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The Socioeconomic Implications of Population Aging in the People's Republic of China

The Socioeconomic Implications of Population Aging in the People's Republic of China

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This brief discusses the socioeconomic implications of population aging in the People's Republic of China.
This brief discusses the socioeconomic implications of population aging in the People's Republic of China.

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Published by: Asian Development Bank on Jul 10, 2013
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The Socioeconomic Implicationsof Population Aging in thePeople’s Republic of China
Yolanda Fernandez Lommen
Head, Economics Unit, PRC Resident Mission, Asian Development Bank 
The Hazards of Population Aging
 A 
population is said to be aging when the elderly segment grows faster thanthe total population, resulting from falling fertility rates and rising longevity. Aging can have adverse effects on economic performance that demandchanges in social and economic policies to address the challenge. While the best-known dimension of aging relates to fiscal sustainability due to spiralinghealth care and pension costs, the repercussions of aging are wider. The structure of the labor market, the pattern of savings, and migration flows will change in an agingsociety. More worryingly, aging will ultimately constrain economic growth. This isbecause in the absence of increases in total factor productivity and/or in the capitalstock, labor supply shortages result in lower gross domestic product (GDP) growth. Aging in developing economies is particularly complex because their populations agefast but at low levels of income. In addition, their labor markets tend to be largely imperfect with a significant share of the labor force in informal jobs under poor workingconditions. At the same time, shortages of qualified workers hinder developmentbecause the new skills demanded to meet the needs of economic modernization arescarce. Structural constraints—including limited access to financial products andservices, a restrictive business environment, and weak safety nets—compound thedifficulties of aging at an earlier stage of development. Culture can also influence theimpact of aging. While in most developed economies the state plays a pivotal role incaring for the needs of old age, the elderly in Asia have traditionally relied on filialresources and family support. However, extended family networks are weakening, astraditional values change alongside economic reform and modernization, threateningthe sustainability and effectiveness of the mechanism. According to the United Nations definition,
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the population of the People’s Republicof China (PRC) has been aging since 2000. However, the fact that the country is aging
Key Points
•Whilethebest-knowndimensionofagingrelatestofiscalsustainabilityduetospiralingpensionandhealthcarecosts,therepercussionsofagingarewider.Agingwillultimatelyconstraineconomicgrowth.•IncreasedlongevityanddramaticfallsinfertilityratesinthePRCduringthelast3decadespromptedthefastestdemographictransitionintheworldandunderpinnedeconomicreformbycontributingtoGDPgrowthandliftingpercapitaincome.•AgingisparticularlychallenginginthePRCforthreereasons:thesheermagnitudeofthepopulation,thedifficultiesofagingatarelativelylowlevelofpercapitaincome,andthepoorsafetynetstandards.•Determinedpolicyactionsareimperativetoaddressthechallenge,includingmeasurestopromoteeconomicgrowththroughproductivityincreases,strengtheningsafetynets,developingcapitalmarkets,andacceleratingpensionreform.
JELClassification:J10,J26,J61ISBN978-92-9092-158-5ISSN2218-2675PublicationStockNo.ABF102687
1
AspertheUnitedNationsdefinition,apopulationisagingwhen10%ofthetotalpopulationis60orolder,and7%ofthepopulationis65orolder.In2007,thePRC’srespectivepercentagesstoodat13.6%and9.3%.
 
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ADB B
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at a relatively low level of per capita income poses anenormous challenge. This brief reviews the main featuresof aging in the PRC and makes policy recommendationsto address the challenge.
The Case of the PRC: Aging Before Turning Afuent
 Facts and Figures
 Average life expectancy has improved dramatically sincethe founding of the PRC, increasing from 35 years in1949 to 74 in 2009, and in major cities such as Beijingand Shanghai, it is already above 80. At the same time,the fertility rate, underpinned by the one-child policy,has declined sharply from 6 children per woman in 1980to 1.7 at present. These trends have prompted a rapiddemographic transition that has supported developmentand economic growth. Between 1975 and 2005, the totaldependency ratio—defined as the share of children andelderly to the working-age population—fell by almost50%, the largest drop ever recorded in any country. Thebenefits of the demographic dividend increased theworking-age population from 407 million in 1978 to 786million in 2004, adding about 2 percentage points a yearto GDP.However, the accelerated path of the demographictransition turned the PRC into an aging society in 2000.Since then, dependency ratios have increased and thedemographic dividend is expected to start to decline in2015, when the working-age population will peak, and laborshortages will start exerting pressure on the labor market. A higher old-age dependency ratio implies higher healthcare costs and pensions. In 1975, there were 6 children forevery elder, but by 2035 there will be two elderly people forevery child. By 2020, aging will add 10 million new elderly persons each year, while the working-age population willdecline by 7 million adults a year. By 2050, out of a totalpopulation of about 1.4 billion, there will be 440 millionpeople aged 60 and over, 108 million of whom will be aged80 or older. This means that 31.4% of the population will beabove 60 against a world average of 21.9%. Aging is particularly challenging in the PRC not only because of its sheer magnitude, but because it ishappening at a relatively low level of per capita income.Notwithstanding the remarkable achievements in the last30 years, the PRC’s per capita income level only amountsto one-ninth of that of the United States or one-fifththat of the Republic of Korea. Poor safety nets, with mostelderly depending on weakening informal family support,magnify the challenge.Cultural issues in the PRC add additional complexitiesto aging. A strong preference for male descendants hasled to an unbalanced gender ratio. While a natural genderdistribution shows 102–103 male births for every 100females, male births in the PRC stand at 124, an averagenumber masking huge imbalances in some provinces,including Henan and Jiangxi, with about 140 males forevery 100 females. At present, there are 33 million moremales than females, and while in other countries smallergender gaps have been addressed through recourse toemigration, the excess in the PRC is too large. Genderimbalances can turn into sources of social unrest andaffect economic performance.
The Challenges Ahead
Sustaining Inclusive Economic Growth
. An aging populationhighlights the importance of economic growth whilemaking it harder to achieve. Labor shortfalls will increaselabor costs, damaging the PRC’s competitivenessin labor-intensive low-value added manufacturingand strengthening the cost advantage of the PRC’scompetitors in those sectors. For instance, India’sdemographic dividend will peak in 2040, much later thanthat of the PRC, adding 240 million to the working-agepopulation. Against this background, it is essential forthe PRC to rebalance growth and identify new sources of productivity. In addition, future growth has to be inclusiveto avoid social pressures. The strain induced by wideningincome inequality could escalate to unsustainable levelsin a rapidly aging society.
Improving the Mobility and Quality of the Labor Force 
. In theabsence of determined actions to increase mobility andupgrade skills, labor shortages will emerge regardless of large surpluses in rural areas. Mobility restrictions—thehousehold registration system (
 hukou
) and the non-portability of work-related benefits—discourage transfersfrom labor-surplus provinces to labor-deficit ones. Therestricted geographical mobility is compounded by skillshortages and mismatches that hamper transfers acrossthe three productive sectors. This impedes the PRC’sascent in the value-added chain, which is crucial to thesustainability of growth.
 Developing Capital Markets
. Aging affects the pattern of savings. The elderly tend to save less and make differentinvestment and consumption decisions. Foreign directinvestment (FDI) inflows could compensate lost savingsin countries with aging populations, but as inflows areuncertain, excessive reliance on FDI entails risks. Tosustain growth, it may be necessary to improve theeffectiveness of the allocation of savings to investments,
 
