 2015 accounted for 82% of the country’s growth and for nearly 25% of the nation births despite taking up only 13% of the population. However, China has always had low levels of immigration, low working standards and wages in conjunction with a difficult culture to integrate into don’t make it an attractive place for aspiring workers, only 0.5% of the Chinese population is composed of foreign immigrants. Even if the government were to relax laws on immigration the influx would have to be monumental to have an effect due to Chinas already huge population.
An aging population also creates a big market to be tapped into
In conclusion, China is a unique case in need of unique solutions. It is not yet a “rich” country like those that are facing or have faced the aging crisis in the past. Of course, it will have negative effects on economic growth, it’s just a matter of time for how long China takes to restructure its economy into a developed nation to deal with the demographic shift. No doubt it will take time and will be challenging, it’s such a vast populous country, but it has the resources to become a nation structured on the service sector and domestic consumption, a nation that leaves its cheap manufacturing past behind, and becomes a world pioneer in technology and innovation.