Amidst the bravado at Davos appeared an article in a Chinese state-run newspaper — Democratic political civilization seen by 2040: think tank — that reads, “At that time, the per capita income of China will surpass $20,000, with key economic figures entering the rank of the world’s top 40. Citizens will be 100 percent covered by endowment and medical insurance. Over 80 percent of cities may become urbanized, and a democratic, free, fair and effective political civilization will be established.”
If I were Robert Prechter, John Maudlin or Harry Dent, I would spin this into a scary book, but you pay me to give you the straight goods, so here it is.
The demographic dividend. That’s the technical term for the Boomer pig moving through the python, or my foxes/hares/grass analogy.
What Is the Demographic Dividend?
Industrial countries have largely completed what is called the “demographic transition”–the transition from a largely rural agrarian society with high fertility and mortality rates to a predominantly urban industrial society with low fertility and mortality rates. At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labor force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too. That’s the first dividend.
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But a second dividend is also possible. A population concentrated at older working ages and facing an extended period of retirement has a powerful incentive to accumulate assets–unless it is confident that its needs will be provided for by families or governments. Whether these additional assets are invested domestically or abroad, national income rises.
In short, the first dividend yields a transitory bonus, and the second transforms that bonus into greater assets and sustainable development. These outcomes are not automatic but depend on the implementation of effective policies. Thus, the dividend period is a window of opportunity rather than a guarantee of improved standards of living. The dividends are sequential: the first dividend begins first and comes to an end, and the second dividend begins somewhat later and continues indefinitely.
That’s why Steve Schwarzman [VIDEO] is hot on India, less so on China.
The UN Population Division projects the share in total population of working population (15-64 years) to reach its peak in China in 2010, and in India in 2040. China has already consumed almost all its demographic dividend. Its labor demand is increasing more rapidly than the workforce (in part because the increase in the working age population is slowing down as a result of the strict implementation of the one-child policy since the early 1980s). The tightening supply of migrant workers in the coastal areas has contributed to real wage increases in excess of GDP growth since 1998 and before too long, mass exports of cheap goods will move to more competitive areas of the globe.
China is at the crest of its first demographic dividend. I would further argue that this is a once-in-history phenomenon owing to the wars, famine and disease that decimated populations between the late-1800s to the end of WWII (or in the case of China, until the Cultural Revolution) and the invention of penicillin. The net effect is Japan crested first, followed by the U.S. followed by China and then India.
Statement by Vice-Minister of the National Population and Family Planning Commission at the 40th Session of the UN Commission on Population and Development
After 2030, the China’s population aged 65 and above will exceed the population aged between 0 and 14. Comparison with other countries indicates that China will host one of the fastest aging populations in the world.
The other distinctive feature of China’s population age structure change is its remarkable “demographic dividend”. Research indicates that 15% of rapid China’s economic development over the recent two decades could be attributed to “demographic dividend”. In 1990, working population aged between 15 and 64 took up 66.7% of the total population while total dependency ratio (TDR) reached 50%, which marked China’s entry into the era of “demographic dividend”. In 2000, the proportion of working population in China went up to 70.1%. It is expected that by 2020, this proportion will remain at around 70% while total dependency ratio will decline to 37-45%. The “demographic dividend” era will end by 2033 when the proportion of working-age population in China goes down to 66.3% and total dependency ratio rises to 50.9%. As such, the China’s “demographic dividend” era will last over 40 years, with the use of a lower than 50% total dependency ratio as the benchmark. Benefiting from a huge labor force and cheap labor, China will probably be able to maintain its rapid economic growth without facing the problem of labor shortage.
The economic benefits from the first Chinese dividend are peaking as we speak. The government knows it, yet it promises more urbanization, universal pensions and medical insurance. If this is supposed to get ordinary Chinese citizens to stop saving and start consuming like their so-called “profligate American counterparts” to mop up excess manufacturing capacity, then it is indeed a very cynical move.
Demographic Dividend and Prospects for Economic Development in China [DOWNLOAD PDF]
China’s rapid fertility decline in the 1970s has brought it a substantial demographic dividend. The arrival of the demographic dividend coincided with China’s recent economic boom, thus further fuelling an already rapidly growing and dynamic economy. An abundant labour supply, combined with relatively small shares of younger and older dependents, not only helped to make China become the world’s factory at the turn of the twenty-first century, but also contributed to increasing output per capita and thus the standard of living. Such a dividend, as we discuss above, is transitory and will soon be exhausted. China’s unusually rapid fertility decline means that it will also face undergo a more rapid and severe process of ageing. China’s 2000 census revealed that the shares of the older population had risen to 10.5 and 7.1 per cent for those aged 60 and 65 above, respectively, from 7.6 and 4.9 per cent in 1982. China’s rapid fertility reduction and its recent low fertility levels and improved life expectancy will accelerate China’s ageing process in the near future.
