Getting Old Before Getting Rich

This is definitely about to become the new ‘meme’ about China. Actually it is reasonably valid. China’s ‘demographic shocks’ which come principally from the great famine produced at the time of the cultural revolution, and then from the subsequent one-child policy, are undoubtedly going to have significant consequences. Today UK Tory front bench spokesman on Trade and Industry David Willetts has a piece on the topic in the FT (subscription only unfortunately):

One reason for China’s stellar growth is that it is at a demographic sweet-spot. The massive reduction in infant mortality achieved by China’s barefoot doctors in the 1960s and 1970s is now yielding a surge of young workers – an extra 10m working-age adults per year. China’s challenge now is just to absorb them into the labour force. Add to that the massive population flow from the countryside and you can see why wages are low and growth is so fast. There are few pensioners and there are not many children either. The rabbit is indeed in the middle of the python.

If you are frustrated by your inability to read more, and are willing to hack it through a more academic paper on the same theme, then can I recommend “Demographic Dividend and prospects for economic development in China” by Wang Feng, of the University of California Irvine and Andrew Mason, of the University of Hawaii. The paper was presented at the recent (August 2005) UN experts meeting on ageing.

Update: New Economist has a fuller version of the Willets piece online.

This entry was posted in A Few Euros More, Economics and tagged , , by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

5 thoughts on “Getting Old Before Getting Rich

  1. Hello Edward,

    The problem I have with this “getting old before getting rich” meme, is that too few (and that includes David Willetts) seem to have bothered to go and check the numbers and verify them. Willetts’ meme *would* be reasonably valid if his theories were backed up by hard numbers and analysis, but they simply aren’t.

    Willetts and his ilk have committed two cardinal sins of professional discussion here: 1. They’ve failed to differentiate slogans from actual policies (“One Child Policy” absolutely *does not* mean that families in China have an average of one child, even in official stats!), and 2. they’ve utterly failed to look skeptically at the figures they like to cite, which on closer look reveal that China’s birth rate (of both boys and girls) is, on net, pretty close to replacement level, since local bureaucrats all regularly and systemically undercount.

    On point 1, the “one child policy” merely refers to a desire by China in the late 1970’s to introduce incentives and fines to move the incredibly high (and probably unsustainable) total fertility rate down from close to 5 children per couple to something more manageable. They weren’t shooting for one child per family, just announcing a desire to stabilize (and knowing that the “one per couple” meme would, in reality, lead to a settling down to something like 2 per couple, net). Ironically, in reality China’s TFR had already stabilized in the early 1970’s before this, with the spread of education especially– making the sometimes coercive practices of some OCP bureaucrats after that even more objectionable on moral grounds as well as grounds of lack of efficacy– but the point is that China’s *actual* policies have never brought the TFR down to one child per family, nor will they ever. The policy has applied, basically, only to urban areas, and even then only to a fraction of the population. Most of China’s vast population still lives on farms, where the OCP does not apply and people often still have 5 kids per couple. Even in cities (where people voluntarily opt for small families anyway), there are myriad exceptions, bribes, evasions, whatever to have more than one child.

    On the second point– even what stats on population are collected, are recognized by Chinese demographers to be laughably off base from reality, i.e., vast underestimates. Chinese bureaucrats routinely understate population numbers in their districts to garner favor with their higher-ups. Multiply this by thousands of bureaucrats, and you get an underestimate of tens of millions of children born throughout China– whose actual population is close to 1.4 billion, not 1.3 billion, and still growing at an annual rate close to replacement level.

    Chinese demographers have demonstrated this not only through sampling counts of their own, but by reporting the data of *vaccine manufacturers*, who obviously have an incentive to get the numbers right. Like you probably, I tend to trust markets more than vested interests because in markets, *people are putting their money on their estimates* and therefore have an incentive to be competent and accurate with their estimates– to get the numbers right. Same with vaccine makers– unlike bean-counters currying favor with their superiors, their job requires them to come up with accurate numbers or else there are dreadful consequences. And it’s practically an in-joke among Chinese vaccine manufacturers that you always order enough vaccine to cover *25-50% more kids* in any given district than the official numbers report– because there are always seem to be 125-150% as many kids as the bureaucrats indicate. Even then, sometimes the vaccine makers run out of their product. (My article, at http://tinyurl.com/at4rj has more references.)

    So, sorry, but the Chinese demographic plunge, getting-old-before-rich meme is truly one of the most laughably overstated so-called “trends” of our time. It falls apart on closer and more skeptical analysis.

    Even aside from this, I;m very skeptical about the conclusions people so often draw about these things b/c you can’t have an infinitely growing population, in any country. Whether in China, India, the US, EU, Russia, there will inevitably be a point when a maximum population is reached (in the midst of finite resources) and sort of stabilizes there, and thus, there will be a generation in which young workers sort of reach parity (or are outnumbered by) pensioners. The bigger a base population gets, the more very elderly people it will eventually have to support when the population stabilizes. If China and India’s population do continue to grow, eventually– when their population stabilizes– they’ll will have 500 million elderly people to support with a smaller worker base. They won’t have escaped the dependency ratio problem in so doing– they’ll merely have postponed the day of reckoning. We in the USA are already dealing with a preview of this, since our baby boomers– the demographic bulge that powered us in earlier decades– is now becoming elderly, drawing pensions and requiring more in Medicare costs, with a decreased worker base. So it’s not so simple as arguing that growth (whether through native birth rate or through immigration) powers a society– for a generation at least those young workers can help a society grow, but eventually those young workers get old themselves, and must be supported. It might even be better to stabilize earlier (at, say, around 300 million), when the numbers are more manageable, than at, for example, 800 million, when it’s a good deal tougher.

