Victor Smith – EPQ 2017/18

How will demographic trends affect future growth in China?

Chapter 1 – Outlining the demographic trends

China has been through rapid population growth in the last 50 years, with the number of people almost doubling in this period to 1.38 billion, constituting over 18% of the global population . This increase, 1

facilitated by high birth rates and young marriages has given China the world’s largest population. To understand what is going to happen to China’s population in the future, we must outline historic demographic trends and the role of government policy in shaping them.

The most influential and large-scale population control policy ever enacted is arguably China’s One Child Policy. Started in September 1980, in the form of an open letter, the One Child Policy enjoined families to have no more than one child . It is estimated that the One 2

Child Policy prevented up to 300 million births since its introduction . 3

However, it was not the sole factor in causing China’s ageing population; in fact, the birth rate had been decreasing for nearly 20 years prior to the policy, suggesting that it was already building upon previous anti-natalist policies. Instead, the policy did not reduce the birth rate, it only stopped it from increasing rapidly and the birth rate even increased slightly between 1980 and 1983, from 18.2 to 20.2 births per 1000 people . The birth rate had been decreasing prior to 4

1980 due to many, less radical measures taken by the Chinese government. In 1956, a propaganda campaign was started to highlight the benefits of smaller families and further campaigning in the 1960s encouraged later marriages, all in the hope of decreasing the fertility rate, which peaked at 6.38 children per woman in 1965 . Propaganda slogans included “later, longer and fewer” from the 1971 5

campaign which made quick progress in 1973 when Chairman Mao personally commissioned several birth control committees. It is estimated that this decreased the birth rate by up to 50% . 6

Methods used by the Chinese government remained moderate with urban families being recommended to have only 2 children, and rural families being capped at 3 or 4 children . These policies were 7

successful as the fertility rate dropped to

China Population, Worldometers, http://www.worldometers.info/world-population/China-population/ [accessed 5/11/16]1

Mei Fong, One Child: The story of China’s most radical social experiment (London: Oneworld Publications, 2016), p. x.2

F Festini and M de Martino, ‘Twenty Five Years Of The One Child Family Policy In China’, J Epidemiol Community 3

Health, vol. 58, no.5, pp. 358-360.

China – Crude birth rate, Knoema, https://knoema.com/atlas/China/Birth-rate, [accessed 7/11/16]4

http://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=CN , [accessed 3/01/17]5

Zhihao Yu, ‘Demographic Dynamics and Economic Take-Off -- the Economic Impact of China’s Population-Control 6

Policies’, (2008), p. 13.

Robert L. Worden, Population control programs, Country studies, http://countrystudies.us/China/34.htm, [accessed 7

22/10/16].

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Figure 1 - "It's better to marry and have children at a mature age"

http://www.pbs.org/wgbh/nova/earth/population-campaign.html

Figure 2 - Fertility Rate - http://data.worldbank.org/indicator/SP.DYN.TFRT.IN?end=2015&locations=CN&start=1960&view=chart

Victor Smith – EPQ 2017/18

2.75 by 1979 , but the nation’s total population had continued to soar and had reached 981 million by 8

the turn of the decade. 9

The One Child Policy was the final measure taken by the Chinese government in efforts to curb the nation’s rapid population growth. It restricted families to one child. These measures were enforced and encouraged with widespread contraception and economic incentives such as preferential employment for those who complied. However, if a family were found to have more than one child, parents could be arrested and fined, and in some cases coercion was used in the form of forced sterilizations and abortions . It can be argued that the One Child Policy was not a particularly 10

successful measure as the fertility rate remained above one, and even increased after its implementation in 1980, but, there was reason for this. Between 1958 and 1962, a devastating famine in China was responsible for the deaths of up to 45 million people . As a result, the birth rate grew to 11

43.4 births per 1000 of the population in 1963, an all-time high . This led to the beginning of a baby 12

boomer generation who entered the reproductive stage of their life in the 1980s when they were aged 18 to 22. Therefore, a huge increase in the birth rate would be expected in the 1980s, however this was when the One Child Policy was being put into practice, so a surge in the birth rate was severely restricted. It can be concluded that the One Child Policy was moderately successful as it prevented an even greater increase in the birth rate in the 1980s.

Chapter 2 – How these trends have created an ageing population

By definition, an ageing population is one where an increase in the median age can be observed. China is now experiencing such changes with one sixth of the population being over the age of 60 13

and the median age increasing from 20 in 1970 to 37.1 currently . What were the beginnings of an 14 15

ageing population in China?