Yet population ageing, given appropriate policy and institutional arrangements, may bring China a second demographic dividend. The first demographic dividend, discussed above, quantifies the effects of changes in the support ratio, holding output per worker constant. A second demographic dividend may arise because changes in age structure can influence the processes that lead to the creation of wealth. A possibility—one that has been realized in other East Asian economies–is that population ageing will lead to rapid accumulation of capital. When this occurs, the capital-intensity of the economy will raise labour productivity – output per worker. Traditionally, the effect of population on capital-deepening is considered in the standard neo-classical economic model that assumes that the saving rate is constant (Solow, 1956). The approach taken here, however, builds on elaborations of the neo-classical model that treat saving and wealth as endogenous (Tobin, 1967; Mason, 1987; Willis, 1988; Lee, 1994).
With increases in life expectancy, the expected duration of retirement rises. Individuals must accumulate additional wealth or face substantial reductions in standards of living during old age. The wealth can come in several forms, however. One possibility is the accumulation of additional capital. The other is the accumulation of transfer wealth–increases in the obligations of future generations to provide old age support either through public pension plans or as part of familial support systems. Either form of wealth can meet the retirement needs of a growing older population, but increases in capital influence the level of output and economic growth, while increases in transfer wealth do not (Lee, 1994). A third possibility is that neither transfer wealth nor capital is accumulated. In this case, favourable effects on productivity are not achieved and standards of living of the older persons deteriorate.
Note the “third possibility is that neither transfer wealth nor capital is accumulated”. This is exactly what American Boomers are facing now. If anything, the first American demographic dividend, coupled with (theoretically) advanced social safety nets provided perverse incentive to take inappropriate risk (gamble to get rich, since there is always Social Security and Medicare) and consume goods at insane levels, helped lift (Japan first, followed by) China’s manufacturing sector (which capitalized on it’s own demographic dividend) to where it is now over the past 20 years.
I know you all think Alan Greenspan is shit and caused the world’s problems with his bubbles, but he does not mince words in his book, The Age of Turbulence: Adventures in a New World
This chapter has dealt with the emergence of the various modes of capitalistic practice in developed market economies. But there remain three important nations that cannot quite be seen as a simple trade-off of unfettered competition versus restraints from a social safety net: China, Russia, and India. They all follow market rules to a point, but with significant deviations that are not easy to categorize or forecast. China is becoming increasingly capitalistic, with only partial formal rules on property ownership. Russia has rules, but political convenience dictates the extent to which they are enforced. And India has legal property rights that are so qualified by specific regulations, often discretionarily enforced, that they are not as binding as they need to be to attract foreign direct investment. These countries comprise two-fifths of the world’s population, but less than a fourth of world GDP. How their politics, cultures, and economies evolve over the next quarter century will leave a very large imprint on the economic future of the globe.
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We know with some degree of certainty the size of our population age sixteen and over in 2030. Most of them have already been born. The proportion of the population, especially the part under sixty-five years of age, that participates in our labor force is high and reasonably stable. Our population older than sixty-five years is expected to almost double by 2030, and the current 15 percent participation rate for that part of the labor force will rise as well, thus adding a more than usual number of elderly workers by 2030. The size of immigration within the politically and culturally feasible range of possibilities does not matter much to the overall labor force forecast.
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Policymakers should err on the side of prudence when considering new budget entitlement initiatives. Programs can always be expanded in the future should the resources for them become available, but they cannot easily be cut back if resources later fall short of commitments. This is why I believe that moving forward with an unfunded prescription drug program in 2003, before the problems of the severely underfunded and out-of-balance Medicare program as a whole were addressed, was a mistake, perhaps a very large one.
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There is a great deal of work to be done to set Medicare right. It should be apparently that to cover future Social Security and Medicare funding shortfalls wholly by raising taxes is economically infeasible.
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We are left with a most daunting reality: resolving the funding shortfall for federal social insurance is going to require benefit cuts.
So there we have it. All this economic and political debate is all bull. The real problem cannot be addressed. It’s not Keynes vs. Hayek (hat tip to member Brian). It’s a never-been-tried social experiment suffering an epic tragedy of the commons.
All hope is not lost, at least in North America. Birth rates have increased since hitting an all-time-low in 2002 and continues upward, although with some disturbing trends. American Boomers are now in a panic to save and surely, no one believes that entitlements will still be there in the near future.
As they say, the first step toward a solution is to acknowledge the problem. Boomers will need health care, so something will give. Cost for services and medicine will have to be driven down and made into widely-available commodities. Trade imbalances in place since the 1980s will have to be addressed. America will export, but what? More entertainment and arms?
There are so many possibilities. The key is not to panic or get caught up in irrelevant debates. The market will find a way to adjust and our job as investors is to steer through the minefield.
- The Demographic Dividend A New Perspective on the Economic Consequences of Population Change [DOWNLOAD PDF]
- Aim for China’s second demographic dividend
- Bubbles and demographics: Is China following Japan and the US?
- Europe’s working population to shrink
- China’s Aging Population
- Money, not government, makes for small families