    Ultimately, having a young growing population is not a solution to economic concerns b/c eventually those workers, too, become old and must be supported by a smaller young population later on when the population stabilizes. It’s unfortunate that this blithe assumption is so often repeated, because in the long term it always fails. Better solutions would be, for example, focusing on a public health care system that keeps elderly people healthier and more willing to stay in the workforce longer (as in Japan), or that focuses less on macro-growth and more on nurturing and maximizing the best talent in a stabilizing– yet still substantial– population. This tired meme in economics– that a country is best served by a growing population– just isn’t sustainable over the long term in the real world. There have to be other ways to support a population and maintain a decent level of economic activity and productivity for a nation.

  2. Hello Wes,

    I’ve just seen your lengthy comment on this post. I think it deserves some response from me. Please check back later or tomorrow. At the moment I’m deep in thought ploughing through growth regressions, trying to get to the heart of what you call “This tired meme in economics”.

  3. Ok, I’ve found a bit of time. You want to make two points I think:

    1/. “what stats on population are collected, are recognized by Chinese demographers to be laughably off base from reality” and “China’s birth rate (of both boys and girls) is, on net, pretty close to replacement level”.

    2/. “Ultimately, having a young growing population is not a solution to economic concerns b/c eventually those workers, too, become old and must be supported by a smaller young population later on when the population stabilizes.” and “This tired meme in economics– that a country is best served by a growing population– just isn’t sustainable over the long term in the real world. There have to be other ways to support a population and maintain a decent level of economic activity and productivity for a nation.”

    Now before I start, I have no special interest in the ‘work’ of David Willets (indeed I don’t know if he even has any). I just linked to this as a topical piece in the papers about something which I am interested in.

    Now on your first point. I both agree and disagree. Demographic stats are known to be wildly unreliable in China this is true, but there is very little evidence that they are anywhere near replacement. I’ve dug out a link to a paper from a demographer whose work I do really respect – Wolfgang Lutz – and as you will see he tries to overcome some of the data shortcomings using probabilitic techniques. These you can either take or leave, but the interesting thing is the data spread he presents.

    http://iussp2005.princeton.edu/download.aspx?submissionId=51192

    The paper by Feng and Mason (also linked in the posts) given at the US experts conference provide references and additional support for the view that there are important structural breaks in the age pyramid and I don’t think we should be shrugging this off so easily.

    One part second point, that we can’t stay young forever (as societies, life expectancy is growing and fertility declining) is surely true. The important issue for our economic and welfare systems is the rate at which we age (or if you like the transitional dynamics).

    The other part, about whether or not a countries economic needs are best served by a rapidly growing population is more complex. I think there is a growing consensus among economists (in particular thanks to the work of the ‘Harvard Economists’ – Jeffrey Williamson, David Bloom, Jeffrey Sachs, David Canning, Mathew Higgins) that it is not size, or whether the population is growing or shrinking that matters, but rather the age structure of the population.

    China has experienced a serious ‘demographic shock’ and given the scale which China’s economy is likely to reach, I don’t think we should take this problem lightly.

  4. “that it is not size, or whether the population is growing or shrinking that matters, but rather the age structure of the population.”

    You don’t seem to understand what he said. You can only keep an “optimal” age structure if the population is contiually growing, which in the long run is unsustainable, therefore it isn’t optimal. I’m not sure he isn’t arguing with a strawman however.

    You’d still want an “optimal” age structure when a country is poor and other conditions for growrth are there, and you never want an age structure which is heavily skewed toward senior citizens.

  5. “You don’t seem to understand what he said. You can only keep an “optimal” age structure if the population is contiually growing, which in the long run is unsustainable, therefore it isn’t optimal.”

    Sorry David, I think I did. I simply never used the term optimum.

    As you indicate a continually growing population means many things, since population momentum and life expectancy rising mean that growing population is compatible with reducing generations (Germany and Japan are only now stopping ‘natural growth’).

    Economically speaking the ‘sweet moment’ (or demographic dividend, or window of opportunity) comes when fertility drops from a high level, and the generations start to reduce. ie the demographic dividend comes from an initial inversion in the age pyramid. This produces more (proportionately) in the working age groups. This is normally when the development process takes off. So – even though this is not my expression – this is the optimum initial condition for initiating the transition from a Malthusian type underdeveloped economy to a modern developed one. The point is there is no ‘universal’ optimum since there is no steady state during the process (and the existance of a steady state *is* postulated as a sort of inherent prejudice in the neo-classical growth models). There is simply a transition from one weakly homeostatic state to another weakly homeostatic one (this is the *there* where we haven’t arrived yet). Most growth theory is trying to describe transitional dynamics as if they represented a steady state.

    But all this is hellishly complicated, and we still have no consensualised theory (strange really, seeing how important all this is).

    The point is – again as you indicate – once the pyramid inverts you later get a structural problem as the proportion of elderly people begins to make the pyramid unstable. This is where Germany and Japan are right now.

    “You’d still want an “optimal” age structure when a country is poor and other conditions for growrth are there, and you never want an age structure which is heavily skewed toward senior citizens”

    Yes, I think you have captured the essence. The problem is that the former seems to imply the latter.

    However: how old is old?

    This is what I am thinking about at the moment. And I am increasingly convinced that things are much more driven by increases in life expectancy than they are by fertility. But this is still a ‘work in progress’, so I guess you will have to wait a bit yet for an acceptable justification for this statement.

Comments are closed.