The greatest expansion of China’s population was between 1963 and 1971. The fertility rate peaked at 6.38 children per woman in 1965 and the birth rate also peaked in 1963 at 43.37 births per 1000 of 16

the population . As a result, the population grew by 159 million in these 8 years alone, representing 17

an average growth rate of around 2.6% per year. China also had very high fertility rates in previous decades, helping to create a large bulge in the population. This surge in population growth is represented by a bulge in the population pyramid in the age quartiles 0 to 19. The baby boomer generation then grows older with time and the bulge is pushed further up the pyramid. It has remained as a bulge as it was not supported by continued high birth rates due to population control policies used

Therese Hesketh, ‘Family size, fertility preferences, and sex ratio in China in the era of the one child family policy: results 8

from national family planning and reproductive health survey’, British Medical Journal, vol. 3, 2006, pp. 371-373.

China Population, Worldometers, http://www.worldometers.info/world-population/China-population/ [accessed 5/11/16]9

Kenneth Pletcher, ‘One-child policy, Britannica, https://www.britannica.com/topic/one-child-policy, [accessed 17/03/16]10

John Gray, ‘Mao's Great Famine: the History of China's Most Devastating Catastrophe (1958-62)’, New Statesman, http://11

www.newstatesman.com/books/2010/09/mao-China-famine-western, [accessed 02/03/17]

http://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=CN , [accessed 3/01/17]12

Arthur R. Kroeber, China’s Economy: What Everyone Needs to Know (New York, Oxford University Press, 2016), p. 166.13

Adele Hayutin, ‘China’s Demographic Shifts: The Shape Of Things to Come’, <http://longevity3.stanford.edu/wp-14

content/uploads/2012/10/Chinas-Demographic-Shifts_Hayutin-r-10-2008.pdf> , 2009

The World Factbook: China, Central Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/15

geos/ch.html, [accessed 05/11/16]

http://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=CN , [accessed 3/01/17]16

Ibid.17

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by the Chinese government between 1956 and 1979. With greater health in China, has come increased life expectancy, as shown by the higher level of the population pyramid in 2015 than in 1970.

China’s economy has benefitted greatly from having such a large working age population, however, this may come to be their biggest challenge. These workers will eventually pass the retirement age and become elderly dependents, this process is known as the demographic transition . The size of China’s grey 18

population has not yet been fully reached. There are expected to be 487 million Chinese over the age of 60 by 2053, which will represent 35% of the population . 19

As previously stated, and as shown in Figure 3, the greatest increase of China’s population was between 1963 and 1971 meaning that the size of the ageing population will increase when these workers reach their retirement age which is currently 60 for men and 50 for women . This can be 20

shown on a population pyramid as the upwards movement of a bulge of productive workers into retirees as men and women pass the ages of 60 and 50, respectively. Therefore, a dramatic increase in the size of China’s pensioner population can be expected in the next 15 years as those born between 1963 and 1971 retire.

As well as looking at the raw number of those over the age of 60, we must also review the dependency ratio. The dependency ratio is a way of showing the strains placed on the working population - it shows the number of dependents (those aged 0-14, and those over 65) over the size of the working population (ages 15-64). It essentially shows the number of workers for every dependent, thus a lower dependency ratio means there are fewer strains on the working population. If the size of the ageing population is growing at a faster rate than that of the working population, the dependency ratio will increase as more retirees will need support from fewer workers. Continuous decades of anti-natalist propaganda has had severe effects on people’s mentalities over having children, so that in the future it will no longer be an issue of trying to prevent births, but of trying to encourage them. Figure 5 shows that younger generations – those who were aware of the

Arthur R. Kroeber, China’s Economy: What Everyone Needs to Know (New York, Oxford University Press, 2016), p. 16418

Al Jazeera, ‘Inside Story – Ageing China’, Youtube https://www.youtube.com/watch?v=mxgczQWQem8 [accessed 19

18/04/17]

‘China’s social security system’, China Labour Bulletin http://www.clb.org.hk/content/China%E2%80%99s-social-20

security-system, [accessed 30/02/17]

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Figure 3 – 1970 China population pyramid - http://www.China-profile.com/data/ani_pop_1.htm

Figure 4 – 2015 China population pyramid - http://www.China-profile.com/data/ani_pop_1.htm

Figure 5 - https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1550484/

Victor Smith – EPQ 2017/18

propaganda or whose parents were affected by the One Child Policy – prefer fewer children. 40 to 49-year old’s, who were born before the implementation of the One Child Policy, are five times more likely to prefer more than three children than those in the 15 to 19 age group. This shows the social implications of the One Child Policy as couples are now choosing to have fewer children, rather than being forced to, with the long-term effect being a decline in fertility rates. In 2015 only 12% of eligible couples applied to be able to have more than one child . 21

Declining fertility rates has led to a fall in the size of the working age population as the number of workers retiring is greater than the amount entering the workforce. Growth in the size of the elderly population combined with a declining working age population will cause the old-age dependency ratio to increase drastically. Currently, there are 9.2 working age people for every senior citizen, but by 2050 there will only be 2.5. 22

Another product of the low fertility rates and the ageing population in China has been the 4:2:1 phenomenon. This is when a grandchild must support two parents and potentially four grandparents. This can be represented with a pyramid where the grandchild at the bottom has to support 6 dependents – if all others are over the age of 60. With life expectancy increasing in China, such a phenomenon could become common. This would place huge strains on the economy as people of working age are unable to stay in a job as they have to care for parents and potentially grandparents.