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The Socioeconomic Implications of Population Aging in the People’s Republic of China
which requires developing capital markets and wideningaccess to financial products and services. In addition, awell-functioning financial sector will underpin pensionreform, a key challenge directly associated with aging.
Strengthening Safety Nets
. Safety nets remain weak in spiteof recent efforts. Only about 15% of the working-agepopulation in the PRC is covered by any sort of socialsecurity net, with most of the beneficiaries located inurban areas. After several rounds of reform, a two-tierpension system has been adopted in urban areas, offeringa basic pay-as-you-go (PAYG) pension topped up by fully funded individual accounts. However, the systemis far from optimal and presents major challenges. First,expanding the PAYG system toward universal coveragewould require large increases in the budget allocationsfrom the current 3% of GDP. Second, the national reservepension fund appears to be substantially underfunded.Third, the low rate of return of the personal accountscasts doubt about their ability to generate the expectedreplacement rates. Efforts should be even greater inrural areas, where safety nets and pensions are almostnon-existent.
Policy Directions for the PRC
Labor supply shortfalls lead to diminished returns to capitaland, hence, less economic growth. Developed countrieswere the first to age and approached the problem by shiftingfrom input-driven growth models to productivity-drivenones. This could be achieved through rebalancing thegrowth pattern, including the development of services,and labor market reforms. Hence, determined policy actions are imperative to address the aging challenge,including measures to promote economic growththrough productivity increases and labor market reform,strengthening safety nets, accelerating pension reform,and developing capital markets.
Increasing Labor Supply.
Drawing on successful experiencesin countries with aging populations, some of the followingpolicy actions could be considered:
•
Enhancing labor mobility. Policy actions conduciveto greater labor mobility in the PRC will reinforceemployment generation. Existing institutionalbarriers—
 hukou
and restriction on the portability of benefits—hinder natural migration flows and deterurbanization, resulting in an inefficient allocation of labor. Simulations suggest that transferring a largershare of the labor force employed in agriculture intoother sectors could add as much as several percentagepoints to GDP growth.
•
Raising the retirement age. Improved longevity haslifted life after retirement threefold in most of thecountries with aging populations, suggesting that itis appropriate to revise the retirement age upward.The retirement age in the PRC was establishedin 1950, at 60 for men and at 55 for women, whenlife expectancy was significantly lower. Underthe current average longevity, the retirement agecould be increased to 65 for both genders in urbanareas, while adopting a more flexible approach inrural areas. The common perception that early retirement eases unemployment is misleading. Thisis supported by many years of evidence in developedeconomies, where early retirement has not reducedunemployment levels. Given the improved longevity,early retirement does not usually free up space fornew workers, as early retirees continue to work whilereceiving a pension.
•
Encouraging female participation in the labor market.Female participation can be promoted through a policy of equal opportunities, supported by improved supportfor child and elderly care, to encourage married womento remain or join the labor force. In addition, andaccounting for the longer average life expectancy of women, the retirement age of female workers shouldbe lifted to match the standard of male workers.
•
Fine-tuning family planning policies. A relaxation of the one-child policy would ease the burden of only children supporting elderly parents and grandparentsin the PRC, the so-called 4-2-1 problem. However,adjustments should be carefully planned, as even smallchanges could result in large absolute numbers given thelarge size of the PRC’s population.
•
Importing labor indirectly through foreign directinvestment outflows. Asymmetries in the timepath of aging unleash capital flows from societieswith aged populations to ones with populationsthat are aging slower or not at all. FDI generatescapital income from foreign production that addsto the growth generated domestically. An adequateregulatory framework is necessary for these benefitsto materialize.
•
Importing labor directly though an open policy towardimmigration. Welcoming immigrants from countrieswith younger populations is the most direct way toincrease labor supply. However, this approach requiresa comprehensive regulatory framework supporting theparticipation of foreign workers, including loweringinstitutional and social barriers to immigration.

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