China's Ageing Population could Hinder Per Capita Income Growth

July 19, 2016Chinaby East Asia Forum

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China's demographics could conspire against its growth potential.

In East Asia, rapid income growth in the second half of last century has produced unprecedented and rapid population ageing. Rising living standards and incomes tend to induce longer lifespans and fewer births per woman, leading to dramatic increases in the proportion of old people within the total population. Where it took France 115 years to double the share of its population that is 65 years and over from 7 to 14 percent, the same shift in China will take just 25 years.

In East Asia, Japan and South Korea entered the group of nations with ageing populations — that is, 7 percent or more of the population aged over 65 years — when per capita incomes were in the high-income bracket. For other countries, including China and Thailand, population ageing has begun at lower income levels.

In China’s case, this was identified three decades ago, in 1986, by demographer Wu Cangping. He projected that China would ‘get old before it gets rich’. This led economists to fear that China’s aged demographic structure could dampen economic growth and prevent China from reaching the living standards enjoyed by developed countries.

Joint research between the University of Melbourne and Peking University published in the 2016 China Update has extrapolated Wu’s model across countries to better assess China’s population ageing and economic development nexus in the dynamic global context. Our research shows that China has many peers that are getting old before getting rich. Importantly, the research also identified a handful of countries with an ageing population that in recent years have successfully entered the high-income group.

This global panel approach to understanding population ageing and economic links over time draws greater attention to Wu’s important inference that the effects of population ageing may be context contingent, instead of a simple linear function of the share of elderly people to the total population. Our study also suggests that in recent years, entering the high-income country grouping has been more probable from an ageing population base than from countries that are home to younger populations, as in the case of Japan and South Korea’s transitions. This implies that ageing China may have a better chance of reaching high-income status than is feared.

Comparisons of China with countries that have recently ascended to the high-income bracket in the presence of an ageing population — such as the Czech Republic, Russia, Slovakia and Uruguay — also point toward optimism in China’s broader chance of reaching its high-income grouping aspirations. For example, China’s research and development investment level as a share of GDP is now above the level of countries having recently entered the high-income group, and the country’s technology exports are above even the OECD average.

Further study of countries that have successfully transitioned from middle-income to high-income groupings in the presence of an ageing population might provide useful policy insights for Chinese policymakers. Learning from the challenges faced by other countries in the poor and ageing category could also be of great use for China.

In 2014, some 600 million people worldwide were aged over 65, roughly 8 percent of humanity. More than one-third of countries are now home to ageing populations. These countries are very diverse, and so are their residents old. For example, the old in most OECD countries have spent most of their lives relatively well off — particularly compared with the old in China, who have spent their entire lives as citizens of a developing country.

Presently there is a lack of research into how these very different ageing populations interact with their economies, to dampen growth or otherwise. For example, do the old in the OECD own a greater share of wealth relative to their population share than the old in developing countries? In addition, what does this mean for growth and policymaking as population ageing deepens over coming decades?

Better knowledge of the effects of population ageing across countries and time could, importantly, serve to enhance growth in both poor and rich ageing countries alike. This would not only help to produce the resources to support these ageing populations, but also better directly and indirectly support China to reach its goal of getting rich, even though it now has a rapidly ageing population.

Can China get rich after getting old? is republished with permission from East Asia Forum