Chapter 3 – Effects on healthcare systems

One of the major implications of China’s ageing population will be the profound effects on healthcare systems. As the number of pensioners grows in China, so will the pressure on hospitals and nursing homes. Hospitals in China are already under growing pressure from the increasing prevalence of old-age related diseases such as Dementia and Alzheimer’s, and also non-communicable diseases that are associated with higher living standards such as obesity and high blood pressure. Rates of hypertension rose from 20% in 2002 to 34% in 2010 . Now, non-communicable disease accounts for 80% of all 23

deaths , a shocking rise from 59% in 2004 . The WHO estimated that China could have lost $558 24 25

billion of national income due to premature deaths caused by heart disease, stroke and diabetes . 26

The monetary costs of caring for the elderly are far higher than the costs associated with caring for the young, with a large proportion of these costs being health associated. This is because in old-age people require prescription drugs, care providers, mobile care services and geriatric departments, with costs of looking after an over 65 being “27% bigger than for a younger person and 76% bigger than for a child” . The current system of old-age care will be unable to cope with the projected number of 27

elderly. As of 2005, there were just under 40,000 institutions with services for the elderly,

Arthur R. Kroeber, China’s Economy: What Everyone Needs to Know (New York, Oxford University Press, 2016), p. 17021

George Magnus, The Age of Aging (Singapore, Wiley & sons, 2009) p. 59. 22

Lin Feng, Health system strengthening and hypertension awareness, treatment and control: data from the China Health 23

and Retirement Longitudinal Study, World Health Organisation, http://www.who.int/bulletin/volumes/92/1/13-124495/en/, [accessed 04/06/17]

Laurie Burkitt, WHO: 80% of China Deaths from Non-Communicable Diseases, Wall Street Journal https://24

blogs.wsj.com/Chinarealtime/2012/12/07/who-80-of-China-deaths-from-non-communicable-diseases/, [accessed 04/06/17]

Judith Banister et al, Population Aging and Economic Growth in China, ‘Program on the Global Demography of Aging, 25

vol. 53, (March 2010), p. 11.

The Impact of Chronic Disease in China, World Health Organisation, http://www.who.int/chp/chronic_disease_report/26

media/China.pdf, [accessed 10/06/17]

George Magnus, The Age of Aging (Singapore, Wiley & sons, 2009) p. 124.27

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accommodating 0.8% of the elderly population . To expand this capacity to 3% would require 28

investments summing over $200 billion . This capacity was in 2005 when there were 130 million 29

elderly in China, however, by 2030, there will be 336 million, of which 5% will require nursing home care . This suggests that an investment of $200 billion will be hardly sufficient. There are also 30

pressures on individual caregivers. The number of over-60s who need nursing home care, but do not have access to a caregiver is expected to rise by 2260% from 2005 to 2030 . These projections could 31

create severe hindrances to China’s future economic growth as healthcare spending is expected to rise dramatically, thus limiting China’s flexibility in expanding other areas of the economy.

Developments in life expectancy and the increasing prevalence of chronic and degenerative diseases in China may exacerbate the pressures described above. Life expectancy has risen from 43.4 years in 1960 to 76.1 in 2015 . This will put more pressure on health systems and nursing homes. The longer 32

people live, the longer they may have to stay in hospital or a nursing home, taking another’s place, resulting in the need for expanded capacity. The increased prevalence of chronic and degenerative diseases is partly due to increased life expectancy. People suffering from diseases such as dementia and Alzheimer’s require specialist care and facilities. In the later years of life, health associated costs increase dramatically, meaning that as life expectancy increases in China, expenditure on health could rise massively.

Chapter 4 – Effects on the labour market

It can be argued that one of the factors leading to China’s rapid economic growth from the beginning of the reform era to the present was the abundance of cheap labour. As the number of workers in an economy increases, wages can fall as there is greater competitiveness among job seekers and employers can afford to pay them less. Low wages in China made it incredibly attractive for foreign firms to invest in, and it quickly became a manufacturing hub, with their high levels of exports fuelling growth which averaged at 9.4% to 2012 . 33

Due to fertility rates staying very low, the size of China’s labour market is expected to shrink markedly, with estimates showing that it could fall to 700 million by 2050, from 911 million in 2015 . A shrinking labour 34

pool could cause an increase in wages as firms experience greater difficulty in finding employees and thus must entice potential workers with higher wages. This could cause severe damage to Chinese manufacturing in several different ways, as the country has excelled in the global market for manufactured goods through incredibly low production costs. An increase in wages would push up production costs and thus cause a decline in profits for firms. Private firms could bypass this by outsourcing their production to countries with lower wage rates.

