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What China can teach the world about getting old and staying rich

Japan and Italy stand out as examples of how not to manage an aging population

| China
Elderly people eat free hotpot in Taiyuan, pictured in October 2018: China has made sure that the economic burden of carrying its older generations is affordable.   © Reuters

Dr. Lauren A. Johnston is research associate, China Institute, SOAS, University of London. She is founder and managing director of New South Economics.

Two hundred years ago the British demographer, economist and moral philosopher Thomas Malthus published a series of works on political economy and population. These gave rise to what is now known as the Malthusian Trap.

The idea was that since the human population grows at a compound rate but plants and farmed animals do not, then without human restraint, forces such as famine, war and pandemics will serve to check population growth.

Since then technological progress has led to dramatic but uneven increases in food production, where obesity is now a bigger problem than hunger in most regions. Moreover, sharp declines in the total fertility rate have been met with soaring increases in life expectancy. The result is a growing shift from young to old dependency, particularly among rich economies.

While Malthus may have underestimated productivity potential, the conceptual logic of his fears has endured, especially in poor countries with fast-growing populations. Malthus' ideas -- and how they drew attention to the need for elevated productivity in particular -- are worth revisiting.

All else being constant, countries with a greater number of older people than young people will experience labor shortages. In addition to rising pressure to allocate more resources toward pensions and health care -- and away from productive investments -- more working-age people are needed to care for the old.

Still, the story may be more nuanced. By comparing the impact of aging populations on China and Japan, we might better understand the true costs of aging populations.

While China is now an upper-middle-income country, its large older generation was born in the 1950s and 1960s and hence spent the bulk of their lives in a low-income country. Policies implemented from the 1970s, such as the one-child policy, led to fewer births while average incomes were lower. But in Japan, today's seniors have been relatively prosperous their whole lives.

Unlike Japan, China has long been active when it comes to planning around economic development and demographic change. Fearful that "getting old before rich" would derail China's national development goals, Chinese authorities implemented policies designed to keep the economy growing, despite the rapid aging process that will intensify this decade.

In China, a sizable share of its younger generations are vastly more educated than their immediate predecessors. They are positioned to drive higher labor productivity per worker as the size of its working-age population falls.

Another difference with Japan: while the size of China's workforce is falling, working-age human capital stock is rising. China's leaders have also been progressively channeling the economy toward capital-intensive sectors. When labor was plentiful, incentives were offered for labor-intensive manufacturing. But targeted investment in high-tech sectors ensured that China would have pockets of capable scientific and technical expertise for when labor became scarce. Targeted incentives now also encourage outbound Chinese investment in younger and lower-wage countries via its Belt and Road Initiative.

China has made sure that the economic burden of carrying its older generations is affordable, especially when it comes to pensions and health care promises. While some would argue that elderly pensions are so low that they are stunting consumption-related growth, at least China's aging population agenda has been deliberate, explicit and attuned to both the short and long-term.

Japan, on the other hand, has -- until recently -- been sleepwalking toward a late-stage Malthusian trap. Working-age Japanese are not only faced with the impossible task of having to be sufficiently productive to cater to advance the economy with fewer workers, they have to fund a large and growing older population that is relatively expensive to look after.

Working-age Japanese have to fund a large and growing older population that is relatively expensive to look after. (Photo by Akira Kodaka)

And that is without the deep human capital or income gap across generations or catch-up growth possibilities that China has. That means that as Japan's population ages, aggregate demand will likely keep struggling. China does not have an equivalent problem because its current generation of pensioners -- who grew up in a low-income country -- have never been big consumers. Poor-old China and rich-old Japan stand as two points on the modern economic demographic transition spectrum.

At another point on that spectrum is next year's Group of 20 chair, Italy. Almost as "old" as Japan, Italy in recent years spent four times more on pensions than on education. Already facing ageing-related aggregate demand challenges, any disproportionate resource allocation in favor of the old moreover forward risks the capacity of future workers' productivity potential. This in turn may ultimately reduce the total fertility rate, in turn increasing the elder dependency ratio, and so goes the vicious circle of what I have called the Johnston trap.

In 1970, Japan had a median age of 28 years. Today that median age is 50. As the median population age shifts across all countries, young and old, and rich and poor, it is fair to assume that median preferences and needs will shift as well. A good example of this is monetary policy. Low-interest rates are good for young people -- with secure well-renumerated jobs -- looking to buy their first home, but bad for older people who rely on higher interest rates to boost their retirement incomes.

The entire economic system, it would seem, should continually adjust to this economic demography transition. Failing to do so, especially in countries burdened by an aging population, could mean both a downward economic and demographic trajectory. In other words, the Johnston Trap.

If we want the elderly to keep enjoying healthy and secure lives and be integrated into society, we must ensure that their needs and rights, as well as their accumulated assets and entitlements, do not diminish the lifetime opportunities -- and productivity potential -- of our young people. Because that will increasingly drag down everyone.

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