Joseph Henry Flaherty el al, ‘China: The Aging Giant’, Journal Of The American Geriatrics Society, Volume 55, Issue 8, 28

2007, Table 1

Ibid, p. 6 29

Ibid, Table 130

Ibid31

‘Assessing Chinese Life Expectancy’, http://Chinapower.csis.org/life-expectancy/ [accessed: 12/04/17] 32

Thomas Hirst, ‘A Brief History Of China’s Economic Growth’, World Economic Forum https://www.weforum.org/33

agenda/2015/07/brief-history-of-China-economic-growth/, [accessed 03/04/17]

Wu Yan, ‘China's labor market: Shrinking workforce, rising wages’, China Daily http://www.Chinadaily.com.cn/China/34

2016-11/21/content_27444998.htm, [accessed 09/05/17]

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Figure 6 – working age population in China, WEF - https://medium.com/world-economic-forum/chinas-working-age-population-will-fall-23-by-2050-2a1553609421

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However, SOE’s (State Owned Enterprises) might not be able to do the same as they are government controlled and their function is to provide jobs for the Chinese, thus outsourcing would defeat this purpose. In order to maintain the same profit margin, SOE’s would have to raise the price of their products, causing the competitiveness of their exports to fall as cheaper alternatives would be more attractive. A fall in exports could cause Chinese growth to falter significantly as they are a component of aggregate demand – accounting for just over 22% of GDP in 2015 . There are fears that China is 35

‘getting old before it gets rich’ . China’s rapid economic growth in the last few decades has been 36

fuelled by their vast manufacturing industry, which has fuelled exports of low cost and low-price goods all around the world. Higher wage rates from a shrinking labour force could threaten this booming industry, which is also under increasing pressure from poorer countries moving into China’s position of low-cost manufacturing to feed western demands.

There are many policy choices for the Chinese government, firstly to maximise the size of the shrinking labour force but also to increase labour productivity. An obvious solution would be to encourage families to have more children so that in 20 or so years , the workforce receives a boost 37

in numbers. This may not be a feasible solution for Chinese policymakers. As previously mentioned, the long-term social impacts of the One Child Policy

included a change of mentalities towards wanting to have fewer children rather than being forced to, thus a rise

in fertility rates could be impossible. Increasing the retirement age is a common and simple policy for expanding the size of a workforce. It would allow older workers to continue working beyond the original retirement age so that they can stay in the workforce for longer, thus increasing the total number of workers. It also can lower the pension payment burden for the government . China is also 38

lucky to have a relatively high female participation rate of around 63.9% , compared to under 40% in 39

India . Participation rates have been in decline from the 1990’s to 2010, suggesting there is potential 40

to raise them again. Allowing for greater flexibility in working-time arrangements can encourage 41

women with children to seek work. Expanding or creating state-run childcare services permits mothers who would otherwise stay at home to work, boosting female participation rates. The OECD predicts that equal participation rates between men and women can increase GDP growth by up to

‘China: Exports, Percent of GDP’, The Global Economy, http://www.theglobaleconomy.com/China/Exports/, [accessed 35

13/03/17]

Arthur R. Kroeber, China’s Economy: What Everyone Needs to Know (New York, Oxford University Press, 2016), p. 16636

George Magnus, The Age of Aging (Singapore, Wiley & sons, 2009) p. 61.37

Ibid p. 70.38

Desgupta et al, ‘Women In The Labour Market In China’, http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/39

documents/publication/wcms_371375.pdf, 2015

George Magnus, The Age of Aging (Singapore, Wiley & sons, 2009) p. 65.40

‘Policies To Increase Labour-Force Participation of Women and Older Workers’, OECD http://www.oecd.org/social/41

labour/31743892.pdf, [accessed 3/04/17]

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Figure 7 – www.ilo.org/wcmsp5/groups/public---asia/---ro-bangkok/documents/publication/wcms_371375.pdf P18

Victor Smith – EPQ 2017/18

0.7% annually In recent years, female labour participation rates have started to recover, potentially 42

due to lower fertility rates allowing more women to work.

Many characteristics of the Chinese economy could lessen the potential effects of a shrinking labour market. Automation of labour is gaining traction as more innovative firms start to invest and could be a viable option for Chinese manufacturers in the future to fill labour shortages. Total expenditure on Research and Development has been rising consistently since the reformist period in the 1980s and is currently at 2.06% of GDP from 0.54% in 1996 . However, using robots to fill such job vacancies 43

may not even be necessary as the number of required workers in manufacturing starts to decline. China’s consumer base has been expanding rapidly in recent years, with retail growth standing at 10.4% in 2016 , suggesting a movement away from reliance on exports towards becoming a middle-44

income country. In such a case, a large pool of labour is not required as employment in services and high-tech industries starts to increase. Fortunately, China is well prepared for this transition in terms of prospective workers as the number of Chinese graduates has risen by about 50% annually since the 1999 education reform, with an expected 8 million students to graduate in 2017, representing half of new entrants into the workforce . A workforce dominated by graduates would also be more 45

productive than low-skilled workers, helping to compensate for a shrinking labour pool.

Chapter 5 – Fiscal pressures

Population ageing in China is bound to have significant fiscal effects on the economy in the basic issues of reduced tax revenue and pressures on China’s pension system. I will explore the inexorable link between tax revenue and funding pension systems. Although the SOE based welfare system was very generous, it only covered 150 of the 800 million workers in China at the time . The new 46

system created under Jintao in 1997 was more comprehensive and covered a much larger proportion of Chinese workers.

As the size of China’s working population continues to shrink, tax revenues will decrease, simply as there are fewer people working and earning salaries. This could create

‘Achieving stronger growth by promoting a more gender-balanced economy’ OECD, < https://www.oecd.org/g20/topics/42

employment-and-social-policy/ILO-IMF-OECD-WBG-Achieving-stronger-growth-by-promoting-a-more-gender-balanced-economy-G20.pdf> [accessed 6/05/17]

‘Research and development expenditure (% of GDP)’, The World Bank https://data.worldbank.org/indicator/43

GB.XPD.RSDV.GD.ZS?contextual=default&locations=CN, [accessed 09/06/16]

Xin Hua, ‘China retail sales grow 10.4 pct in 2016’, English.Gov.Cn, http://english.gov.cn/archive/statistics/2017/01/20/44

content_281475546674158.htm [accessed 09/06/17]

Katherine Stapleton, ‘China now produces twice as many graduates a year as the US’, World Economic Forum, https://45

www.weforum.org/agenda/2017/04/higher-education-in-China-has-boomed-in-the-last-decade, [accessed 10/05/17]

F. Desmond McCarthy et al, ‘Population Aging And Pension Systems: Reform Options For China’, Policy Research 46

Working Paper, vol. no. 1 (31/05/96)

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Figure 9 - Cited from ‘Population Aging and Economic Growth in China’

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severe problems for China’s expanded government pension system which now covers 700 million people, from 200 million in 2002 . As these 500 million extra participants grow older and pass the 47

retirement age, the pension burden on the state will start to grow and place pressures on the government’s finances. This problem is exacerbated by projected lower tax revenues as more people will be taking out of a system that fewer people are paying into. As a result “pension funding shortfalls could be as much as $7.5 trillion” . Such pressures on China’s government finances could 48

impact on future growth, especially as China initiates its program of foreign investment. This investment strategy includes focussed spending in Latin America and the tripling of foreign assets to $20 trillion by 2020 . Pension related financial strains in the future could limit China’s funding for 49

investment, both domestic and foreign and thus limit growth if infrastructure systems cannot be expanded to raise the trend rate of growth and capacity in the economy.

Fortunately, for government financiers, state pension payments are currently relatively low meaning that total pay-outs are limited. Also, Chinese finances have been very strong since their emergence as a net exporter with consistent trade surpluses and the accumulation of foreign currencies. In June 2008 China had $1.75 trillion in assets and started the China Investment Corporation in 2007 with $200 billion to be invested . These investments suggest flexibility in the Chinese government’s 50

ability to handle pension payments, for the short term. In the long run, more comprehensive strategies and policies will be required. Increasing the statutory retirement age is a common solution among problems of population ageing and it also a solution for pension issues. A raised retirement age would enlarge the labour participation rate and thus decrease the dependency rate of the Chinese pension system. Essentially, “the effect is doubled” as there are more contributors to a system with fewer 51

recipients. As shown by Figure 8, raising the retirement age has significant impacts on the dependency ratio, and thus eases the pension burden on the state. China is also fortunate to have a family culture whereby family members are often obliged to care for their elderly parents. Figure 8 shows that across China, more elderly rely on care from their family than from pensions, despite large regional variations. This could relieve pressure from nursing homes as the children of dependents take on the role of care. However, this institution of parental care could be undermined by the 4:2:1 phenomenon as it is unrealistic for one grandchild to care for a potential of six dependants – though it is likely to be less than six in reality.

Chapter 6 – Potential benefits of population ageing

So far, only the problems and potential solutions associated with population ageing have been discussed, but in fact this phenomenon could have a variety of positive effects and present new opportunities. Many economists have supported this view and Rob Ranzijn stated “the ageing of the population should be seen as a transition not a crisis” . Studies have shown that up to the age of 75, 52

most elderly are providers of social and financial care, rather than recipients , challenging the 53

conventional view of ageing populations being burdens.

Arthur R. Kroeber, China’s Economy: What Everyone Needs to Know (New York, Oxford University Press, 2016), p. 193.47

Mei Fong, One Child: The story of China’s most radical social experiment (London: Oneworld Publications, 2016), p. 7.48

Liu Jiahua, ‘China’s New Model of Investment Explored’, World Economic Forum, https://www.weforum.org/agenda/49

2017/05/chinese-overseas-investment-is-changing-and-the-rest-of-the-world-will-learn-from-latin-america, [accessed 30/05/17]

George Magnus, The Age of Aging (Singapore, Wiley & sons, 2009) p. 177.50

F. Desmond McCarthy et al, ‘Population Aging And Pension Systems: Reform Options For China’, Policy Research 51

Working Paper, vol. no. 1 (31/05/96), p. 37.

Rob Ranzijn, ‘Ageing and the economy: Costs and benefits’, (Sep 2002), p.10.52

Judith Healy, ‘The benefits of an ageing population’, Discussion Paper Number 63, (March 2004), p. 4.53

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It is known that the elderly are able to contribute economically to a nation through volunteering. The grey population have a lot of spare time on their hands and many fill this void by volunteering in a multitude of different ways. Volunteering work is obviously unpaid, further increasing the extent of its positive externalities. An Australian study has shown that unpaid work by the elderly could have amounted to 7% of GDP . In the UK, it is estimated that the elderly contributed £40bn more through 54

volunteering and social care than they received in state benefits and pension. Such effects could easily be intensified in China due to the greater proportion of elderly they will have and the less generous nature of the Chinese pension system. Volunteering by the elderly also contributes to a nation’s social capital and can greatly increase the well-being of those involved, potentially reducing incidences of degenerative diseases as the mind is kept active . Increases in mental wellbeing among the elderly 55

would also reduce strains on healthcare systems as treating degenerative diseases is very costly, time consuming and patients may require a full-time carer.

When previously discussing the 4:2:1 phenomenon, we assumed that the grandparents involved are unable to care for themselves, in most cases, but, this is not true. The elderly are becoming increasingly fit and healthy with greater longevity. As the size of the ageing population increases, so does the opportunity for grandparents to care for their grandchildren, relieving the parents of a burden . As women traditionally look after their children while the father works, relying on 56

grandparents for care could increase work opportunities for women. The increase in female participation rates could offset the declining size of the working population and therefore stimulate growth, although female participation rates are quite high at 63% , ten percentage points below the 57

male participation rate. The effects of this could be far greater in China as there is a close-knit family culture where grandparents are already heavily involved in the care of their grandchildren. Widespread adoption of care roles by the elderly could unlock a huge source of untapped labour, namely women who were previously burdened by having to care for their child . However, it could 58

take a long time for this change to be adopted by families as this culture of women staying at home has been embedded in China for centuries.

Population ageing can often result in the shrinking of a population as both are caused by falling or low birth rates. Like the ageing of a population, the shrinking of a population can cause problems, but there are also redeeming factors. As the population gets smaller, so does the burden that falls on the state. Government spending on things such as education and public services can be reduced as there are fewer children and less strain on infrastructure. Saved money, in the case of Japan, has been used to invest in robotics and automation, one of Shinzo Abe’s policies to increase productivity growth . 59

Alternatively, saved money could be invested back into education systems, for example into university grants or specialist training programs to prepare future workers. China’s economy will change in decades to come, with far more services as it progresses away from manufacturing, therefore the government can smooth this transition as best as possible by preparing future workers and building their skill sets.

Some argue that as a population ages, there is more pressure for older people to join the workforce or remain in the workforce for longer. This can give significant boosts to the output of a workforce.

Rob Ranzijn, ‘Ageing and the economy: Costs and benefits’, (Sep 2002), p.7.54

David Brindle, ‘Older people are an asset, not a drain’, The Guardian, https://www.theguardian.com/society/2011/mar/02/55

older-people-net-contributors-volunteering, [accessed: 01/05/17]

Judith Healy, ‘The benefits of an ageing population’, Discussion Paper Number 63, (March 2004), p. 4.56

Female labor participation rate in China from 2006 to 2016, Statista, https://www.statista.com/statistics/252721/female-57

labor-force-participation-rate-in-china/, [accessed: 15/05/17]

Fred Pearce, ‘Japan’s ageing population could actually be good news’, New Scientist, https://www.newscientist.com/58

article/dn24822-japans-ageing-population-could-actually-be-good-news/, [accessed: 01/07/17]

Linda Sieg, ‘Abe: Japan's shrinking population not burden but incentive’, Reuters, http://www.reuters.com/article/us-59

japan-abe-new-york-idUSKCN11R1N1, [accessed: 26/06/17]

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Older workers have more experience in working life and can also learn new skills very quickly. In the case of tertiary and quaternary industries, older workers are often more skilled as they may have expertise in a certain field, and could thus be more productive than their younger counterparts . 60

However, other economists have argued that there are clear correlations between increasing age and decreasing mental ability as memory, attention and perception are all negatively affected by ageing . 61

On the other hand, the same study also found that there were improvements in personality traits and non-cognitive abilities which could translate into increased skills in the workplace, especially in the service sectors. Such increases in productivity can once again, help to offset labour shortages. As a result, the stock of human capital, measured by total years of schooling among the working age population, may remain constant. The falling size of the workforce will be offset by increases in the total years of schooling from investments in education and the greater number of Chinese graduates . 62

World Bank research has also shown that older people in work perform far better in cognitive tests than inactive elderly. This suggests that working in one’s later life could also improve wellbeing and reduce the chances of developing degenerative diseases, and helping to offset the decreased mental capability that comes with old age . 63

The growing number of elderly will also fuel the growth of new markets that specialise in goods for the grey population. As a population ages, predominant tastes and fashions will also change but there will also be growth in goods essential to elderly life or that could aid it. Growth and innovation for goods aimed at the elderly has already started to take place in Japan, which is suffering from a super-ageing population. For example, 2.5 times more adult diapers are sold than baby diapers in Japan, representing a market which is expected to be worth $1.4 billion by 2020 . Significant amounts of 64

research and development has also been devoted to other products designed with the elderly in mind such as lightweight vacuum cleaners. The innovation and production around these new products could bolster growth as investment and consumption are both factored into GDP and could also add to the multiplier effect due to the high profit margins on such goods. In the UK, there has also been significant growth in private care services, such as private care homes and personal assistants for the elderly. By 2025, there are expected to be one million personal care assistants working in the UK and growth in jobs like this could also be far greater in China due to the rapidity of their population ageing in comparison to the UK. The UK has also seen growth in other age-related products such as targeted holidays and private care services. The group of 51 to 69 year olds is the only group to have increased the number of holidays they are taking . China could capitalise on this phenomenon by encouraging 65

domestic tourism for the elderly. However, most of growth in elderly markets in the UK was fuelled by recent pension reforms and the higher level of generosity in the British pension system, thus effects in China may be lessened as retirees will not have the same level of disposable income to spend. However, such markets will also continue to grow with the increasing size of the elderly population that is expected in China.

Sociologists and economists alike are debating the link between the age structure of a population and the prevalence of crime in that nation. As a population ages, a fall in crime would be expected as the

Lisa Marsh, ‘Disrupting The Way We Think About Older Workers’, Forbes, https://www.forbes.com/sites/nextavenue/60

2015/06/10/disrupting-the-way-we-think-about-older-workers/#23dc6ee26b0f, [accessed: 26/06/17]

Bussolo, Koetll, Sinnot, ‘Golden Aging : Prospects for Healthy, Active, and Prosperous Aging in Europe and Central 61

Asia’, (Washington DC, World Bank: 2015), Table 4.1.

Ibid p. 167.62

Bussolo, Koetll, Sinnot, ‘Golden Aging : Prospects for Healthy, Active, and Prosperous Aging in Europe and Central 63

Asia’, (Washington DC, World Bank: 2015), p. 165.

‘More adult diapers than baby ones to be sold in Japan’, The Tokyo Times, < https://www.tokyotimes.com/more-adult-64

diapers-than-baby-ones-to-be-sold-in-japan/>, [accessed 07/07/17]

Harvey Jones, ‘How the ageing population is a boon for business’, The Guardian, [accessed 09/08/17]65

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Figure 10 - Old age dependency ratio Japan - https://data.worldbank.org/indicator/SP.POP.DPND.OL?

locations=JP Figure 11 - Homicide rate Japan 1888 - 2003 https://

ourworldindata.org/homicides/

Victor Smith – EPQ 2017/18

elderly are less likely to commit crimes . Japan has seen huge falls in serious crime the in the last 70 66

years, and coincidently, its population has been rapidly ageing in this period. Figure 10 shows the increase in the old age dependency ratio in Japan and a clear correlation can be seen with Figure 11, which shows numbers of homicides in Japan. As well as having clear positive effects on standards of living in Japan, decreasing crime rates could also free up government funding as the size of the police force can be reduced. If crime rates fall in China, as they have in Japan, with an ageing population, saved money could be invested into education or automation programs to ease the gradual transformation of the Chinese economy to becoming more service based. However, other economists have argued that the fall in crime seen in Japan is not caused by an ageing population, but has been more shaped by Japanese culture where people ‘police themselves’ . This means that the beneficial 67

effects of population ageing on crime may not be replicated in China as Japan’s culture is incredibly unique.

Other economists have also highlighted the potential benefits that arise from elderly downsizing. Many elderly still live in large homes with spare bedrooms, however some have started to move into smaller homes for financial reasons and also practicality; this has become known as downsizing . In 68

the Netherlands, this issue is already being addressed with the construction of co-housing where elderly live communally, allowing them independence but regular communication with others . The 69

construction of co-housing in China could help to ease the worsening urban housing shortage. House prices have already increased 250% in the last decade and up to 400 million people will enter Chinese cities in the next 15 to 20 years. Much of these price increases have been caused by shortages as the elderly stay in houses too large for their needs. Downsizing by the elderly, especially into rural areas, or into co-housing developments could help to reduce the immense strain currently on urban housing. The construction of such housing developments would spur growth, and the elderly moving into smaller homes or co-housing estates would free trapped housing equity and allow young workers to live affordably in urban areas. Having regular interaction with others would also improve mental wellbeing in old age.

Chapter 7 - Conclusion As the proportion of China’s ageing population grows in coming decades in relation to its total population, the country’s economy will face a multitude of issues, many of which have been identified in this report. Policy options for the Chinese government have also been identified, as have some potential opportunities that may arise. An ageing population is a huge burden for any economy, and this report concludes that overall this phenomenon will have negative impacts on China’s future growth.

Increased healthcare spending, as both the number of the elderly and their life expectancy increases, could limit the government’s flexibility in the future. Policy will be constrained by spending commitments. Demands for increases in state-provided care could also add strain. As tax revenues begin to decline, workforce issues will put huge fiscal pressures on the government. This could create future problems in the Chinese economy – for example, if they have to borrow more in order to maintain spending levels. The projected near-25% reduction in the size of the labour force by 2050 will have profound effects: pressure for wage-increases could harm Chinese manufacturers who have relied on low wages to turn China into a manufacturing hub. It can also be argued, however, that

Judith Healy, ‘The benefits of an ageing population’, Discussion Paper Number 63, (March 2004), p. 9.66

‘As crime dries up, Japan’s police hunt for things to do’, The Economist, https://www.economist.com/news/asia/67

21722216-there-was-just-one-fatal-shooting-whole-2015-crime-dries-up-japans-police-hunt, [accessed: 07/07/17]

Judith Evans, ‘Downsizing eyed as way to ease housing shortage’, Financial Times, https://www.ft.com/content/68

01c3d4c2-ec8d-11e6-930f-061b01e23655, [accessed: 02/08/17]

Peter Bakker, ‘Co-housing In The Netherlands’, (June 2009).69

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wage-increases could spur growth. The negative effects of population ageing are remarkably broad and could affect all parts of the Chinese economy. Finding policies to ease such effects will be truly challenging.

We have seen, however, that there are some policy options for the Chinese government. Increasing the retirement age could decrease the dependency ratio and help to offset labour shortages. This is a way of increasing the potential size of the labour force. Many of the elderly may choose, however, to stay out of work, and in a lot of jobs they would anyway be less productive than younger workers. Measures to boost the birth rate might alleviate labour-force pressures in coming decades as new workers enter the market, but the long-term effects of the one-child policy would make this option difficult. Although such policies could be effective, they also have drawbacks, and I think that the problems arising from population ageing are too profound and far-reaching for ethical policies to do much to mitigate its effects.

In the report’s section on the benefits of population ageing, I highlighted some opportunities that could arise. For example, growth in the ‘grey’ population will open up new markets for consumer goods that are aimed at the elderly. Reductions in crime can also be expected, and so spending commitments on police forces could be scaled back. Volunteering by the elderly might contribute to national income. Some of the benefits examined, however, will not necessarily improve the state of the Chinese economy and increase its growth. They are instead redeeming factors that could mitigate the negative effects of population ageing. For example, the increasing health and longevity of many Chinese citizens might allow them to take on roles as care-providers to grandchildren, thus allowing more women into work, but this would hardly offset the decreasing size of the workforce.

Due to the large number of macro-economic factors in play, it is strikingly difficult to predict what might happen to Chinese growth in the future. The age structure of the population is clearly a very important factor. Growth is beginning to fall as manufacturing decreases, and it was inevitable that the long run of very high growth in the Chinese economy would end at some point. Conversely, as the economy becomes more service-based, growth might pick up again in the future. Although such predictions are difficult, it can be said with some certainty that China’s ageing population will have a depressive effect on growth: the negative effects of this phenomenon are so profound that they will shake all sectors of the economy. Probably no government policies will be able to deal with the problem fully. Potential opportunities that may arise will have only a minor effect on growth compared to the underlying negative effects of the problem.

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